The significance of GAAP cannot possibly be underrated. The framework allows for a uniform approach toward financial reporting, thus, making the process of monitoring simpler and more successful (Goldstein, 2017). Incorporating key ratios it shows the whole picture of a company’s performance. GAAP allows considering essential factors that affect a company’s financial performance when making an important business decision.
For example, when combined, the quick ratio and the liquid ratio not only provide a rather detailed account of a company’s short- and long-term liabilities but also serve as a platform for delineating a strategy for managing corporate financial assets. Inventory, which is overlooked when using the identified ratios, can be taken into account when deploying the inventory turnover ratio (Weygandt, Kimmel, & Kieso, 2014). Consequently, an organization’s purchasing system can be redesigned successfully to establish tighter control over the use of a company’s financial assets.
The debt-to-income (DTI) ratio, in turn, sheds light on whether an organization is capable of meeting the liabilities that it has assumed. Negative changes in the DTI may lead to reconsidering the types of loans made by a firm, as well as its approach toward utilizing its financial assets, in general. Combined with the times interest earned ratio (TIE), the DTI can be used to check whether a firm can handle the challenges of a particular market and survive its financial pressure. Therefore, it could be argued that the function of the TIE ratio is quite close to one of the solvency ratio. Combined with the gross profit ratio, the identified tools can provide a platform for building a coherent financial strategy (Weygandt et al., 2014).
GAAP is considered to be a good financial reporting tool for a reason. It encompasses crucial financial performance indicators. Thus, a profound analysis can be made, and a sensible solution can be created.
References
Goldstein, M. (2017). Banking’s final exam: Stress testing and bank-capital reform. Washington, DC: Peterson Institute for International Economics.
Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2014). Financial and managerial accounting (2nd ed.). New York, NY: John Wiley & Sons.