An insight into the Generally Accepted Accounting Principles


GAAP are the set of rules which are used in the preparation of financial statements. Every organization which trades publicly must release their financial statements each year. These financial statements are used by the investors, banks and creditors to determine the financial health of the organization. For the purpose of comparing the financial statements of the companies, the information provided on the financial statement must be in a similar format. GAAP is based around four key assumptions, four general principles and four basic limitations. The four key assumptions of GAAP are business entity, going concern, monetary unit and time period principle. The four general principles are cost, revenue, matching and disclosure and the four basic limitations are objectivity, materiality, consistency and prudence (Wise geek, 2011).

Contra-Asset Accounts:

This account collects the entire amounts which are the reductions of an asset. This account will mostly have a credit balance. There are two types of contra-asset accounts. First is the allowance for doubtful accounts, which gives an estimate at the end of every accounting period for the expected losses. This account appears as a decrease in the accounts receivable balance on the balance sheet. Second is the accumulated depreciation, which records the depreciation of an asset over its useful life. The amount by which an asset is depreciated that is recorded in the accumulated depreciation account. A decrease of assets is shown by this account on the balance sheet (Rec wizard, 2010).

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Historical Cost:

It is a term which is used in describing the original cost allied with a given purchase. The amount is presented on the same requisites as at the time of purchase. It is not even adjusted for inflation or for any other reason. This method is used in many business situations but it also considered of less value in approaching the real worth of any economic product from this point of view by some financial analysts. For example, if xyz purchases an asset for $6000 and keeps an estimate then the depreciation cost will be $600 per year. The asset after the first year will be depreciated to $5500. If the price of the asset after the first year will be $5900, xyz will not write the price of the asset after the first year. The asset will stay of the original price and less the depreciation till the time asset is not sold (Wise geek, 2011).

Accrual Basis vs. Cash Basis Accounting:

These are two methods of handling cash in a business. In cash basis accounting, earnings are only recorded when one receives cash from the customers and the expenses are only recorded when one really writes a check to the seller. This method is simple and does not consume a lot of time but it can become a pain if you sell products or buy products on credit. In accrual basis accounting the income is only recorded when the payment is received and the expenses are only recorded when one receives goods. Accrual method of recording cash flow is more appropriate because it gives a proper picture of the financial statement. It records the income or payments when they really incur (Tool kit, 2011).

Accounting Standards Codification:

The FASB has officially launched its accounting standards codification which is a research tool that will be used as a single source of reliable nongovernmental U.S generally accepted accounting principles. This recognizes numerous of U.S GAAP pronouncements into 90 accounting topics. This codification even includes Securities and Exchange Commission guidance in different sections. The existing standard documents will become archaic by the new codification and will be taken as non-authoritative by the FASB. The advantages of accounting standards codification are that they will be providing access to all authoritative topics in one place, it will help in reducing the time spent in researching of the people, it will reduce the chances of nonconformity with standard through better usability and will be providing correct knowledge with real time updates (Nowalk, 2009).

Part II:

Company Profiles:

Samsung electronics is globally recognized organization which supplies technology throughout the world. They are one of the biggest electronic organization which manufacture consumer as well as business related electronic products.

RTL group is one of the biggest European entertainment networks; they operate in eleven different countries while having the largest production houses in the world. Their viewership is more than 200 million people across Europe.

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Lockheed Martin Corporation is one of the biggest organizations in its own league; it provides IT and security solutions throughout the world. The major part of their sales is in aeronautics and space industry.

Financial Statements:

The annual reports for the year of 2009 of the companies Samsung, RTL group and Lockheed Martin Corporation have been selected to be revised for their financial statements. In the following paragraphs the financial statements of each of these three companies will be analyzed in different aspects.

Samsung Electronics:

Financial Statements: The financial statements of the company have been published including balance sheets, income statement, cash flow statement and appropriations of retained earnings. The figures are presented in South Korean currency which is then translated in US dollars. The financial statements are provided with footnotes which give the detailed information of accounting policies and financial essentials for reporting. Previous year ending 2008 figures are provided as well for comparison (Samsung, 2009).

Net Income and cash flow: The Company is making good amount of net income and cash flow from operating activities. If we compare both the statements then it is obvious that there is great rise in the cash flow than the net income which maybe important to the organization.

Company's Future Trends: Great increase in the accounts receivable has also been seen which indicates that the company has been giving a lot of credit to its customers; this may create problems in the coming years.

Individual Segments: Samsung has also provided the segment based reporting on geographical area which is under the note 34 on page 88 of the annual report for the year of 2009 (Samsung, 2009)

RTL Group:

Financial Statements: The financial statements in the annual report are presented in a different way than the other companies. Annual report of RTL group contains consolidated income statements as well as consolidated statement of comprehensive income, consolidated statement of financial position, statement of changes in equity and cash flow statement. The figures are presented in Euros. The financial statements also provide the figures of the previous year for comparison (RTL group, 2009).

Net Income and Cash Flow: The Company has shown a great rise 2million Euros in its comprehensive income whereas its net cash from operating activities is in a moribund state by 302million Euros.

Company's Future Trends: This shows that despite of showing net profit for the year; company may go through cash problems and it might need funds from external sources.

Individual Segments: Segment reporting of the RTL group is based on the business segment and geographical placements of companies and customers. It can be found under note 4 on page 127 of the financial statement (RTL group, 2009).

Lockheed Martin Corporation: Lockheed martin Corporation has a different structure and layout of financial statements. The company records consolidated financial statements as well as statement of earnings, balance sheet, cash flow statement and statement of stockholder's equity changes in equity. Consolidated financial statements are provided as well which includes detailed accounting policies and additional financial information. The figures are presented in US dollars. Financial statement also provides the figures of the previous for comparison (Lockheed Martin, 2009).

Net Income and Cash Flow: It is noted in the financial statement of 2009 that the company's net income was in a moribund state, its cash flow from operating activities has declined a lot.

Company's Future Trends: The Company's situation can get worse if the company keeps on running in a declining state and could create financial issues for the company, since it will not be able to pay for its operations.

Individual Segments: Segment reporting of Lockheed Martin Corporation is on the basis of business segments and customer categories which are provided under the note 4 on page 66 of the financial report.