MASTERCLASS Investment – GAAP – What Are The Generally Acceptable Accounting Principles Companies Use?


MASTERCLASS Investment – GAAP – What Are The Generally Acceptable Accounting Principles Companies Use?

MASTERCLASS Investment – GAAP – What Are The Generally Acceptable Accounting Principles Companies Use?

Companies finished half-year reporting at the end of February, and our financial planner and stock broker have been busily sorting through all the data and financial ratios to find WHAT companies to buy – filter out strong financially-healthy growth companies (fundamental analysis) that will then be put through the filter of WHEN to buy, by spotting those in upwards momentum cycles (technical analysis). The fundamental analysis is based on the key financial reports – Balance Sheet, Profit & Loss, Cashflow Statement which are reported under standard accepted guidelines.

There are general rules and concepts that are followed in the field of accounting. These are referred to as basic accounting principles and guidelines and are the foundation on which more detailed, complicated, and legalistic accounting rules are based. In Australia, the Australian Accounting Standards Board (AASB) uses the basic accounting principles and guidelines as a basis for their own detailed and comprehensive set of accounting rules and standards.

A common phrase Generally Accepted Accounting Principles (or GAAP)consists of three important sets of rules: (1) Basic accounting principles and guidelines; (2) Detailed rules and standards issued by AASB; and (3) The generally accepted industry practices.

When a company distributes its financial statements to the public, it is required by the Australian Stock Exchange (ASX) to follow generally accepted accounting principles in the preparation of those statements. Additionally, if a company’s shares are publicly traded, federal law requires the company’s financial statements be audited by independent public accountants. Both the company’s management and the independent accountants must certify that the financial statements and the related notes to the financial statements have been prepared in accordance with GAAP.

GAAP is useful for us because it attempts to standardize and regulate accounting definitions, assumptions and methods. Because of these principles we are able to assume that there is consistency from year to year in the methods used to prepare a company’s financial statements. And although variations may exist, we can draw reasonably confident conclusions when comparing one company to another, or comparing one company’s financial statistics to the statistics for its industry. Over the years the generally accepted accounting principles have become more complex because financial transactions have become more complex.

The Accounting Standards are spilt into various categories eg “Statement of Cashflows”, “Construction Contracts”, etc and a list with most recent updates/ pronouncements for Australia can be found HERE.

Want to learn the core issues of share investing? Our workshop Navigate to Successful Share Investing gives a 2.5 hour practical session to learn to easily understand Company Financial Statements, how to find healthy companies, what tools and ratios to use, work on examples, and also includes how to get better investment outcomes. Other Bonuses as well. Check the next one see Share WORKSHOP or call 0407 361 596.


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