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Chapter 24: 4Q (page 1445)

What type of disclosure or accounting do you believe is necessary for the following items?

a) Because of a general increase in the number of labor disputes and strikes, both within and outside the industry, there is an increased likelihood that a company will suffer a costly strike in the near future.

b) A company reports a material unusual and infrequent loss on the income statement. No other mention is made of this item in the annual report.

c) A company expects to recover a substantial amount in connection with a pending refund claim for a prior year鈥檚 taxes. Although the claim is being contested, counsel for the company has confirmed the client鈥檚 expectation of recovery.

Short Answer

Expert verified

The type of disclosure should be made in conjunction with any change in accounting policy that has a material effect.

Step by step solution

01

Meaning of Disclosure of Principle

The Disclosure Principle refers to the disclosure of all relevant data, whether monetary or non-monetary, to creditors, investors and shareholders. Disclosures must be made by an organization's management.

02

Explaining the types of Disclosure in different items

(a) The extended likelihood that the company will endure an excessive strike does not require any disclosure within the financial statements. The prospect of a strike is an unavoidable risk for many businesses. This, in combination with the risks of war, subsidence, etc., falls under the category of general news.

(b) A note should depict an unusual and rare misfortune so that the monetary explanation gives the user little understanding of the nature of the item.

(b) Contingent assets that actually affect the financial position of a company should be disclosed when the surrounding circumstances show that, in all likelihood, a substantial resource will materialize. In most circumstances, a resource will not be recognized until a court settlement is reached.

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Most popular questions from this chapter

Madrasah Corporation issued its financial statements for the year ended December 31, 2017, on March 10, 2018. The following events took place early in 2018.

  1. On January 10, 10,000 shares of \(5 par value common stock were issued at \)66 per share.
  2. On March 1, Madrasah determined after negotiations with the Internal Revenue Service that income taxes payable for 2017 should be \(1,270,000. On December 31, 2017, income taxes payable were recorded at \)1,100,000.

Instructions

Discuss how the preceding post-balance-sheet events should be reflected in the 2017 financial statements.

The FASB requires a reconciliation between the effective tax rate and the federal government鈥檚 statutory rate. Of what benefit is such a disclosure requirement?

(Disclosure of Estimates) Nancy Tercek, the financial vice president, and Margaret Lilly, the controller, of Romine Manufacturing Company are reviewing the financial ratios of the company for the years 2017 and 2018. The financial vice president notes that the profit margin on sales ratio has increased from 6% to 12%, a hefty gain for the 2-year period. Tercek is in the process of issuing a media release that emphasizes the efficiency of Romine Manufacturing in controlling cost. Margaret Lilly knows that the difference in ratios is due primarily to an earlier company decision to reduce the estimates of warranty and bad debt expense for 2018. The controller, not sure of her supervisor鈥檚 motives, hesitates to suggest to Tercek that the company鈥檚 improvement is unrelated to efficiency in controlling cost. To complicate matters, the media release is scheduled in a few days.

Instructions

  1. What stakeholders might be affected by Tercek鈥檚 media release?

Morlan Corporation is preparing its December 31, 2017, financial statements. Two events that occurred between December 31, 2017, and March 10, 2018, when the statements were issued, are described below.

  1. A liability, estimated at \(160,000 at December 31, 2017, was settled on February 26, 2018, at \)170,000.
  2. A flood loss of $80,000 occurred on March 1, 2018.

What effect do these subsequent events have on 2017 net income?

Distinguish between ratio analysis and percentage analysis relative to the interpretation of financial statements. What is the value of these two types of analyses?
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