Association of Chartered Certified Accountants (ACCA) Certification Practice Test

Which of the following best describes GAAP?

1. A critical piece of legislation for financial reporting.

2. A common set of accounting principles and standards.

3. A set of financial ratios used by investors.

4. A collection of rules only applicable to public companies.

The correct answer is: A common set of accounting principles and standards.

The choice that best describes GAAP is the identification of it as a common set of accounting principles and standards. Generally Accepted Accounting Principles (GAAP) provide a framework for financial reporting that ensures consistency and transparency in the financial statements of organizations. This enables users of financial statements, such as investors and creditors, to compare financial information across different entities effectively. GAAP encompasses a wide range of rules, conventions, and standards that dictate how financial transactions and other accounting events should be recorded and reported. This standardization is vital for maintaining the integrity and reliability of financial reporting across various industries and sectors, not just for public companies. The other options do not accurately capture the essence of GAAP. Legislation encompasses various laws that may influence financial reporting but does not wholly define GAAP. Financial ratios are analytical tools, while the notion that GAAP applies only to public companies is incorrect; GAAP is applicable to both private and public entities in jurisdictions where it is adopted.