General accepted accounting principles Essay

This is a set of rules that guide accountants and auditors in facility and audit of fiscal argumentations. GAAPs guide financial reporting in public organizations under due south requirements as well as in private companies and g all overnment organizations. These rules be not rigid and therefore allow the accountants and auditors rehearseing them some room to concord own judgments.GAAPs ensure that financial statements prep ard under its standards argon comparable, consistent, accredited and relevant. Such financial statement aid users in decision-making on such(prenominal) issues as investing decisions, credit worthiness and tax computation. They help accountants understand decisions when encountered by a difficult situation. monetary statements alert under GAAPs as well reflect a straightforward picture of the entitys financial position. (Stickney, C. and R. Weil, 2005) historical apostrophizeIt is a generally accepted business relationship principle that applies to preparation of the ratio sheet. This principle dictates that an item in the financial statement should be recorded at the amount that it was paying for rather than at commercialize value. This is because the market value fluctuates a lot and those preparing financial statements may apply subjective measures of the market value. Recording assets at their actual price does not affect a business entity much since assets argon held to facilitate the entitys trading operations and not for resale.It is criticized for ignoring the time value of money and market value of the various balance sheet items. However it is preferred as it leaves the commission no room to manipulate the values as they would with market values. Financial statements prep ard under this principles on therefore much(prenominal) reliable. (Stickney, C. and R. Weil, 2005)Accrual behind vs. money basis accountingAccrual basis accounting recognizes tax in the accounting period it is realized or earned and not ne cessarily when they ar paid up. Revenue is considered realizable if the entity has enough lay down to expect bills in future. It is considered earned when the entity has done enough to phiz compensation. The accrual basis in like manner dictates that expenses be charged from revenue they were incurred to produce. exchange basis accounting on the other hand, requires that revenues is recognise in the accounting period that money is received and expenses in the period they atomic number 18 paid for. Revenues and expenses involves in credit transactions are therefore not recognized until payment is done. It is usually utilise in small organizations with a unmindful credit periods. It is simple and inexpensive since one does not have to celebrate several ledger accounts such as accounts payable accounts receivable, prepaid and increase expenses. It also allows the entities to defer tax payments until it receives the notes.However accrual basis is more than widely used sinc e it gives a fairer view of the financial performance of an entity. It also complies with the accrual and matching concepts under US GAAP. The difference between the ii methods is on timing of recording transactions. Cash basis traces all gold come downs but fails to match revenues with expenses incurred. Accrual basis matches revenues with expenses incurred but fails to trace gold prevails. (Stickney, C. and R. Weil, 2005) To overcome this deficiency, the entity has to prepare a cash flow statement. on-line(prenominal) assets and liabilities vs. non- topical itemsCurrent assets are cash and assets that can be converted in to cash within a short period probably within a social class. They include accounts receivable, inventory and prepaid expenses. Non current assets are not sofa bed to cash in a short period and if convertible, there are still non-current as they are used in the entitys operation.Non-current assets are either tangible or intangible. Tangible assets include pr operty and lay down and machinery while intangibles include goodwills and patents. Current liabilities are those liabilities that go under due and are paid up within a year include accounts payable accruals, and tax liability. Non-current liabilities fall due in the recollective term and include such items long-term debt and deferred income tax.This classification is useful in determining the financial position of an entity. A business entity should pay its current liabilities with current assets and non-current liabilities with non-current assets and equity. A firm financing its current liabilities with non-current assets is not in a sinewy financial position.Part 2Wal-Mart stores IncThe consolidated balance sheet is arranged in the order of liquidity while the cash flow is prepared under the indirect methods.   All the statements are prepared in compliance with the US GAAP. Accrual basis accounting is applied and revenues are matched with the expenses incurred to gener ate them. Assets are recorded at the actual apostrophize of acquisition and not at the market value. The balance sheet items are classified as current and non- current items. (Wal-Mart, 2008) Wal-Mart Stores cash flow from in operation(p) activities is higher than the net income. The company is in a position to cope with its financial obligations as they fall due. The cash flow from operating(a)(a) activities is more useful to Wal-Mart since it is harder to manipulate than net income. This is especially so for a retailer where the management can engage in sales boosting activities such as channel stuffing. (Williams J. and J. Carcello, 2006).Google IncThe corporations income statement is prepared under the habitual sized format is thus easier to analyze. The balance sheet and cash flow statement have been combined in to a single statement devoid of much detail.The corporations cash flow from operating activities is higher than the net income, which is an indication of enough liquidity to meet obligations as they become due. The net income for Google is however more useful than the net cash flow from operating as more details of its calculation is provided in the companys yearbook report while the cash flow is given as a final figure. (Google, 2008)Honda worldwideThe financial statements are prepared using the accrual basis accounting and historical cost concept. The revenues and expenses are matched and balance sheet items recorded at the actual cost rather than in fair market value. The balance sheet items are classified as current and non-current and are in order of liquidity.The statements are in compliance with the Japanese financial accounting standards, and are in conformity with the US GAAP. The positive net cash flow from operations indicates that company has enough liquidity to meet its financial obligations. The operating cash flow is more useful since net income does not reflect the firms true financial performance. The cash dividends are p aid out cash from operating activities and it was therefore prudent to issue them. (Honda, 2006)PredictionsWal-Mart StoresThe company is apt(predicate) to be more profitable and have higher cash flows in 2007. This is because its investment work out both domestically and internationally has grown consistently over time. From the annual report it is clear that while the firm will expand its operations internationally, the harvest-time in revenues and cash flow may be hampered by interest rate fluctuations and exchange rate fluctuations. The effect of these fluctuations is however palliate through hedges. (Wal-Mart, 2008)GoogleThe company future financial out look is healthy and income and cash flow from operating activities are likely to grow in 2007. Constant growth in both measures of performance has been also increase absolutely and also relative to reverse. It has also achieved greater efficiency as the proportion of net income in revenue has growth consistently. The trend is likely to continue in 2007. (Google, 2008)Honda worldwideWhile the net income has been growing over time the net cash flow from operating activities have declined in 2006. This is an indication that the company may experience cash flow problems in 2007. This company projects that revenues will grow in 2007 in spite of risks make up by interest rate and foreign exchange fluctuations. It however projects the growth to be moderate. (Honda, 2006)