Question

Dress-for-Success, Inc. is a successful C Corporation in its sixth year of business and already has $5 million gross sales. The company sells and automatically ships gently used clothing items to online customers. It collects the monthly fixed fee at the beginning of each month and ships one item each week. The owner, Linda Smith, does not see any reason to follow GAAP accounting principles. The company is not publicly traded but does put the financial statements on the company’s Web page for customers to see. Research this issue and answer the following:

• Explain how Dress-for-Success is accounting for the transactions under the cash basis method and how she should account for them if she did follow GAAP.
• Should Dress-for-Success, Inc. use GAAP? Why or why not?
• Are there any ethical issues in this situation? Explain.

Answer 1

                     CASH BASIS METHOD

IT IS A METHOD OF ACCOUNTING THAT REVENUE TRANSACTIONS AND EXPENSES ARE RECORDED WHEN THE CORRESPONDING CASH IS RECEIVED OR PAYMENTS ARE MADE.

                    ACCRUAL BASIS METHOD

IT IS A METHOD RECORDS REVENUE WHEN A PRODUCT OR SERVICE IS DELIVERED TO A CUSTOMER BUT THE PAYMENT IS NOT MADE. G.A.A.P REQUIRE ACCRUAL BASIS RATHER THAN G.A.A.P.

G.A.A.P - GENERALLY ACCEPTED ACCOUNTING PRINCIPLES

IT MUST BE FOLLOWED BY ALL THE COMPANIES TO PREPARE FINANCIAL STATEMENTS. G.A.A.P IS VIEWED FAVORABLY BY LENDERS, CREDITORS, CUSTOMERS ETC. MOST FINANCIAL INSTITUTION WILL REQUIRE FINANCIAL STATEMENTS WITH G.A.A.P WHILE ISSUING BUSINESS LOANS. SO IT IS BETTER FOR "DRESS- FOR SUCCESS, INC."TO PREPARE FINANCIAL STATEMENTS BY USING G.A.A.P.

                                 ISSUES

THERE ARE MANY ISSUES RELATED WITH PREPARATION OF FINANCIAL STATEMENTS. IT MUST BE PREPARED ACCORDING TO G.A.A.P. G.A.A.P IS A SET OF ACCOUNTING RULES AND PROCEDURES. MOST FINANCIAL INSTITUTIONS, CREDITORS ,CUSTOMERS, INVESTORS ALL REQUIRE THE FINANCIAL STATEMENTS ACCORDING G.A.A.P. IT HELPS TO COMPARE AND FIND CORRECT PICTURES OF BUSINESS .

ERRORS OR OMISSIONS IN APPLYING G.A.A.P CAN BE COSTLY IN BUSINESS TRANSACTION.VIOLATION CAN CAUSE INACCURATE REPORTING FOR INTERNAL AND BUDGETING PURPOSE. IT WILL REDUCE THE RELIABILITY FOR THIRD PARTY READERS.