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How Companies Carry Out Fraudulent Activities Despite the Presence of GAAP

How Companies Carry Out Fraudulent Activities Despite the Presence of GAAP



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Published by: pagla420 on Aug 11, 2008
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How companies carry out fraudulent activities despite the presence of GAAP
GAAP principles
have been developed by the accounting profession over the years to provide a consistent system of financial reporting in a constantly changing environment”From the earliest days of accounting up through the first third of the 20th century, GAAPwere developed through common usage.The primary purpose of GAAP is to help accountants provide relevant and comparableinformation. In other words, financial accounting practices should produce information that isrelevant to the decision made by financial statement users. GAAP identify uniform practicesthat make financial statements more understandable and useful. “The ground rules used by business entities in presenting financial information are calledgenerally accepted accounting principles (GAAP).” Jack L. Smith.
The principles of GAAP:
The most important principles of GAAP are1. Business entity concept2. Periodicity concept3. Going concern concept4. Cost principles5. Accrual concept6. Cash concept7. Conservatism concept8. Consistency concept9. Double entry concept10. Objectivity principle11. Stable dollar concept12. Matching concept
Business Entity Concept:
Data gathered in an accounting system relate to a specific business unit of entity. The business entity concept assumes that each business has anexistence separate from it’s owners, creditors, employees, customers, other interested partiesand other business.
Periodicity Concept:
Accounting to periodicity concept or assumption an entity’s life can bemeaningful subdivided into time periods (such month or years) for purposes of reporting theresults of its economic activities.
Going Concern Concept:
Unless strong evidence exists to the contrary, accountants assumethat the business entity will continue operations into the indefinite future. Accountants callthis assumption the going concern or continuity assumption.
Cost Principle:
Assets such as land, buildings, merchandise and equipment are typical of themany economic resources that will be used in producing revenue for the business. The prevailing account is that such assets should be used at their cost. When we say that an assetis shown in the balance sheet at its historical cost, we mean the original cost of the asset tothe business entity; this amount may be very different from the asset’s current market value.
Accrual Concept:
Accounting that recognizes revenues and expenses as they occur, eventhough the cash receipt from the revenue or the cash disbursement related to the expense mayoccur before or after the event that causes revenue or expense recognition.
Cash Concept:
After accrual transaction when we receive or pay cash in form of revenue or expenses then we record it in our accounting book. It’s not a fact when the transaction hashappened but main thing is receiving or paying cash in this concept.
Conservatism in accounting relates to making judgments and estimates thatresult in lower profits and asset valuation estimates rather than higher profits and assetvaluation estimates. Accountants try to avoid wishful thinking estimate that could result inoverstating profits for a current period.
Double entry Concept:
Double entry concept means each entry has two sides one is debtor and the other is creditor. In this concept only those transactions are recorded which createffect on business directoty.
Objectivity Concept:
objectivity is the posy entry measurement. That means what isactually happened; take place in the accounting book. We take the information from differentdocuments. For example:- sales document, purchase invoice, property deeds and transfers of title and put that amount in the financial statement. There is no place of subjectivity in our accounting book that means pre-entry measurement.
The stable dollar concept:
Money is the unit of measure employed in recording financialtransactions. Knowing the money values assigned to financial transactions enables the user of financial statements to estimate the profitability of a business enterprise. The dollar is not a precise and unchanging unit of measure. A dollar of previous is not the same as dollar of today because the effects of inflation. The value of dollar changes over time but accountantscannot build useful statements with unstable units of measurement. Therefore a financialstatement is prepared on the basis of stable dollar concept.
Consistency Concept:
Consistency means in the matter of depreciation if the company usesstraight-line method then the company must use this method in each period. 
Matching concept:
All expense of the accounting period must be matched against therevenue earned in the period. If a benefit has been consumed, the effect must be recordedweather or not documentation has been received. This argument is referred to as thematching concept.
Background on fraudulent:
The Committee of Sponsoring Organizations of the Treadway Commission (COSO) placed areport that examined fraudulent financial reporting from 1987–97 by US public companies.Some of the most critical insights of the study are as follows:(a) The companies committing fraud mostly were small, and 78% of the samples were notlisted in the New York or American Stock Exchanges.

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