Conforming to GAAP, Mandatory or Not
In true sense, GAAP represents a set of accounting procedures, standards and principles which an organization must follow to enhance clarity in financial statements in order for them to be useful to analysts. Conforming to GAAP is important because it facilitates consistency in recording and reporting financial statements. This way, investors and other market analysts will gain a clear understanding about any publicly traded company’s financial performance throughout and at end of certain financial accounting period. Conformance to GAAP provides investors and analysts with a guarantee about transparency and accuracy of financial records and statements. Generally, for the U.S. companies, it is important to conform with GAAP measures while non-U.S. companies may follow IFRS .
Cash Flow Earnings per Share (CFEPS) and the Conventional Accrual-Based EPS
The conventional EPS measure includes non-cash expenses (such as depreciation and amortization) to be deducted from the gross profit. This way, EPS of any company may be artificially deflated . In comparison to this, Cash Flow Earnings per Share (CFEPS) reflects more strict measure about a company’s true position to generate revenue and profit. In Cash Flow Earnings per Share (CFEPS), depreciation and amortization are added back to the net income which is then divided by common shares outstanding. Depreciation and amortization, when added back, provide a clear picture about CFEPS because they not actually cash based losses. This way, CFEPS (being more useful than conventional EPS) protects a company’s cash flow against any artificial alteration or manipulation.
References
Mayes, D. G., & Wood, G. E. (2013). Reforming the Governance of the Financial Sector. Routledge.
Whitaker, S. C. (2016). Cross-Border Mergers and Acquisitions. John Wiley & Sons.
