Crafted Cheese Generally Accepted Accounting

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Generally Accepted Accounting Principles (GAAP).

GAAP is a set of specific common guidelines, provided by the institutions such as the Financial Accounting Standards Board, the American Institute of Certified Public Accountants and the Securities and Exchange Commission, about "acceptable accounting practices." These acceptable practices should not necessarily be regarded as a set of ground rules. In fact, it is a common denominator, useful when foreign firms, especially auditing companies, proceed to financial verifications. The GAAP provide for an easier task from the auditing companies and anybody else who interprets the financial statements.

Historical Cost.

The historical cost is "an accounting technique that values an asset for balance sheet purposes at the price paid for the asset at the time of its acquisition." This means that the current market value or any opportunity cost are not taken into consideration. In my opinion, this methodology simplifies greatly work related to recording assets in the balance sheets. The original cost can be quickly taken from the invoice, instead of evaluating all possible costs involved.

C. Accrual Basis vs. Cash Basis Accounting.

The accrual basis accounting records payments and revenues when the actual business activity occurs. On the other hand, cash basis accounting records payments and revenues only when cash is received or paid. For example, if we buy a car in December and pay for it in February the following year, under the accrual method, the payment will be recorded in December, while under the cash method, it will be recorded in February the following year.

From this example we can also figure out the main impact of each method on the financial statement. Indeed, in this particular case, using the accrual method means that the payment is recorded in the current fiscal year. On the other hand, the cash method records the payment in the following year, because it is noted in February.

The accrual methodology is generally recommended, mainly because it is "more realistic for measuring business performance." Indeed, a manager would be able to see exactly how his company has performed in each month because the revenues are noted as each business is concluded.

D. Current Assets and Liabilities vs. Non-Current Items

In my opinion, the current assets and liabilities give a keen overview of the company's short-term solvability, but also of the company short-term revenues. Each term will provide information on how the company is performing in terms of inventory, current liabilities, etc. Many of the current assets and current liabilities entries can also be used in financial ratios that provide information on the company's overall financial health.

Part II

The financial reports are quite similar for the three companies mentioned, with mainly the same organization of the balance sheet, the income statement and the cash flow statement.

The balance sheet includes two main categories, assets and liabilities and shareholders' equity. Both of these are in turn split into current assets and other assets. In terms of current assets, all three companies include inventory, cash and cash equivalents and receivables, while the liabilities cover short- and long-term debt, as well as the shareholders' equity.

The cash flow statement includes the three different categories, cash flows from operating activities, cash flows from investing activities and cash flows from financing activities.

In order to be able to properly evaluate, we need to mention that the net income "measures business revenues vs. expenses." In this sense, the income statement provides the best expression and explanations on how the business is actually performing, what could or should be improved.