When companies prepare financial statements

When companies prepare financial statements, GAAP requires “administration to make judgments, estimates and assumptions that affect the amounts of assets, liabilities, revenues, and expenses” (Starbucks Corporation, 2017, p.82). The estimates and assumptions will guarantee that distribution has been made before reporting of the financial statements. Some of the accounting estimates and assumptions company reviews include inventory, accounts receivable, revenue, and doubtful debts.
For Starbucks, the estimates and assumptions that affect the reporting amount are goodwill and the long-term assets. According to McCool (2018), The GAAP wants companies to use accrual accounting rather than cash accounting. Accrual basis accounting compares to cash basis accounting allows companies to records transaction at the time in which financial event took place. If companies used cash basis accounting transactions will not be recorded at the type it took place, and investors will not know the actual sale performance and total inventory (McCool, 2018). Moreover, using accrual accounting companies can see their expenses, calculate the revenue they supposed to receive, and create doubtful accounts. Therefore, accrual accounting helps illustrate a picture of the company’s financial status. Starbucks Corporation (2017) notes that its estimates and assumptions for revenue and growth are based on the “internal projections and the historical performance of stores” (p.52).


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