Why Is GAAP Important to Financial Statements?

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Financial statements in the United States are reported using GAAP principles so that full disclosure is provided to potential investors. Use the Generally Accepted Accounting Principles to understand the finances of a company with insight from a personal financial adviser in this free video on finances.

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Video Transcript

Hi, I'm Roger Groh. Today, we're here to talk about the profit and loss statements and balance sheets and other tools that you can use in order to look at a company and determine the health of it, whether they're profitable, whether they're losing money, whether they have a lot of debt on their balance sheet or not as examples of how they might be doing it. Within the United States there is an accounting board that has come out with a series of rules called generally accepted accounting principles or GAAP. All companies reporting within the United States, major companies, report under the auspices of GAAP. That means that the same way that cash flow is reported and the same way that earnings are reported and the same way that a balance sheet is built doesn't different between a little teeny tiny company that makes ice cream cones all the way up to GE for instance, it's the same development process. And therefore, when you pick up a P&L from one company, you can quickly understand what it means compared to another. It's terrific. It's really intended to provide full disclosure to potential investors or current investors. Now, just so you know, many countries don't do that. In many countries, they don't apply very advanced accounting techniques like that and the data that you see in one statement may reflect nothing at all to do about what they really do. So the United States is at a big advantage globally from an investment point of view because we have these rules. Now generally, they've also been accepted by other countries. And if you are... if you're a public company, and if you're intending to raise money here in the United States even though you're based in China, or you're based in Japan, or you're based in Australia, you're probably going to do your financial statements in GAAP. The reason is that you want US investors to know that you've gone the extra mile to disclose to them exactly what's going on in your business. If you'd like to know more about financial statements, I recommend that you go to a website. It's called theanalystexchange.com. And I admit I'm biased because I'm on that... part of that company as a teacher and as a director, but nonetheless it's a way that you can learn more about financial statements, how to build them, how to read them and how to use them. I'm Roger Groh.

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