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Chapter 2: 8E (page 67)

(Full Disclosure Principle) Presented below are a number of facts related to Weller, Inc. Assume that no mentionof these facts was made in the financial statements and the related notes.

Instructions

Assume that you are the auditor of Weller, Inc. and that you have been asked to explain the appropriate accounting and related disclosure necessary for each of these items.

(a) The company decided that, for the sake of conciseness, only net income should be reported on the income statement. Details as to revenues, cost of goods sold, and expenses were omitted.

(b) Equipment purchases of \(170,000 were partly financed during the year through the issuance of a \)110,000 notes payable. The company offset the equipment against the notes payable and reported plant assets at \(60,000.

(c) Weller has reported its ending inventory at \)2,100,000 in the financial statements. No other information related to inventories is presented in the financial statements and related notes.

(d) The company changed its method of valuing inventories from weighted-average to FIFO. No mention of this change was made in the financial statements.

Short Answer

Expert verified
  1. Company must disclose every monetary transaction of the business-related revenues, expenses etc.
  2. Show the asset as $170,000 and a liability of $110,000.
  3. Disclose the information related to inventory in the footnotes of the balance sheet.
  4. Disclose the valuation method change in the financial statements' footnotes.

Step by step solution

01

Meaning of Financial Statement

The financial statement is defined as the statement prepared to find out the financial position and performance of the business.

02

Explanation for statement (a)

The company is doing wrong. The company must disclose all the transactions related to the business without hiding anything from the financial statements. The company must disclose revenues and expenses which generate the net income only then the users of the financial statements can know whether the company is earning profit or loss.

03

Explanation for statement (b)

The company must show the proper accounting treatment in the financial statements. The company must show the asset as $170,000 and a liability of $110,000. The company must record all the transactions of the business without hiding anything from the financial statements.

04

Explanation for statement (c)

The company must disclose the information related to inventory in the footnotes of the balance sheet and also the method that is used to value the inventory. If the valuation method of inventory is not mentioned in the footnotes, the balance of the inventory might vary based on the method.

05

Explanation for statement (d)

The company must disclose the change of valuation method from the weighted average method to the FIFO method in the footnotes of the financial statements.The company should also explain the change in the balance of the inventory because of the change in the inventory method.

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Most popular questions from this chapter

BE2-10 (L06) Identify which basic principle of accounting is best described in each item below.

  1. Norfolk Southern Corporation reports revenue in its income statement when the performance obligation is satisfied instead of when the cash is collected.
  2. Yahoo! recognizes depreciation expense for a machine over the 2-year period during which that machine helps the company earn revenue.
  3. Oracle Corporation reports information about pending lawsuits in the notes to its financial statements.
  4. Gap, Inc. reports land on its balance sheet at the amount paid to acquire it, even though the estimated fair value is greater.

Expenses, losses, and distributions to owners are all decreases in net assets. What are the distinctions among them?

What are some of the challenges to the IASB in developing a conceptual framework?

Question: The AICPA Special Committee on Financial Reporting proposed the following constraints related to financial reporting.

  1. Business reporting should exclude information outside of management鈥檚 expertise or for which management is not the best source, such as information about competitors.

  2. Management should not be required to report information that would significantly harm the company鈥檚 competitive position.

  3. Management should not be required to provide forecasted financial statements. Rather, management should provide information that helps users forecast themselves the company鈥檚 financial future.

  4. Other than for financial statements, management need report only the information it knows. That is, management should be under no obligation to gather information it does not have, or does not need, to manage the business.

  5. Companies should present certain elements of business reporting only if users and management agree they should be reported- a concept of flexible reporting.

  6. Companies should not have to report forward-looking information unless there are effective deterrents to unwarranted litigation that discourages companies from doing so.

Instructions

For each item, briefly discuss how the proposed constraint addresses concerns about the costs and benefits of financial reporting.

Identify which basic principle of accounting is best described in each item below.(a) Norfolk Southern Corporation reports revenue in its income statement when the performance obligation is satisfied instead of when the cash is collected.(b) Yahoo! recognizes depreciation expense for a machine over the 2-year period during which that machine helps the company earn revenue.(c) Oracle Corporation reports information about pending lawsuits in the notes to its financial statements.(d) Gap, Inc. reports land on its balance sheet at the amount paid to acquire it, even though the estimated fair value is greater.
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