Topics: Generally Accepted Accounting Principles, Balance sheet, Financial statements Pages: 3 (1085 words) Published: March 21, 2013
The basic accounting concepts have defined the conception of the preparation of financial statements and the process of preparation in the UK is well regulated. But financial accounting requires a fair amount of flexibility in some certain areas, so the need of judgements and estimations for accounts preparers is demand. Meanwhile it leaves a significant approach in accounting treatments. For example, when organizations decide which of several inventory valuation methods to utilize; managers make decisions regarding depreciation methods and allowances for bad debts. The judgement and estimations form the elements of several accounting rules. And the effectiveness of financial statements in forecasting the performance of the business can be compromise when the companies begin to use their power of estimation to manipulate the outcome of financial results with the help of flexibility. Under the current requirement, when preparing financial statements, an entity might apply EU-endorsed IFRS (International Financial Reporting Standards), FRSSE or UK GAAP. GAAP is a principles-based system, which lays out the main objectives of good reporting in the subject area and then defines guidance explaining intention and relating it to some common examples. It is more flexibility under GAAP. The information is reliable and relevant and accounts can apply reporting methods to the best reflect the financial actuality for the particular entity. Two example of valuation methods of accounting principles that evaluate the value of inventory are the FIFO and LIFO method. There are several differences between FIFO and LIFO approach, so it can be two different balances for the same inventory depending on the valuation method. Therefore, a financial statement can be affected dramatically by switching form FIFO to LIFO. When switching from FIFO to LIFO, an entity needs to consider whether it is essential to restate its financial data for previous years to reflect the new method or...
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