The importance of applying GAAP
The U.S GAAP provides a standardized method of recording business transactions that affect the financial position of a company (). Regarding accuracy, GAAP dictates that companies should use a uniform accounting principle from one reporting period to another to ensure that there is consistency in financial statements.
Concerning relevance, GAAP provides a standardized way of recording financial transactions that financial statement users need to make sound investment decisions. Otherwise, the usability of financial statements will be detracted. Moreover, GAAP narrows down the required information to make accurate and relevant financial statements.
In reliability, GAAP allows auditors to attest to the validity of management assertions in the financial reports. This makes financial statements more reliable for users such as investors, business owners, and shareholders. For example, small firms need to present their financial reports to lenders such as financial institutions when they are seeking for loan. Moreover, reliable statements help the management team to make better decisions regarding operational goals.
Limitations of apply GAAP
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GAAP treats major accounting issues about inventory valuation, revenue recognition, and financial instruments in a different way from the IFRS (). It means that multinational corporations have to prepare expensive and difficult reconciliation reports that can compromise the clarity and transparency of the statements.
According to GAAP, the omission of financial information can lead to inconsistency in financial reports. Reporting financial information may be accompanied by a volatile business environment, and this can lead to business uncertainties that arise from the expanding disclosure requirements.