Question

earch forums . Chapter 15 - Generally Accepted Accounting Principles DB #5 Why is it permissible to violate generally accepted accounting principles when preparing reports used strictly by management? Your response should be a minimum of 100 words. In your answer, explain and provide support as to why or why not it is acceptable and give an example for either argument. If you use an outside source in support of your answer, follow APA formatting for the reference. For this DB, please respond to the thread from your instructor. Do not start a new DB thread; posts not posted as a reply to the instructor will not be graded

Answer 1

Generally accepted accounting principles are a common set of accounting principles, standards & procedures which are applicable on a mandatory basis for Public Companies (i.e.., companies listed on a stock exchange). In the US, the GAAP is issued by the Financial Accounting Standards Board (FASB).

For Non-Public Companies or Private Companies the GAAP is followed only on a voluntary basis usually for dealing with banks and other institutions which may have some kind of interest (financial or otherwise) in the entity's financial position and as such may wish to oversee the entities financial results.

GAAP is followed to ensure the following:

1) Reliability,

2) Clarity, Consistency, Comparability

3) Understandability

4) Relevance   

However, the management uses financial information to make decisions with respect to operational efficiency & Overall profitability and as such does not require the reports to be prepared in compliance to GAAP as such reports are meant for internal use only.

Since ONLY the management uses such reports, No external persons like investors, banks, etc., are expected act on the information circulated internally. As such, it is permissible to violate the GAAP when preparing reports strictly for management as no other person can act on such confidential information.