CA1-7
(Need for GAAP) Some argue that having various organizations establish accounting principles is
wasteful and inefficient. Rather than mandating accounting rules, each company could voluntarily disclose
the type of information it considered important. In addition, if an investor wants additional information,
the investor could contact the company and pay to receive the additional information desired.
Instructions
Comment on the appropriateness of this viewpoint.
Solution
It is not appropriate to abandon mandatory accounting rules and allow each company to voluntarily disclose the type of information it considered important. Without a coherent body of accounting theory and standards, each accountant or enterprise would have to develop its own theory structure and set of practices and readers of financial statements would have to familiarize themselves with every company's peculiar accounting and reporting practices. As a result, it would be almost impossible to prepare statement that could be compared.
In addition, voluntary disclosure may not be an efficient way to disseminating information. A company is likely to disclose less information if it has the discretion to do so. Thus, the company can reduce its cost of assembling and disseminating information. However, an investors may be interested in different types of information. Since the company may not be equipped to provide the requested information, it would have to spend additional resources to fulfill such needs; or the company may refuse to furnish such information if it's too costly to do so. As a result, investors not get the desired information or they may have to pay a significant amount of money for it. Furthermore, redundancy in gathering and distributing information occurs when different investors ask for the same information at different points in time. To the society as a whole, this would not be an efficient way of utilizing resources.
(Need for GAAP) Some argue that having various organizations establish accounting principles is
wasteful and inefficient. Rather than mandating accounting rules, each company could voluntarily disclose
the type of information it considered important. In addition, if an investor wants additional information,
the investor could contact the company and pay to receive the additional information desired.
Instructions
Comment on the appropriateness of this viewpoint.
Solution
It is not appropriate to abandon mandatory accounting rules and allow each company to voluntarily disclose the type of information it considered important. Without a coherent body of accounting theory and standards, each accountant or enterprise would have to develop its own theory structure and set of practices and readers of financial statements would have to familiarize themselves with every company's peculiar accounting and reporting practices. As a result, it would be almost impossible to prepare statement that could be compared.
In addition, voluntary disclosure may not be an efficient way to disseminating information. A company is likely to disclose less information if it has the discretion to do so. Thus, the company can reduce its cost of assembling and disseminating information. However, an investors may be interested in different types of information. Since the company may not be equipped to provide the requested information, it would have to spend additional resources to fulfill such needs; or the company may refuse to furnish such information if it's too costly to do so. As a result, investors not get the desired information or they may have to pay a significant amount of money for it. Furthermore, redundancy in gathering and distributing information occurs when different investors ask for the same information at different points in time. To the society as a whole, this would not be an efficient way of utilizing resources.
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