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Theory: GAAP vs. IFRS finance choices, best statement

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1. The Financial Accounting Standards Board (FASB) sets the accounting rules for public companies in the United States. These accounting rules are known as Generally Accepted Accounting Standards (GAAP). The International Accounting Standards Boards (IASB) proposes international accounting rules. These rules are known as International Financial Reporting Standards (IFRS). There has been considerable discussion concerning the possibility that the United States would replace GAAP with IFRS.

Accordingly, do you think the United States should replace GAAP with IFRS? Do you believe that IFRS will ever be an universally accepted set of accounting rules?

2. Using the DuPont Model, should we assume that every company should have a high profit margin and a high asset turnover in order to be successful?

3. Current assets are an important element of the firms resources used primarily to provide the firm liquidity to support their current and long term liabilities. What are some of the issues concerning these important assets and how management and investors look closely at them to determine the health of the firm.

4. In the development of a depreciation approach for the long-term assets of the firm what areas should the accountant be looking at to determine which method should be used. What areas for tax purposes should be considered or are they the same?

5. In looking at the owners' equity does it matter how we blend the common and preferred stock in the firm? Why would management choose the use of stock to support the financial needs of the firm rather than the use of debt?

6. There are 4 main financial statements that we use for our financial management of the firm. Which is more important and how do they relate to one another? Can we do without any of them? What would be some of the information we would expect to see in the notes to the financial statements?

7. What is the difference between financial accounting and managerial accounting? Provide example of each and how they assist management in the control of the firm. Identify the some of the areas both work in and some of the unique models that each use. Can both be used interchangeably and if not why not.

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Your tutorial comments are 918 words and offer the opinion of Dr. Sargent (and so no references are included) on these questions.

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1. The Financial Accounting Standards Board (FASB) sets the accounting rules for public companies in the United States. These accounting rules are known as Generally Accepted Accounting Standards (GAAP). The International Accounting Standards Boards (IASB) proposes international accounting rules. These rules are known as International Financial Reporting Standards (IFRS). There has been considerable discussion concerning the possibility that the United States would replace GAAP with IFRS.

Accordingly, do you think the United States should replace GAAP with IFRS? Do you believe that IFRS will ever be an universally accepted set of accounting rules?

I think the US GAAP will start looking more and more like IFRS as the two standard setting bodies work together. I do not think it will replace US GAAP because the level of litigation in the US requires more specific rules than IFRS offers. Auditors need the certainty of the rules to avoid litigation that questions their judgment and puts them out of business.

2. Using the DuPont Model, should we assume that every company should have a high profit margin and a high asset turnover in order to be successful?

While it would be awesome to have high turnover and high margins, it is nearly impossible to accomplish. The two ingredients to the DuPont model (profit margin and turnover) are usually a tradeoff (except perhaps for monopolies). That is, if you lower the price, you get higher volumes. If you raise the price, volume goes down but profit margins rise. So, these two are usually moving in the opposite directions of each other. You can be successful with high turnover (think Costco) OR high margins (Apple).

3. Current assets are an important element of the firms resources used primarily to provide the firm liquidity to support their current and long term liabilities. What are some of the issues concerning these important assets and how management and investors look closely at them to determine the health ...

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Carol Sargent, PhD
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  • BSc, University of Virginia
  • MSc, University of Virginia
  • PhD, Georgia State University
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