GAAP

Flashcards on Internal Controls

What does GAAP stand for?

Generally Accepted Accounting Principles

How many concepts form part of the GAAP concept?

1. Historic Cost Concept

2. Prudence Concept

3. Going Concern Concept

4. Materiality Concept

5. Business Entity Concept

6. Accrual Concept

What is the Historic Cost Concept?

The assets should be recorded at the price at which they were bought and not at present value.

What is the Prudence Concept?

Financial statements must report in the most conservative manner. Never anticipate profit be ready for a loss

What is the Materiality Concept?

Information that is important should be highlighted while unimportant information can be added together as a sundry.

What is the Business Entity Concept?

Financial matters of owner must be kept separate from financial matters of business.

What is the Going Concern Concept?

The financial statements must be drawn up as if the business will continue to operate for some time in the future.

What are Accrual Matching Concepts?

The income and expenses incurred must match the year they are recorded.

What is the purpose of GAAP

provide a set of guidelines / rules that companies agree to use when preparing their financial reports.

ensures that the information presented in financial statements is consistent and understandable.

How do GAAP principles contribute to consistency and transparency in financial reporting?

TRANSPARENCY: GAAP requires that companies share all important financial details, both good and bad. This way, everyone looking at the information gets a complete and honest view of how the company is doing financially.

CONSISTENCY: GAAP gives companies a set of rules for writing down and showing their financial information. Because companies use the same rules, it's easier to compare their financial reports and understand what's going on.

Why is including material, or significant, information important in financial reports?

helps users make informed decisions

complete and accurate picture of their financial performance.

Allowing users to properly evaluate the company's financial position and make informed decisions.

How does the Prudence Concept affect financial decision-making?

financial decision-making by encouraging caution and conservatism

provide a more accurate and reliable picture of a company's financial position.