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Generally Accepted Accounting Principles Case

Autor:   •  December 19, 2012  •  Essay  •  342 Words (2 Pages)  •  1,168 Views

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GAAP, or Generally Accepted Accounting Principles is defined as the acceptable methods of accounting. GAAP establishes standards to make financial records relevant and reliable for all interested investors, stockholders, or other financial readers. Meanwhile, IFRS or International Financial Reporting Standards states how certain types of transactions on financial statements should be reported. The purpose of the IFRS is to make evaluations as easy as possible internationally, which is rather difficult because every country has their own set of rules. The use of IFRS have affected mulitinational companies around the world in terms of the change in the financial reporting of local standards to IFRS. GAAP and IFRS is two things that differ, there are some differences between GAAP and IFRS.

One major difference between accounting practices in GAAP and IFRS is that GAAP is rule-based while IFRS is principle-based. Principle-based accounting allows for different interpretation of the same transactions, where rule-based GAAP follows a set of rules in preparing financial statements - this means there is no room for error. In GAAP, unusual and infrequent items must be included as extraordinary items - extraordinary items are prohibited in IFRS.

The other difference is in relation to the LIFO (last in first out) cost flow assumption. Only GAAP accepts the LIFO method for inventory valuation, one reason why companies use LIFO is a way to keep company's tax lower. Whereas IFRS can only use average cost and FIFO (first in first out) for inventory valuation. The effect of using FIFO will be the opposite of LIFO in that companies will pay more taxes than assuming their cost of their goods sold is steadily rising, because their net income will appear to be larger.

GAAP and the IFRS are fundamentally very different. GAAP is ruled based as demonstrated in how it states inventory, leases, income taxes, and consolidation of subsidiary companies are reported;

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