GAAP (Generally Accepted Accounting Principles)
What is GAAP?
GAAP stands for Generally Accepted Accounting Principles. Despite its funny name, it is a very important idea for investors and companies alike. Basically, GAAP is a set of principles, standards, and procedures that companies agree upon in order to report their financial data. Some standards must be adhered to, such as those set by certain boards, and others are just commonly used standards that have become commonplace in these statements.
What are the components of GAAP?
GAAP includes hundreds of different components, but here are a few of the most important:
- Inventory costs
- Debt
- Stockholders' equity
- Short-term investments
- Long-term investments
- Revenues and Sales
- Taxation
- Profits
- Goodwill and other intangibles
Why is GAAP important?
Companies that use GAAP when making their reports will have mostly consistent ways of displaying the data. As a result, it is easier to find what you need, and more difficult for the company to trick you or misrepresent their figures. GAAP covers many different aspects of the financial reports, giving the companies a template and making your effort to read them easier.
Watch out for...
If a company does not use GAAP to report their financial data, be cautious! There is a better than average chance that they are trying to hide something from investors and the public. Also, realize that GAAP is only a set of standards. The same set of data can be displayed multiple ways to convey different things. It is still possible for companies to be tricky and misrepresent themselves even while adhering to GAAP principles. As a result, do not automatically believe a company's financials just because they are using GAAP.
Comparison of GAAP and non-GAAP
There can be great disparities in accounting methods. The following shows a comparison between GAAP and non-GAAP methods:
