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Explain importance of US GAAP, ISFR and liquidity

Explain why these concepts are important to financial statements.

A. Generally Accepted Accounting Principles (US GAAP)

B. International Accounting Standards (ISFR); and

C. Liquidity.

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A. The US Generally Accepted Accounting Principles set standards by which all independently prepared financial statement can be measured. The standards are purposely general in nature because it would be impossible to state rules for each type of financial situation. Some industry standards are more easily defined: such as the size of shoes or wattage of light bulbs. GAAP, on the other hand, tries to provide a framework for accountants to use in preparing financial statements.

The importance of having standards is that stakeholders of all kinds can assess and compare the financial statements to other companies in the industry or in the markets. Stakeholders may include shareholders, bankers, lenders, investors, financial analysts, potential buyers and sellers of stock or of companies, and anyone else who has an interest in a company with a published financial statement. Another class of stakeholders is those involved in enforcement: the IRS, the SEC, the FBI, the EPA and any number of similar agencies.

The third issue about GAAP relates to consistent quality in reporting. The guidelines have been basically unchanged over ...

Solution Summary

In a 721 word solution, the concepts are adequately explained together with numerous examples to better demonstrate the uses and importance.

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