FIN621 Quiz

FIN621

Generally Accepted Accounting Principles

Learning outcome: After attempting this activity, students will be able to understand the concepts of " Genera* Accepted Accounting Principles."

Background generally accepted accounting principle (GAAP) is a collection of rules for how businesses and companies disclose their financial data. Financial statements and their appended notes face several challenges, such as the language used, the amount of data supplied in each statement, and the classification of items in the statements. There are three components of GAAP designed to ensure that accounting and financial reporting methods are not deceptive. These include accounting principles, FASB rules and standards, and generally accepted industry practices. These elements help in establishing uniform standards for financial reporting and accounting, giving investors the information they need to assess a company's financial health. Accountants could misrepresent an organization's financial situation if they do not follow GAAP.

Case:

ABC Company has been in the business of manufacturing yarn. Five years ago, the company purchased machinery worth Rs. 100 million, with a residual value of Rs. 10 million and useful life of 10 years. The company implemented a straight-line method for charging depreciation for the first five years. Recently a new CEO, Mr. Hamid, has been hired, and he advised the accountants to use the double-declining method for charging depredation expenses.

Requirement:

You are advised to comment if the company adopts new depreciation method for reporting, then in such case, which accounting principle is violated, and in order to justify the change, which accounting principle is required to be followed.

Solution

accounting principle which is violated is " Principle of permanence of Methods"

Accounting principle is required to be followed is " Principle of Prudence"