eporting should provide information that is useful to present and potential investors and creditors and other users in making rational investment, credit, and other financial decisions. The information should be helpful to present and potential investors and creditors and other users in assessing the amounts, timing, and uncertainty of prospective cash receipts. The information should also provide information about economic resources, the claims to those resources, and the changes in them. SFAC No. 2
notes that useful information must have the characteristics of relevance, reliability, and comparability or consistency.
Relevancy means that information should be timely and bear on the decision-making process by possessing feedback and/or predictive value. Reliability means that information must be faithful in representation; free from bias, neutral, and verifiable. Comparability is even though different companies may use different accounting methods, there is still sufficient basis for valid comparison. Consistency is that deviations in measured outcomes from period to period should be the result of deviations in underlying performance (Framework).
According to the Investopedia.com 'GAAP are the common set of accounting principles, standards and procedures that companies use to compile their financial statements. GAAP are a combination of authoritative standards (set by policy boards) and simply the commonly accepted ways of recording and reporting accounting information.' Thus GAAP, (Generally accepted accounting principles), which help in achieving the above objectives whilst preparing financial statements, including the company's balance sheet, income statement and cash flow statement. Moreover principals are necessary to allow the economy to function efficiently, because decisions about the distribution of resources rely heavily on credible, concise, and understandable financial information. Financial information about the operations and financial position of individual companies is also used by the public in making various kinds of decisions.
GAAP is based on prevalent industry practice; Accounting Principles Board (APB) statements and opinions; Financial Accounting Standards Board (FASB) statements, concepts, technical bulletins and interpretations; American Institute of Certified Public Accountants (AICPA) statements, issue papers, bulletins, interpretations and concepts; as well as various other professional announcements, textbooks and articles.
On the other hand, income taxes are based upon the Internal Revenue Code or the income tax department of the local or state government. It is guided by the regulations issued by them to achieve the objectives laid down by the government.
A first objective is to understand the difference between tax accounting and financial accounting. The major differences can be timing and recognition differences. The timing difference involves revenue such as prepaid rent for GAAP and tax return purpose. In addition, timing differences can be due to different methods of valuing assets like different depreciation rates under GAAP and tax accounting rules. Additionally there is difference in how are taxes reported in GAAP and Tax accounting. GAAP reporting does not accurately present taxes paid. Tax reporting does not accurately reflect the useful life of the equipment. Another can
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