A GAAP income statement is a collection of several different statements.
The Generally Accepted Accounting Principles (GAAP) income statement is a financial report prepared in accordance with the guidelines established by the Financial Accounting Standards Board (FASB). Organizations that follow these principles can assure investors of a certain consistency, which can make it easier to evaluate investment options. This type of statement also follows a quality standard, which helps encourage legal and ethical reporting. Some of the things found on a GAAP income statement include the classification of balance sheet items and revenue recognition.
A GAAP income statement is actually a collection of several different statements. In addition to a statement that provides an overview of the organization’s situation, there is the balance sheet, the statement of equity and the statement of cash flows. Both the compilation of all these statements and the statement with the general description can be called an income statement.
Some of the information commonly found on a GAAP income statement includes assets, liabilities, expenses and income. They are usually organized into main categories with subcategories and separate line items as needed. For example, the expense category could have a food subcategory, where there could be a separate beverage line.
There are several specific principles that apply to a GAAP income statement. An important guideline is that a distinction should be made between current and non-current assets and liabilities. Items that are unlikely to be converted into cash at the end of the year are considered non-current. All liabilities that will not be settled at the end of the year are also considered non-current. The general cash flow for the period in question must also be reported.
The precise guidelines for preparing a GAAP income statement may change over time. The FASB will periodically propose changes to industry professionals, who will provide feedback, which will feed into the board’s decision-making process. Once these changes are adopted, the structure of the statements will also evolve.
While a GAAP income statement can give investors a greater sense of confidence in a company, it’s not the only measure to consider. As with any set of rules, an accountant can work within GAAP guidelines to distort information and mislead analysts. Using these guidelines is a good start, but it can also be an important practice to take a deeper look at the company and how its P&L matches its actual state.