The general accepted accounting principles (GAAP) income statement is a financial report prepared in accordance with guidelines set by the Financial Accounting Standards Board (FASB). Organizations that follow these principles can assure investors of a certain amount of consistency which can make it easier to weigh investment options. This kind of statement also adheres to a standard of quality, which helps to encourage legal and ethical reporting. Some of the things found in a GAAP income statement include balance sheet item classification and revenue recognition.
A GAAP income statement is actually a collection of several different statements. In addition to a statement providing an overview of the organization’s status, there is the balance sheet, the statement of owner’s equity, and the statement of cash flow. Both the collection of all of these statements and the statement with the overview may be referred to as the income statement.
Some of the information commonly found on a GAAP income statement includes assets, liabilities, expenses, and income. These are typically arranged into major categories with sub-categories and separate line items as necessary. For example, the category of expenses may have a sub-category of food, where there may be a separate line item for beverages.
There are several specific principals which apply to a GAAP income statement. One important guideline is that a distinction must be made between current and non-current assets and liabilities. Items that will probably not be converted to cash by year end are considered non-current. All liabilities that will not be paid off by the end of a year are considered non-current as well. Overall cash flow for the period in question must also be reported.
The precise guidelines for preparing a GAAP income statement can change over time. The FASB will periodically propose changes to professionals in the industry, who will then give feedback, which is incorporated into the board’s decision making process. Once these changes are adopted, the structure of the statements will also evolve.
While a GAAP income statement may give investors a greater sense of trust in a company, it is not the only measure to consider. As with any set of rules, an accountant can work within GAAP guidelines to distort information and deceive analysts. Use of these guidelines is a good start, but making a deeper analysis of the company and how well its income statements match with its true status can be an important practice as well.
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