Question

Explain in your own words the importance of GAAP.

Answer 1

The accounting standards developed and established by the Financial Accounting Foundation’s(FAF) standard-setting Boards — the Financial Accounting Standards Board (FASB) and theGovernmental Accounting Standards Board (GASB)—are known collectively as Generally Accepted Accounting Principles—or GAAP.

GAAP is a dynamic set of both broad and specific guidelines that a company should follow in measuring and reporting the information in their financial statements and related notes.In United States all the companies or all major companies are required to report their financial statements in accordance with GAAP. GAAP is generally considered to be a rule-basedaccounting standard and clear financial rules give lenders and investors greater confidence in theaccuracy of financial reports making it easier faster and less expensive for companies to borrow money or secure finances.