Accounting For Dummies®, 4th Edition

2.4. Keeping in Step with Accounting and Financial Reporting Standards

The unimpeded flow of capital is absolutely critical in a free market economic system and in the international flow of capital between countries. Investors and lenders put their capital to work where they think they can get the best returns on their investments consistent with the risks they're willing to take. To make these decisions, they need the accounting information provided in financial statements of businesses.

Imagine the confusion that would result if every business were permitted to invent its own accounting methods for measuring profit and for putting values on assets and liabilities. What if every business adopted its own individual accounting terminology and followed its own style for presenting financial statements? Such a state of affairs would be a Tower of Babel.

2.4.1. Recognizing U.S. standards

The authoritative standards and rules that govern financial accounting and reporting by businesses based in the United States are called generally accepted accounting principles (GAAP). When you read the financial statements of a business, you're entitled to assume that the business has fully complied with GAAP in reporting its cash flows, profit-making activities, and financial condition — unless the business makes very clear that it has prepared its financial statements using some other basis of accounting or has deviated from GAAP in one or more significant respects.

If GAAP are not the basis ...