Which of the following is NOT true about generally accepted accounting principles (GAAP)? a. In the United States, they are issued by the Financial Standards Accounting Board. b. They are stringent, giving firms little latitude in reporting financial situations. c. Two firms that both follow GAAP can still have significant differences in how they compute their financial outcomes. d. They are outlined in Statements of Financial Accounting Standards.
The Correct Answer and Explanation is:
The correct answer is b. They are stringent, giving firms little latitude in reporting financial situations.
Explanation:
Generally Accepted Accounting Principles (GAAP) are a set of accounting standards used to prepare financial statements in the United States. They are designed to ensure transparency, consistency, and comparability across financial reporting. However, GAAP provides companies with certain latitude in areas such as judgment calls, estimates, and the choice of methods to reflect financial outcomes. This flexibility allows firms to adapt the principles to their unique business situations while maintaining overall consistency with the framework.
Let’s break down each option:
- a. In the United States, they are issued by the Financial Accounting Standards Board (FASB).
- This statement is true. FASB is the body responsible for setting and updating GAAP in the U.S. They issue statements that guide the preparation of financial statements.
- b. They are stringent, giving firms little latitude in reporting financial situations.
- This is not true. While GAAP provides a framework for consistency, it allows some degree of flexibility in how companies choose to apply certain principles. For instance, companies can select from different depreciation methods (straight-line or declining balance) depending on their needs.
- c. Two firms that both follow GAAP can still have significant differences in how they compute their financial outcomes.
- This is true. Although both firms are following GAAP, they might use different accounting methods or make different estimates (like in the valuation of inventory or the determination of bad debt), leading to different financial outcomes.
- d. They are outlined in Statements of Financial Accounting Standards (SFAS).
- This is also true. The SFAS was a key way FASB issued new accounting standards. However, SFAS has been replaced by the Accounting Standards Codification (ASC) as of 2009, but the content is still relevant in the context of GAAP.
In conclusion, option b is the only one that is inaccurate because GAAP is not overly rigid and allows flexibility in certain aspects of financial reporting.
