The essentials of finance and accounting for nonfinancial managers edward fields – chapter 4 generally accepted accounting principles

A Review
THE ROLE OF THE FINANCIAL Accounting Standards Board (FASB) was briefly described in the introduction. This is a research organization, made up primarily of accountants. The FASB, along with the entire accounting profession, has, over time, developed a series of rules called generally accepted accounting
Principles (GAAP). In addition, the FASB publishes what are called FASB Bulletins. These are a series of more than one hundred publications that describe what corporate reporting methodologies should be. Most of these methodologies have been adopted and are now incorporated into accounting practice.
A broad analogy is that the GAAP rules are the basic constitution and the bulletins are proposed amendments. Here are some of the GAAP rules.

The Fiscal Period
All reporting is done for predetermined periods of time. Reports may be issued for months or quarters and certain reports are issued annually. Accounting fiscal periods usually coincide with calendar periods, although not necessarily with the calendar year. For example, a company’s fiscal year may be July 1 to June
30 or February 1 to January 31.

The Going Concern Concept
When accountants are keeping the books and preparing the financial statements, they presume that the company will continue to be in existence for the foreseeable future. If there is serious doubt about this, or if the company’s ceasing operations is a certainty, the financial statements (essentially the balance sheet) will be presented at estimated liquidation value.

Historical Monetary Unit
Accounting is the recording of past business events in dollars. Financial statements, and in fact all financial accounting, report only in dollars. While units of inventory, market share, and employee efficiency are critical business issues, reporting on them is not within the realm of financial accounting responsibility. Financial statements depicting past years are presented

as they occurred. The selling prices of the products and the value of assets may very well be different today, but reports of past periods are not adjusted.

Conservatism
The principle of conservatism requires that “bad news” be recognized when the condition becomes possible and the amount can be estimated, whereas “good news” is recognized only when the event (transaction) has actually occurred.
One example of this is the allowance for bad debts on the balance sheet, which is recorded before the losses are actually incurred. Another example is reserves for inventory writedowns, which are recorded before the dated or out of style products are actually put up for sale at distress prices. Revenue, however, is not recorded, no matter how certain it is from a business point of view, until the product is actually delivered or the service is actually provided. Payment in advance, while assuring the certainty of the sale in a business sense, does not change the accounting rule. Revenue is recorded only when it is earned.

Quantifiable Items or Transactions
The value of the company’s workforce and the knowledge the workers possess may in a business sense be the company’s critical competitive advantage. However, because that value cannot be quantified and expressed in dollars, accounting does not recognize it as an asset. The value of trademarks and franchise names is also generally not included. Coke, Windows, and Disney are certainly franchise brand names with worldwide recognition.