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GAAP

1. If GAAP is not required for internal reporting, than management can develop any system they choose. This does however bring up an issue that is quite important to every company... efficiency. Companies obviously work hard to build their efficiencies and they strive not to waste their efforts. Time is money as they say. However, is having a management accountant ignore GAAP inefficient?

"Why would a person (a management accountant) go to the trouble of creating a whole different standard of presenting the numbers when one already exists and is universally recognized?"

2. In todays fast pace and stream line manufacturing, management can not afford to dismiss any tools that can lower costs in all areas of a company". This fits very nicely with how I define the role of a management accountant. The accountant should produce reports that are beneficial for managers to make well-informed decisions relevant to the objectives of the organization. Managers need to have the best information possible and ignoring any tools that can present better information is an unwise choice by any company.

That leads to the question, are GAAP financial statements going to provide managers with all of the information that they need to make decisions? Are public companies that are required to use GAAP for financial reporting crippling their managers by not giving them all the information, both quantitative and qualitative, to make decisions?

3. Let's discuss another scenario where both quantitative and qualitative aspects come into the decision making process. Pretend that you have just received two job offers and you now need to decide between the two. The details of each job are below.

Job A:
Salary: $40K a year
Work week: 40 hours

Job B:
Salary: $47K a year
Work week: 50 hours

The quantitative difference is $7,000 that you can hold in your hand. Qualitatively there is a choice to be made also on how much time you are willing to work. Both of these variables are important. Receiving a higher salary is great but so is having more time to spend with your family. Is either one of these aspects "better" than the other? Can you ignore one of them and still come to an informed decision?

GAAP based financial statements focus mainly on the quantitative aspects of accounting, i.e. how much money did you make, spend, save, how much you owe or are owed. This is information crucial to managers running their companies or departments. What about the qualitative aspects? How does a manager know what qualitative aspects to consider?

4. Data is extremely important and good managers will seek out additional information to base their decisions on. For a decision like a purchasing a new machine, an accountant might be able to put together a good comparison of the quantitative considerations, i.e. how much money does it cost, how much do you expect revenue to change, what additional costs are there, etc.

In this instance, the purchase price might be good, and we might expect the new machine to increase our revenues but the accountant's report will be lacking the qualitative considerations. In the end, is the purchase really worth it if the machine has a history of breaking down every month? A lot of time can be lost, and a lot of money, if the decision to purchase is based solely on the quantitative aspects presented by the accountant. In this example, by searching out this qualitative consideration, it also brings to light a quantitative consideration that was initially missed (the loss of money due to down time) because the 'numbers' did not take into account user reviews of the product. What avenues do managers have to seek out this qualitative information?

Solution Preview

1. If GAAP is not required for internal reporting, than management can develop any system they choose. This does however bring up an issue that is quite important to every company... efficiency. Companies obviously work hard to build their efficiencies and they strive not to waste their efforts. Time is money as they say. However, is having a management accountant ignore GAAP inefficient?
"Why would a person (a management accountant) go to the trouble of creating a whole different standard of presenting the numbers when one already exists and is universally recognized?"

By having a management accountant, he or she has to rely on the GAAP in order that all the numbers are crunched in an efficient manner. The individual will answer to those in management, but the GAAP standards remain the same and do not change over time. In essence, the difference is the fact that the person is doing accounting in a managerial setting. All the numbers are recognized, and this means that there is no need to create something different that is already in place as well as works in every workplace in the United States. A person who is trying to change the principals of the GAAP is possibly breaking it, or not a true accountant for that matter because of the fact that he or she does not want to comply with the policies set forth by the manual provided for anyone in this particular field. Regardless, a person has to decide whether or not to comply or risk losing one's job through the process because the GAAP is there to keep everyone on the same standards with the U.S. government, especially if a tax audit occurs in the future.

U.S. GAAP (2011). A brief history. Retrieved on June 23, 2011, http://accountinginfo.com/financial-accounting-standards/asc-100/105-gaap-history.htm.

2. In today's fast pace and stream line manufacturing, management cannot afford to dismiss any tools that can lower costs in all areas of a company". This fits very nicely with how I define the role of a management ...

Solution Summary

This solution discussed the GAAP in depth.

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