style="font-size:15px;"> The types of information that have to be included with the financial statements
How information is classified and presented in financial statements (mainly in the form of footnotes)
The SEC makes the disclosure rules for public companies. Disclosure rules for private companies are controlled by GAAP. Chapter 10 explains the disclosures that are required in addition to the three primary financial statements of a business (the income statement, balance sheet, and statement of cash flows).
Divorcing public and private companies
Traditionally, GAAP and financial reporting standards were viewed as equally applicable to public companies (generally large corporations) and private companies (generally smaller). For some time, private companies have argued that some of the standards issued by the FASB are too complex and burdensome for private companies to apply. Although most accountants don’t like to admit it, there’s always been a de facto divergence in actual financial reporting practices by private companies compared with the more rigorously enforced standards for public companies. For example, a surprising number of private companies still do not include a statement of cash flows in their financial reports, even though this has been a GAAP requirement for 30 years.
Private companies do not have many of the accounting problems of large, public companies. For example, many public companies deal in complex derivative instruments, issue stock options to managers, provide highly developed defined-benefit retirement and health benefit plans for their employees, enter into complicated intercompany investment and joint venture operations, have complex organizational structures, and so on. Most private companies don’t have to deal with these issues.
Finally, we should mention in passing that the AICPA, the national association of CPAs, has started a project to develop an Other Comprehensive Basis of Accounting for privately held small and medium-sized entities. Oh my! What a time we live in regarding accounting standards. The upshot seems to be that we’re drifting toward separate accounting standards for larger public companies versus smaller private companies — and maybe even a third branch of standards for small and medium-sized companies.
Following the rules and bending the rules
An often-repeated story concerns three persons interviewing for an important accounting position. They’re asked one key question: “What’s 2 plus 2?” The first candidate answers, “It’s 4,” and is told, “Don’t call us. We’ll call you.” The second candidate answers, “Well, most of the time the answer is 4, but sometimes it’s 3, and sometimes it’s 5.” The third candidate answers, “What do you want the answer to be?” Guess who gets the job. This story exaggerates, of course, but it does have an element of truth.
The point is that interpreting GAAP is not cut-and-dried. Many accounting standards leave lots of wiggle room for interpretation. Guidelines would be a better word to describe many accounting rules. Deciding how to account for certain transactions and situations requires seasoned judgment and careful analysis of the rules. Furthermore, many estimates have to be made. Deciding on accounting methods requires, above all else, good faith.
Chapter 3
Safeguarding Company Assets
IN THIS CHAPTER
We think it’s safe to say that most folks are not enthusiastic bookkeepers. Let’s hope you reconcile or balance your checkbook against your bank statement every month (most likely electronically these days) and somehow manage to pull together all the records you need for your annual federal income tax return. But if you’re like us, you stuff your bills in a drawer or bury them in your cellphone somewhere, and just drag them out once a month when you pay them. And when’s the last time you prepared a detailed listing of all your assets and liabilities (even though a listing of assets is a good idea for fire insurance purposes)? Personal computer programs are available to make bookkeeping for individuals more organized, but you still have to enter lots of data into the program, and in our experience, most people don’t put forth the effort.
Individuals can get along quite well without much bookkeeping — but the exact opposite is true for a business. First of all, a business needs a good bookkeeping system simply to operate day to day. An army marches on its stomach. A business marches on data and information, without which it literally couldn’t make it through the day.
In addition to facilitating day-to-day operations, a company’s bookkeeping system serves as the source of information for preparing its periodic financial statements, tax returns, reports to managers, and a variety of other demands. The completeness, accuracy, reliability, and timeliness (the acronym CART that you see referenced time and again throughout this book) of these reports is critical to the business’s survival. If its accounting records are incomplete or inaccurate, its financial statements, tax returns, and management reports are incomplete or inaccurate. And
