Jan Perkins is a business consultant. She analyzed the business processes of one of her clients, Diamond Companies, in November, Year 1. She prepared a report containing her recommendation for changes in some of the company’s business practices and presented Diamond with the report in December, Year 1. Jan guarantees that her clients will save money by following her advice. She does not collect for the services she provides until the client is satisfied with the results of her work. In this case, she received a cash payment from Diamond in February, Year 2.

Required

a. Define the acronym GAAP.

b. Assume that Jan’s accountant tells her that GAAP permits Jan to recognize the revenue from Diamond in either Year 1 or Year 2. What GAAP rule would justify reporting the same event in two different ways? Write a brief memo explaining the logic behind this rule.

c. If Jan were keeping records for managerial reporting purposes, would she be bound by GAAP rules? Write a brief memo to explain how GAAP applies to financial versus managerial reporting.