Essay about Generally Accepted Accounting Principles

Most economically, the important body of work is the role of conditional conservatism in markets. Indeed, there is a view that information needs of accountant is the main driver of the market demand for accounting conditional conservatism. At the present moment, US was the markets dominator to reflected in the accounting standards. However is if very difficult to predict how different US GAAP would be today in the absence of US markets.

Accounting conservatism is significant for all stakeholder and take part in important role in capital market. (Basu, 1997; Givoly and Hayn, 2000; Sivakumar and Waymire, 2003; and Srivastava and Tse, 2009). Definition of Conservatism is accounting practices that “look forward to no profit but anticipate all losses” in accounting conservatism for claiming profit high level of verification is necessary and losses is recorded as they are discovered and most expenses as they are incurred. In the above given definition while reporting asset select the lowest value and while reporting liabilities select the maximum value among possible option.

GAAP is an international convention of good accounting practices. It is based on the following core principles. In certain instances particular types of accountants that deviate from these principles can be held liable.

Generally accepted accounting principles (GAAP) offer a framework for all standards, rules and procedures that are ""¦defined by the professional accounting industry" and have been adopted by "nearly all publicly traded U.S. companies" (Investing Answers). The principles contained within GAAP are regularly updated in order to "reflect the latest accounting methodologies," and companies rely on these updated principles, which are both established and administered by the American Institute of Certified Public Accountants (AICPA) and the Financial Accounting Standards Board (FASB) (Investing Answers).

Generally accepted accounting principles, better known as (GAAP) discloses statements and reports financial information dealing with businesses and organizations. They are rules made by the Financial Accounting Standards Board (FASB) in which are commonly used in the health industry to maintain the decisions of the organization. GAAP gives detailed information to investors about the budget of the organization and their debt. GAAP includes the most common principles used in the health care setting. They are; the entity concept, going-concern concept, matching principle and cash vs. accrual accounting, cost principle, objective evidence, materiality, consistency, and full disclosure

Jim will appear to making less money than it actually did and therefore have to report fewer taxes. In other words, Jim is seeking for a tax saving. It can be explain by using the contracting perspective where manager will choose accounting techniques that will maximizes his or her utility at the expenses and also maximize bonuses. Furthermore, by creating LIFO inventory layer adjustment it will give lower reported earnings. If the company can avoid the inventory increase for the year and instead having a reduction, they can take a credit adjustment to cost of sale and increase their profit. Under literature Scott (2000), this proposal fall under opportunistic earning management where the management report earnings opportunistically to maximize own profit. Related study are Burgstahler and Dichev (1997) conclude that managers engage in earning management to avoid reporting losses or earning decline. Research show that there is negative relationship between unexpected discretionary accruals and stock returns around the earnings announcement date. This result indicates that the market views discretionary accruals as opportunistic.

The conceptual framework of accounting is made up of entities, measurement processes and the objectives and characteristic of the information needed. With the accounting of transactions economic entities are defined and measurement processes are created and the information required is clarified. Once a need and recognition of the value of information was acknowledged the need for a conceptual framework of accounting came into being. Once the conceptual framework is created a need for rules and laws that enforce the standards, principles, and codifications are formulated to meet the needs of the economic entities. [1]

In the underlying paper the author re-examines the conservatism principle and its asymmetric effects on earnings. With samples consisting of all firm-year observations from 1963 to 1990 with returns data on the CRSP NYSE/AMEX Monthly files and respective accounting data on the COMPUSTAT Annual Industrial and Research files, he formulates and tests four major hypotheses to find evidence for his predictions. At first he chracterizes “conservatism in accounting as the more timely recognition in earnings of bad news regarding future cash flows than good news”.1 In his first hypothesis he predicts a more sensitive response of earnings towards bad news in comparison to good news, proxied by negative and positve annual stock returns. His second prediction is that earnings are more timely than cash flow, indicating a stronger association of accruals to conservative accounting effects. Hypotheses three and four account for a test on the

This report investigates the application of conservatism in accounting and its role in financial reporting. We also examine and compare the advantages and disadvantages associated with conservatism and provide our opinion about conservatism. Conservatism may be a controversial accounting measurement principle but it has a long history and its use is far-reaching. Conservatism by definition is that all probable losses or expenditures will be recognized as they

Earnings management reduces the quality of financial reporting, it can interfere with the resource allocation in the economy and can bring adverse consequences to the financial market. This essay analyses both, causes and motives of earnings management as well as possible remedies. Therefore, it is not surprising that market participants, legislators, regulators, and academics are concerned with the need to control financial reporting abuses.

This paper is a contribution made my Ross L. Watts and Jerold L. Zimmerman, titled as “Towards a Positive Theory of Determination of Accounting Standards” published by American Accounting Association. It explores the factors that have been influencing management’s attitudes in lobbying on accounting standards. It describes an attempt made by two in evolution and development of the Positive Accounting Theory by reasoning, factors like taxes, regulations, management compensation plans, book keeping cots, etc. The results concerned with the theory are consistent.

The purpose of financial statement is to provide entities form employee’s to government organizations to include all stakeholders viable and reliable information that effects strategic decisions. With the differences between the U.S. GAAP and IFRS pose problems over the an acceptable accounting flaws that exist with in standards of accounting practice relevant to manipulate the system that has been adopted. Via Turner Investments (2016) a CPA blogger says "Anyone who believes all countries can embrace international accounting standards and use those standards in the same way is dumber than a sack of rocks, The New York Times Web site.” Additionally, as cited by Hassan (2015) of Zhou and Chen that “the reason why banks manipulate earnings is supported by three arguments: signaling argument, income smoothing or earnings management argument and capital management argument” (p. 93). Further in concern, is a statement by American Institute of Certified Public Accountants (AICPA) that the “U.S. GAAP must go” declared in Forbes.com that the system can “collapse under its own weight” due to playing and construing financial records (Turner Investments, 2016). The regulation heavy U.S GAAP bares constraints and needs to be more user-friendly as with the IFRS standards given way to a universal international accounting system reflective of the times we live in.

Accounting is used as a tools to inform investors and other stakeholders about management’s performance. However, accounting standards permits management to use judgment in financial reporting methods for some accounts as they have best knowledge of its business so it can choose accounting alternatives that suit their business. With ability to choose its preferable reporting methods, estimates and disclosure, this flexibility creates opportunity for managers to distort earnings in which they adopt accounting methods that do not truly reflect firms’ financial status (Healy and Wahlen, 1999). In addition, due to the fact that management has better access to firms’ business transactions and operations than stakeholders do and auditing and

The Burns and Scapens framework for analyzing managerial accounting change was built on the study of old institutional economics, which sees "economics as a process of social provision, subject to multiple and cumulative causation." This view culminates in a model that argues that the managerial accounting practices at institutions are subject to a process of constant change, influenced by routines and rules. The institutions contribute to these routines and rules, but so do actions on the part of managers within the institutions. By combining multiple influences over time, we arrive at modern managerial accounting practice. In other words, Burns and Scapens tells us that managerial accounting practice changes over time, influenced by a number of factors including rules, routines and actions.

Hence, the negative impacts of earnings management and accusing earnings management as one of the main reason of last decade financial scandals have forced accounting setters and financial regulators to provide solutions and initiatives for hindering earnings management. However, most of the attempts have failed, since earnings managements researchers found that managers still can achieve their earnings management objectives, through manipulating real activities. So it is more useful to examine the relationship between accounting responsibility in real earnings management. ????