GAAP remains a customary framework guiding principles used in a financial accounting in relation to a specific jurisdiction. The GAAP comprise of standard concords as well as rules, which accountants need to observe during recording, briefing together with general preparations that entails a financial statement (Bonham & Ernst & Young, 2008). GAAP is frequently obligatory in firms where investors experience lowest regularity degrees in financial statements. In most cases, investors make usage of the financial statements in analyzing of firms for purposes of investment purposes.
The 1992 great depression led to a crash in the stock market. The situation resulted in the congresses passing the 1933 Securities Act and the Securities Exchange Act1934. The Acts established a mechanism to regulate the performances of account performances in public companies and establish standards.
American Institute of Certified Public Accountants had the responsibility of creating as well as maintaining the standards of accounting from 1936 to the year 1973.The task was later taken over by the Financial Accounting Standards Board(Lubbe & Watson, 2006).Majority of investors around the globe opt for mutual funds as their investment activities. Many of them are presently investing in the stock market, therefore, the usage of GAAP to help in understanding the best timing to invest(Williams & CCH Incorporated, 2010). Investors need to invest in companies with good earnings; cash flow together with a solid balance sheet (Lubbe & Watson, 2006).It is obvious that any firm can achieve the needed requirements by the usage and GAAP.
Any financial statement, which is prepared in relation to GAAP remains helpful for an investment psychoanalysis because of various reasons. An investor should make usage of a company’s financial statement to assess their general performance. In a situation whereby the financial statements of a company are in GAAP, this means a company’s performance constituency and is appropriate and appealing to the investors. Majority of investors are obligated to apply GAAP in reviewing and evaluating the performance of a firm. At the same time, a financial statement prepared using a GAAP is useful for investors to use the them in comparing a firm with it’s rivals (Williams & CCH Incorporated, 2010). The main reason is because GAAP tends to rule out statistical as well as operating financial dealings when evaluating a firm’s performance, consequently, providing a real and definite figure.
There are various organizations, which have influence GAAP regulation standards. The organizations collaborated to create GAAP standards. at first, United States Securities together with Exchange Commission (SEC) , worked together with private organizations like AICPA and the Financial Accounting Standards Board to establish GAAP standards (Lubbe & Watson, 2006). At the same time, GAAP tend to be influenced by numerous influential organizations. America’s financial policies are influenced by organizations such Government Finance Officers Association plays a big role in GAAP (Bonham, Ernst & Young,2008).
GAAP plays a vital role in evaluating a company for investment opportunities. This is because it is a standardized mechanism and remains reliable. Companies need to use GAAP to eliminate disparities in the financial reports during preparation of financial statements. Conversely, organizations, which are looking for investors need to use GAAP because the mechanism is transparent and attractive to investors. A financial statement prepared by use of GAAP has few or no mistake during auditing by external auditor.
Bonham, M., & Ernst & Young. (2008). International GAAP 2008: Generally accepted accounting practice under International financial reporting standards. Chichester, West Sussex, England: J. Wiley & Sons.
Lubbe, I., & Watson, A. (2006). Accounting: GAAP principles. Oxford: Oxford University Press.
Williams, J. R., & CCH Incorporated. (2010). GAAP guide. Chicago, IL: CCH.