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Questions and Answers
What is the primary purpose of GAAP?
What is the primary purpose of GAAP?
Which entity is responsible for stipulating GAAP for state and local governments?
Which entity is responsible for stipulating GAAP for state and local governments?
The Economic Entity Assumption separates which two entities for accounting purposes?
The Economic Entity Assumption separates which two entities for accounting purposes?
Under the Monetary Unit Assumption, which type of transactions are recorded?
Under the Monetary Unit Assumption, which type of transactions are recorded?
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Which accounting principle assumes the ability to report business activities in distinct time intervals?
Which accounting principle assumes the ability to report business activities in distinct time intervals?
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What does the Cost Principle refer to in accounting?
What does the Cost Principle refer to in accounting?
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Who mandates that financial reports must adhere to GAAP in the United States?
Who mandates that financial reports must adhere to GAAP in the United States?
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What is NOT a characteristic of GAAP?
What is NOT a characteristic of GAAP?
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What is the main purpose of making financial information publicly available?
What is the main purpose of making financial information publicly available?
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Which of the following statements is true regarding GAAP?
Which of the following statements is true regarding GAAP?
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How does GAAP benefit comparisons between companies?
How does GAAP benefit comparisons between companies?
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Which of the following is a requirement for companies that must follow GAAP?
Which of the following is a requirement for companies that must follow GAAP?
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Are private companies required to follow GAAP?
Are private companies required to follow GAAP?
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Which organization requires publicly traded companies to adhere to GAAP?
Which organization requires publicly traded companies to adhere to GAAP?
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What is a key characteristic that GAAP numbers should possess?
What is a key characteristic that GAAP numbers should possess?
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What accounting method is primarily used globally outside the United States?
What accounting method is primarily used globally outside the United States?
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What does the Full Disclosure Principle require of financial statements?
What does the Full Disclosure Principle require of financial statements?
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What does the Going Concern Principle assume?
What does the Going Concern Principle assume?
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How does the Matching Principle affect financial reporting?
How does the Matching Principle affect financial reporting?
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When is revenue recognized under the Revenue Recognition Principle?
When is revenue recognized under the Revenue Recognition Principle?
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What does the concept of Materiality allow accountants to do?
What does the concept of Materiality allow accountants to do?
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What does the principle of Conservatism instruct accountants to do when faced with two acceptable reporting alternatives?
What does the principle of Conservatism instruct accountants to do when faced with two acceptable reporting alternatives?
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What does GAAP compliance ensure?
What does GAAP compliance ensure?
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What is the primary purpose of GAAP?
What is the primary purpose of GAAP?
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Study Notes
GAAP (Generally Accepted Accounting Principles)
- GAAP is a set of common accounting rules and standards used for financial reporting.
- It ensures financial reporting is clear and consistent across different companies.
- Different countries and industries have their own specific GAAP standards.
- In the United States, the Securities and Exchange Commission (SEC) requires companies to follow GAAP.
- The Financial Accounting Standards Board (FASB) establishes overall GAAP guidelines, while the Governmental Accounting Standards Board (GASB) sets GAAP for state and local governments.
- Publicly traded companies must adhere to both SEC and GAAP requirements.
Basic Accounting Principles and Guidelines
- Economic Entity Assumption: Business transactions are kept separate from the owner's personal transactions.
- Monetary Unit Assumption: Only transactions measurable in U.S. dollars are recorded.
- Time Period Assumption: Business activities are reported in distinct time intervals (e.g., monthly, quarterly).
- Cost Principle: Items are recorded at their historical cost (original purchase price).
- Full Disclosure Principle: Important information is disclosed in financial statements or notes.
- Going Concern Principle: Assumes a company will continue to operate in the foreseeable future.
- Matching Principle: Expenses are matched with the revenue they generate.
- Revenue Recognition Principle: Revenues are recognized when a product is sold or service performed, regardless of cash receipt.
- Materiality: Insignificant amounts can be reported differently if they don't impact decision-making.
- Conservatism: When choosing between reporting alternatives, the option resulting in lower net income or assets is preferred.
GAAP Compliance
- Compliance means maintaining financial records that allow investors, lenders, and others to make informed decisions about a company.
- Small businesses may not need to be GAAP compliant unless seeking financing or a buyer.
Purpose of GAAP
- To establish a uniform standard for financial reporting.
- Help investors make informed decisions about where to invest their money.
Importance of GAAP
- Provides a standardized way to record transactions and events impacting a company's financial position.
- Enables comparison of company performance across different sectors and regions.
- Enforces neutrality, comparability, verifiability, and trustworthiness in financial information.
GAAP for Private Companies
- The AICPA framework is a reporting system suitable for both businesses and banks.
- Private companies in the U.S. are not legally required to follow GAAP, but many choose to do so.
GAAP Requirements for US Companies
- Not all US companies are obligated to follow GAAP.
- Publicly traded and regulated companies must comply with GAAP for financial reporting.
International Standards
- International Financial Reporting Standards (IFRS) are used in many countries worldwide.
- IFRS has some key differences from U.S. GAAP.
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Description
This quiz covers the essentials of Generally Accepted Accounting Principles (GAAP) and basic accounting guidelines. Learn about the foundational rules that ensure clarity and consistency in financial reporting for companies in various industries. Focus on the key assumptions that underlie financial reporting standards.
