121_01sg_GAAP - Summary of Generally Accepted Accounting...

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364 Appendix C Summary of Generally Accepted Accounting Principles Generally accepted accounting principles (GAAP) are primarily influenced by the Financial Accounting Standards Board (FASB) and its predecessor organization, the Accounting Principles Board (APB). However, the Securities and Exchange Commission (SEC) has ultimate authority to establish accounting principles for publicly-held companies. The FASB has been developing a Conceptual Framework to define the nature and function of financial accounting. The basic objective of financial reporting is to provide information that is useful for investment and lending decisions. Information should be relevant, reliable, and comparable. Relevant information is useful. Reliable information is unbiased and free from significant error. Comparable information can be compared from period to period. The entity concept provides that the transactions of the organization be accounted for separately from the transactions of other organizations and persons, including the owner(s) of the entity. The going-concern concept is an assumption that the business will continue to operate in the future. This concept enables accountants to assume that a business will continue long enough to recover the cost of its assets. The stable-monetary-unit concept assumes that the value of the monetary unit never changes. Accountants ignore the effects of inflation and make no accounting adjustments related to changes in the purchasing power of the dollar. Many parties believe that inflation adjustments should be made to accounting information. FASB encourages large companies to supply inflation-adjusted data in financial reports. The time-period concept provides that financial information be reported at regular intervals so that decision makers can compare business operations over time to assess the success or failure of the business. This concept is the basis for accruals and adjusting entries prepared at the end of an accounting period. The materiality concept requires accountants to accurately account for significant items and transactions. Information is significant (or material) if it is likely to cause a statement user to change a decision because of that information. The accounting treatment for a $3 pencil sharpener is not likely to affect any decisions; the pencil sharpener is immaterial. However, failing to record a $1 million liability would affect the decisions of many users. Thus, the $1 million is material. The definition of materiality varies from company to company. A large corporation such as General Motors might consider $10,000 to be immaterial, while the neighborhood grocery store would consider $10,000 to be very material. The
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This note was uploaded on 10/24/2010 for the course ACCOUNTING 31609 taught by Professor R.ambrose during the Fall '09 term at San Mateo Colleges.

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121_01sg_GAAP - Summary of Generally Accepted Accounting...

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