Essay Example on Generally accepted accounting principles GAAP are Rules

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GENERALLY ACCEPTED ACCOUNTING PRINCIPLES 2 Generally accepted accounting principles GAAP are rules that guide the preparation of financial statements Every public traded company has to prepare financial statements every year For investors and other stakeholders to determine the financial health of a firm each public traded company must follow these rules Deegan 2012 The focus of this paper is to examine the application of GAAP in Australia For the discussion the financial statements of Alumina Limited with be used Question 1 Generally the gross income of a company is calculated by subtracting the total expenses incurred by the company from the revenues accrued through sale of goods or other holdings Companies that are publicly traded release their income statements or the profit or loss statement Deegan 2012 Through this statement one can be able to identify the gross income or the net income of the company Alumina Ltd publishes annual reports on its income and is represented as a summary of its statement of profit or loss and other comprehensive income In the statement the company provides information on total revenues total profit for the year and total comprehensive income for the specific year In its 2016 2017 report the company disclosed its revenues as 4 057 million US dollars while profit for the year was 48 9 US million

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The total comprehensive income for the year was 524 7 million dollars These figures presents the comprehensive income for the year 2017 as indicated in their profit loss statement Alumina Limited 2017 Question 2 The fundamental principle of accountability requires public listed companies to report credible financial information to the government the general public potential investors and other stakeholders such as shareholders Such information must represented in a specific way that is GENERALLY ACCEPTED ACCOUNTING PRINCIPLES 3 acceptable to all the stakeholders for the statements to be credible The development of such statements should follow accepted and identifiable standards Firms are required to adopt accepted standards rather than developing statements according to their own preferences or those of their auditors or accountants GAAP provides a guideline on how to prepare financial reports Use of GAAP allows companies to develop reports that are credible to stakeholders and can be used to compare a company's financial status to those of other companies and therefore make a rational decision about investments credit or other financial decisions If a company chooses its own method of reporting investors and other stakeholders would find it difficult to compare its performance to others and such statements would be of no use to the stakeholders Australian Accounting Standards Board 2015 Another key rationale for the use of GAAP is that allowing companies to choose their own financial reporting standards would lead to inconsistencies Without GAAP companies would choose the information they want to share or hide This means that companies that are not performing well will cheat to ensure that the reputation of the firm is maintained By implementing GAAP companies cannot cheat when developing financial reports Also GAAP minimizes the risk of errors in financial reporting owing to the number of checks and safeguards that underpin these standards 



Flood 2013 Question 3 GAAP requires companies to include the following in their financial statements a assets b liabilities c equity d expenses and income including losses and gains e cash flows A complete set off financial statements should comprise of a statement of cash flows for a given period statement of changes in equity comprehensive income for the period and financial position of the company at the end of the financial year The presentation of this information GENERALLY ACCEPTED ACCOUNTING PRINCIPLES 4 should be based on accrual principles of accounting in that the presented items should satisfy the definition of such items Companies should avoid misrepresenting for example liabilities as asset and so forth Australian Accounting Standards Board 2015 Alumina Ltd follows these rules when publishing its financial statements In its balance sheet for year ending 31 Dec the company indicates in its financial statement that its total assets amounted to 2 117 8 million US dollars while its total liabilities were 110 9 million US dollars The net assets from the financial statement for the year was 2 006 9 million US dollars In terms of cash flow the company reported cash from operations as amounting to 118 4 million dollars while free cash flow was 152 million dollars The company further reported a change in total equity between year 2015 and 2016 from 1982 million dollars in 2015 to 2006 9 million dollars in 2016 The financial report also includes other financial measures such as cash flow changes in income as well as comprehensive income for the year ending 2016 Alumina Limited 2017 The information contained in the report shows that the company adheres to the accounting standards of Australia Question 4 While Alumina Ltd published a comprehensive report that adheres to the generally accepted accounting principles there are some areas where the company fails to publish some information For example in its statement of financial position the company did not indicate its assets in terms of property plant and equipment also it did not classify assets in terms of tangibility Also the company did not include deferred tax liabilities and assets Furthermore the company did not disclose non controlling interests liabilities for current tax assets classified as held for sale and total assets classified for sale Lack of this information contravenes the recommendations of Australian accounting and reporting standards However the financial GENERALLY ACCEPTED ACCOUNTING PRINCIPLES


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