The Utility of GAAP financial statements

GAAP financial statements for any purpose is the transparency and integrity of these statements and the confidence people have in these statements as compared to those prepared under the absence of GAAP . Particularly after the ENRON and WorldCom scandals the shareholders are insecure about the proper disclosure of financial statements and the ratios derived from these statements . The principles of GAAP help in the accurate and complete disclosure of values which helps build up the confidence of the shareholders and eventually the value of the company . GAAP procedures also help in the

financial juggling of values through various methods of depreciation and doubtful debts

Pitfalls of using GAAP financial statements in assessing value creation

One shortfall of using GAAP financial statements is that the principles under GAAP are based on the business environment of U .S .A and might be misinterpreted in other countries . One article suggests that the users of financial statements are using other means to get the required information as the current business environment has considerably changed since the development of GAAP (Rimerman , 169 . The use of GAAP historical cost principle also results in a considerable change of estimated values . Consider a machine that was purchased 5 years ago and is lying idle in the factory premises . The real value might be far different from the original cost and the machine would not have depreciated considerably

Conclusion

As we have seen the GAAP financial statements help in manipulating values of the financial statement and in turn manipulating the ratios and value of the company . Value creation is of utmost importance in this era of corporate competition . As more and more companies go public the value of a company becomes more important as the shareholders now have to choose from a wide array of investment options in different...