Big Gaap/Little Gaap

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In the case “Big GAAP/Little GAAP”, we can see that some information is better provided in the notes. For example, the bank may not be aware that Forthwright Co. is in a strained financial position now because the financial statements do not show. The accounting profession has adopted a full disclosure principle that calls for financial reporting of any financial facts that are significant enough to influence the judgment of a reader. In this situation, several issues are left out of the reports, such as the company has to purchase expensive equipment to clean up medical wastes or else it is going to harm Forthwright financially. For the bank to assess Forthwright’s financial situation accurately, this kind of information should be considered and may be significant for decision-making. In Forthwright Co.’s position, omitting all the notes would be favorable since some information gives out its strained financial situation. Reading only the financial statements, it is hard for the bank to find out that the reason why Forthwright can meet the working capital requirement is because they sold a lot of its equipment and leased them back in order to bolster its cash. From their prospective, they managed to meet the working capital requirement, no matter what happened. However, it is another story from the bank’s point of view. If the fact that Forthwright Co. is now in a strained financial position is made clear to the bank and, according to the case scenario, that this situation is getting worse, they may want to reconsider the loan. Therefore, hiding the notes violates the full disclosure principle and gives incomplete information. The questions left for our firm are whether Forthwright Co. did this on purpose or did they has informed the bank in another way. If the bank doesn’t know, then omitting notes would be inappropriate, for it is trying to mislead the bank. However, Mr. Forthwright might be lack of accounting knowledge to recognize the fact that notes are...
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