Question

CA1-7 WRITING (Need for GAAP) Some argue that having various organizations establish accounting principles is wasteful and inefficient. Rather than mandating accounting rules, each company could voluntarily disclose the type of information it considered important. In addition, if an investor wants additional information, the investor could contact the company and pay to receive the additional information desired.InstructionsComment on the appropriateness of this viewpoint.

Short answer

The above viewpoint is wrong; it is important to follow the common rules, procedures, and guidelines as it brings uniformity to the financial statements.

Step-by-step solution

Meaning of GAAP

The term GAAP means generally accepted accounting principles. All companies use GAAP to prepare the organizations' financial statements. GAAP principles are commonly accepted and followed by the rules, policies, and procedures which are used at the time of preparation of financial statements.

Reasons for following GAAP while preparing financial statements

The main reason for following the GAAP rules while preparing the financial statements is to ensure that the financial statements are complete, have uniformity or consistency, and are comparable. The GAAP rules and procedures are commonly accepted accounting principles. When companies follow these rules and procedures while preparing the financial statements, it becomes easy for the companies to compare the company to company results from one year to another year. Even investors can rely on the company's financial statements, which are prepared based on the GAAP rules.

Commenting on the viewpoint of the people on the given statement

The given statement is wrong. It is necessary to follow the common rules, procedures, and policies while preparing the organization's financial statements. The decision-making is dependent on the financial statements of the company.If the company does not follow the common rules and procedures while preparing the financial statements,the important decisions are affected. If the company follows common rules and policies while preparing the financial statements, inter-firm and intra-firm comparisons get easier.

The investors can compare the company's financial statements and decide on their investment plan.

Even creditors such as commercial banks look at the financial statements of the company to give a loan to the company.

Conclusion

Hence, it is very important to follow the common rules and procedures while preparing the company's financial statements.