Resources: Ch. 1 & 2 of Financial Accounting Theory and Analysis: Text and Cases

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Case 1-4 Generally Accepted Accounting Principles

At the completion of the Darby Department Store audit, the president asks about the meaning of the phrase “in conformity with generally accepted accounting principles,” which appears in your audit report on the management’s financial statements. He observes that the meaning of the phrase must include more than what he thinks of as “principles.”

Required:

1. Explain the meaning of the term accounting principles as used in the audit report. (Do not in this part discuss the significance of “generally accepted.”)
2. The president wants to know how you determine whether or not an accounting principle is generally accepted. Discuss the sources of evidence for determining whether an accounting principle has substantial authoritative support.
3. The president believes that diversity in accounting practice will always exist among independent entities despite continual improvements in comparability. Discuss the arguments that support his belief.