Why should managers be allowed some flexibility in their financial accounting and reporting choices? Of the two approaches to accounting standard setting that are mentioned above, which best describes the current financial reporting environment in the United States?
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It is often alleged that the value of financial statement information is compromised by the latitude that GAAP gives to management. Companies can use different accounting methods to summarize and report the outcome of otherwise similar transactions. Inventory valuation and depreciation are examples in which GAAP allows several alternative accounting methods.
At one extreme the FASB and the SEC could limit accounting flexibility by establishing a single set of accounting methods and procedures that all companies would apply. At the other extreme, The FASB and the SEC could simply require companies to provide relevant and reliable financial information to outsiders, without placing any restrictions on the accounting methods used.
Required:Provide a two three sentence reponse based on the selected paragraph
1. Why should managers be allowed some flexibility in their financial accounting and reporting choices?
2. Of the two approaches to accounting standard setting that are mentioned above, which best describes the current financial reporting environment in the United States?
3. Discribe the advantages and disadvantages of these two approaches to accounting standard setting, and tell how thse advantages and disadvantages vary across different groups of financial statement users.
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1. Why should managers be allowed some flexibility in their financial accounting and reporting choices?
Because financial accounting requires a fair amount of flexibility in certain areas. For example, companies decide which of several inventory valuation methods to utilize. Managers also regularly make choices regarding depreciation methods and allowances for bad debt. The use of estimates and judgments form the base of many accounting rules. When firms begin using their power of estimation to change the outcome of financial results ...
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