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If a company is found violating GAAP principles, there are many possible consequences. Hiring a professional accounting team trained in GAAP and having internal auditors track and check finances are two ways to ensure your company is meeting GAAP standards. Any external party looking at a company’s financial records will be able to see that the company is GAAP compliant, making it both easier to attract investors and to successfully pass external audits. This means these companies’ financial statements must follow all the GAAP principles and meet GAAP standards. FASB came up with the qualitative characteristics of accounting information to evaluate the usefulness of financial information.Publicly traded companies in the U.S. Since FASB is concerned about financial statement usability, it had to define what makes a financial statement usable. GAAP does not have to be used by a private company that makes internal financial statements. Remember, GAAP only has to be used by private companies that issue financial statements. All of the objectives that FASB and the prior accounting standard setting bodies wanted to accomplish can be simplified to one main objective: to make financial statements universally understandable and usable for all of their users. GAAP’s primary intent is not to help businesses. FASB wants to make consistent standards that help end users understand and use the company’s financial data. For instance, an investor will look at a company’s financial statements in order to decide whether to invest. Who are the end users? End users include people like investors, banks, lenders who use third party financial statements to evaluate business decisions. While establishing GAAP, FASB was mainly concerned about the end users of financial statements. FASB’s mission is to “establish and improve standards of financial accounting and reporting that foster financial reporting by nongovernmental entities that provides decision-useful information to investors and other users of financial reports.” In 1973 however, FASB was designated to be the only organization to establish private sectors accounting principles and standards in the United States. There have been a few different organizations since 1933 that have established US accounting standards including the American Principles Board. Instead, the SEC has allowed private organizations the opportunity to regular the accounting industry with principles and standards. Thus, the SEC has declined, with a few minor exceptions, to create accounting standards. The SEC realized that it was in its and the accounting industry’s best interest to keep accounting standard setting private. These acts established the Security Exchange Commission or the SEC and give it the power to create accounting standards in the United States. Congress passed the Securities Exchange Acts of 19. Soon after the stock crash in 1929, Congress designed to take action to help prevent investors from being deceived by fraudulent financial statements. GAAP is created by a private, independent seven-member board called the Financial Accounting Standards Board. The numbers and ratios will be meaningful because both companies used the same methods and techniques to prepare and present their balance sheets. This way an investor can compare a 2011 balance sheet of one company to the 2011 balance sheet of another company. This is useful because it maintains accounting consistancy through years and across companies.
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Every private company that issues financial statements to the public, must follow the rules of GAAP. These rules and concepts are called generally accepted accounting principles or GAAP. In the world of financial accounting, there are many different rules, concepts, and guidelines that govern how companies should account for financial transactions and present their financial statements. Let’s take a basic look at how US accounting standard are made and who makes them.
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Learning the accounting principles will not only help you understand basic accounting, it will help you analyze transactions in the future. In order to learn accounting, understand certain transactions, and analyze financial statements, it is important to take a step back and study the accounting principles that are underneath all of the debits and credits.