prepare a written report answering the following : 1.a) identify a person or ent
ID: 2547151 • Letter: P
Question
prepare a written report answering the following :
1.a) identify a person or entity that will sue the information in the financial statements to make a decision and identify the decision to be made
1.b) explain why the sue of GAAP as opposed to allowing carte blanche'(i.e., everyone reporting whatever and however they please) contributes to a better decision for the person/entity you have chosen.
2)Given that public corporations are required to use GAAP, identify the negative consequences of a corporation or corporations (officers,manager) intentionally violating GAAP(fraud). Specifically, consider the impact on the various users of the financial statements, as well as the general society.
Explanation / Answer
1)A) The financial statements of the company will be used by the creditors of the company. The creditors may perform various types of ratio analysis to decide whether a loan should be extended to the company based on the liquidity and solvency position of the company. Even renewal of existing loans can be renewed.
B) The use of GAAP ensures that the fiancial statements are in complaince with a set of accounting principles that are generally accepted. For example, the creditors shall compute the current ratio to assess liquidity. They must have reasonable assurance that the valuation of inventory which forms a part of the current assets is correct. If it was "carte blanche" reporting, an organization would report the highest value of inventory and windowdress its balance sheet. It would have been difficult on the part of the lenders to make an informed decision in such a scenario.
2) It is necessary for public corporations to use GAAP so that the presentation of financial statemnts is true and fair. If a company is intentionally avoiding the use of GAAP, they are manipulating the financial information to show a rosy picture of the company's affairs or concealing important information. If this is the case, it will impact the management, investors, employees and creditors of the organization. The top management might be misled due to the false profitability of the company. The investors might make a bad investment decision and block their funds. The creditors of the organization might grant loans which they will be unable to recover.
Vice-versa , if the officers deliberately report a loss by avoilding the use of GAAP, the company might not declare dividends , thus impacting a section of the society.
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