« Computer Professional Exemption | Main | Equity Compensation Accounting Issues »

Nov 8
GAAP
Linda Chan November 8, 2006
Know More: Accounting fraud 2.0, Accounting fraud
The following is not meant to be legal or financial advice, and is provided for information purposes only.

On October 13, 2006, Professor Solomon N. Darwin of UC Berkeley, gave a lecture to attorneys on Generally Accepted Accounting Principles (GAAP).

For the balance sheet, assets indicate the future economic benefit. The user of the financial statement should review who owns or controls the assets, and the transaction or event of acquisition. One must not rely only on the balance sheet to determine the financial health of a company. For instance, intangible assets on a balance sheet that may need to be amortized may show up as losses. In this instance, one should also review the cash flow statement to determine how well the company is doing. A company that engages in many acquisitions may have many intangible assets.
The liabilities determine the company’s future sacrifices of economic benefit. They may consist of contingent liabilities such as pending lawsuits. Pending lawsuits are reported when damages are probable and estimable. Lawsuits are disclosed in footnotes. Liabilities include anything that is past due, such as rent. Liabilities may also include warranties. A warranty expense is recognized at the time of sale. A company reviews the historicals to determine how many goods are returned. When a good is returned, the costs are taken out of warranty reserves. This is an example of the matching principle.

The income statement includes discussions on revenues. Revenues are the inflows of assets for goods/services sold. They are recognized when earned and realized. Whether revenues are earned depends on delivery. Delivery depends on shipping terms. When revenues are booked, they need to match with the related expenses. For example, factory labor is considered an asset when selling manufactured products such as cars.

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