Sunday, November 30, 2008

GAAP's effect in the United States

Generally Accepted Accounting Principles (GAAP) are crucial when it comes to financial reports in the United States. As explained earlier, there are many rules and regulations that must be followed to prepare and present financial reports. These rules are very important because it gives potential investors and creditors the opportunity to understand how the company is performing as well as how they have progressed since their start.

Knowing how a company is performing is very important when thinking about investing in a company. Think about it if you wanted to invest in a company. You would want to know what is going on with that company, how they are doing, are they going to continue business, and will business progress over time. Those are only a few of the many questions that run through our minds and the minds of investors before they invest in a company. However, with the right set of financial reports, based on the rules of GAAP, information can be gathered to come to conclusions about that company and choose whether or not to invest in that company.

GAAP has made it easy for people to know about their company and how they are performing. With the switch to International Financial Reporting Standards (IFRS), it isn't going to be clear as to how the company is performing. Because financial statements prepared under GAAP are intended to reflect an economic reality, GAAP makes a company's financials comparable and understandable so that investors, creditors and others can make rational investment, credit and other financial decisions. In order to be useful and helpful to users, GAAP requires information on financial statements to be relevant, reliable, comparable and consistent. Likewise, with IFRS and the principle-based accounting system, the financial reports are going to be a lot harder to compare to one another in turn making it hard to decide whether or not to invest in that company.

-Jeff

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