Financial statement analysis is an important skill for business professionals. The two most common methods of financial statement analysis are generally accepted accounting principles (GAAP) and operational cash flow based on accrual accounting (OCBOA). GAAP is the standard that companies use to prepare their financial statements, while OCBOA is a method of financial statement analysis that takes into account a company’s operating cash flow. In this blog post, we will explore the difference between GAAP and OCBOA. We will also discuss the benefits of using both methods of financial statement analysis.
What is GAAP?
GAAP is the acronym for Generally Accepted Accounting Principles. GAAP is a set of guidelines that companies use to record and report their financial data. GAAP is not a static document; it is updated periodically by the Financial Accounting Standards Board (FASB). The goal of GAAP is to provide a common framework that companies can use to report their financial information in a clear and consistent manner.
GAAP is used by companies all over the world, and it helps investors and analysts to compare apples to apples when they are looking at financial statements. While GAAP is not mandatory, it is strongly recommended, and most companies choose to follow GAAP in order to maintain credibility with investors.
What is OCBOA?
OCBOA stands for Other Comprehensive Basis of Accounting. It is an accounting method used to report certain financial statement items on a basis other than GAAP. OCBOA reporting focuses on providing users with information about an entity’s economic position, rather than its financial position. As a result, OCBOA statements are often more useful for decision-making purposes than GAAP financial statements. OCBOA is allowed for federal income tax purposes and is permitted in some states for state income tax purposes. OCBOA is also permitted for certain types of non-profit organizations.
Difference between GAAP and OCBOA
GAAP (Generally Accepted Accounting Principles) is a set of accounting standards and guidelines that companies must follow when they prepare their financial statements.
- GAAP is overseen by the Financial Accounting Standards Board (FASB).
- OCBOA (Other Comprehensive Basis of Accounting) is an alternative set of accounting principles that some companies may choose to use instead of GAAP.
- OCBOA is not as widely used as GAAP, but it may be more suitable for certain types of businesses.
The key difference between GAAP and OCBOA is that GAAP is mandatory while OCBOA is optional. All publicly traded companies must use GAAP, but private companies may be able to choose OCBOA if it better suits their needs.
Conclusion
In general, GAAP is considered to be more reliable because it has been around longer and has been tested in court. However, some companies find OCBOA to be more flexible and easier to work with. If you’re curious about which approach your company should use, speak to your accountant or financial advisor for advice.
