The owner of R&R Equipment Company has decided to omit an asset and related liability,
received 1 week before year end, from their year end balance sheet. The owner feels this is
alright since they are omitting both and both sides will still balance. The reasoning behind
this might be because the inventory has not yet had a chance to sell and has not yet made
any profit for the company. Another reason behind this could be that his company has been
using the cash basis method of accounting. The cash basis method of accounting
recognizes the impact of transactions in the financial statements only when a company
receives or pays cash. (Horngren, Sundem, Elliott, Philbrick, 2006) It is my opinion that
using this method of accounting may hinder or omit relevant transactions and information
that may later impact the company in a negative manner.
Generally Accepted Accounting Principles (GAAP) refers to the practices that are to be
followed while making ready and passing out financial statements. There might be
circumstances when Randy decision is acceptable. These circumstances might include the
relevance of the information and the consistency of the information. The relevance of the
information refers to if it makes an impact on the decision being made. The consistency of
information refers to unchanging policies and procedures used. The cost benefit criterion
could also be used in this situation.
Circumstances that this action would not be acceptable under GAAP would include the use
of the reliability concept. This concept states the quality of information that assures
