The SEC ( Securities & Exchange Commission) only requires publicly traded companies and companies obligated to publicly release their financial statements to adhere to GAAP. The purpose of these standardized practices is to ensure consistency and completeness in financial reporting, and to set a basis by which performance can be compared across multiple companies. These principles were created in the 1970s in a joint effort between the Financial Accounting Standards Board (FASB) and the Governmental Accounting Standards Board (GASB). GAAP stands for “Generally Accepted Accounting Principles” and are the guidelines by which most finance professionals in the United States record and report financial performance in a company. Financial reports are needed for tasks such as raising capital, initial public offerings (IPOs), transactions such as mergers or acquisitions, applying for lines of credit (LOC), and even the latest events such as qualifying for the recent stimulus loans, grants, and loan forgiveness.įor both inward and outward-facing purposes, a standardized, comparable accounting method helps maintain consistency month to month and allows the performance of the company to be compared with the performance of others. While financial reporting is essential for internal management for measuring and analyzing operations, assets, financial obligations, and success, it is also important for stakeholders outside the company. It records and presents information about the company’s financial position, revenues, expenses, and related disclosures. Generally Accepted Accounting Priciples (GAAP)įinancial reporting is an important part of business that communicates the financial performance and results of a company.
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