GAAP and possible consequences?

User Generated


Business Finance

Question Description

What is the purpose of GAAP and the accounting cycle?  Is it possible to deviate from GAAP and the accounting cycle and still prepare financial statements?  Why or why not?  What are some possible consequences of this course of action?

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Explanation & Answer

Purpose of GAAP is to prepare and standardize the reporting of financial statements, such as balance sheets, income statements and cashflow statements, for publicly traded companies and many private companies in the United States. The purpose of GAAP is to ensure that financial reporting is transparent and consistent from one organization to another.

The purpose of accounting cycle is to help the business keep its accounting records in an orderly fashion and to report financial information.

Yes, it is possible to deviate from GAAP and still produce effective financial statements. Companies may deviate from GAAP to produce internal financial reports that can be used for decision making purposes. For example, a company could report assets at their market value, rather than the historical purchase price. This may be beneficial if the company plans to liquidate in the near future.


The primary problem with deviating from GAAP is that it eliminates consistency and comparability, and 3rd parties users may have a difficult time understanding the information. 

znquninag (2757)

Very useful material for studying!