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GAAP Questions: Purpose, Application and Consequences

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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? Provide an example.

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Solution Summary

The solution discusses the standardization of GAAP and the expectation of the readers of financial statements. Examples are given of perfectly correct deviations from GAAP and how those deviations are disclosed.

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We recognize that GAAP is the standard used in the presentation of financial statements. Because the standard is published and well-known, there are certain expectations about the data. If a company wishes to deviate from the standard, the financial statements require disclosure of the deviations. There were some very smart people who designed this rather simple procedure.

The reader of a financial statement expects that certain accounting ...

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