Questions and Answers
What are notes to the financial statements intended to provide?
What is highlighted in the notes section regarding accounting policies?
The alternative choices of accounting methods allowed.
When are sales recorded according to significant accounting policies?
When the title passes.
How are short-term investments stated on the balance sheet?
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Inventories are usually based on ______.
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What is calculated using the formula Cost - Accumulated Depreciation?
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Deferred income taxes arise from differences between the year of transactions and when they affect net income.
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What do the additional notes in annual reports provide?
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What should be disclosed if litigation is pending but is not considered material?
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What is goodwill on the balance sheet a result of?
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What type of information is required for financial reporting that relates to diversified businesses?
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Study Notes
Notes To The Financial Statements
- Financial statements' effectiveness in conveying information is limited, necessitating accompanying notes.
- Audited financial statements must include notes explaining significant accounting policies and additional information.
- Notes ensure fair representation of a firm's financial position and operational results.
Accounting Policies
- The notes section typically begins with a statement of accounting policies.
- Different accounting methods allowed can impact balance sheets, income statements, and cash flow statements.
- Choices of methods are constrained by Generally Accepted Accounting Principles (GAAP).
Significant Accounting Policies
- Sales Recognition: Revenue is recognized when legal title passes; timing varies by industry (shipment for manufacturing, sale for retail).
- Short-Term Investments: Reported at fair market value; unrealized gains or losses are shown on the income statement.
- Cost Principle: Many assets valued at purchase price, with market prices available from exchanges like NYSE and NASDAQ.
Inventory Valuation
- Inventory generally valued at cost; GAAP mandates lower of cost or market valuation.
- Cost valuation methods include FIFO (First-In-First-Out), LIFO (Last-In-First-Out), and weighted average.
Property, Plant, and Equipment
- Recorded at historical cost; tax recovery calculations use cost minus accumulated depreciation.
- Depreciation can be calculated through straight-line, accelerated, or units-of-production methods.
- Additional costs include freight, installation, and sales tax.
Income Taxes
- Income tax expenses are reported based on taxes incurred from income.
- Deferred income taxes arise from discrepancies between taxable and net income, predominantly due to depreciation.
Additional Notes
- Annual reports include other notes for comprehensive disclosure, supporting a fair representation of financial health and operational results.
Commitments and Contingent Liabilities
- Lease commitments and litigation contingencies are disclosed based on material significance.
- No footnotes for minor negligence; disclosures required when suits are filed, and contingent liabilities booked upon judgment.
Goodwill
- Goodwill appears on balance sheets due to acquisitions exceeding the fair market value of identifiable assets.
- Often results from acquiring businesses rather than assets when intangible value exists, like reputation and customer loyalty.
- Under current GAAP, goodwill remains an indefinite asset on the balance sheet.
Industry Segment Information
- Financial reporting requires industry segment information due to the diversification of many businesses.
- This information aids stockholders and users in understanding financial performance across various sectors.
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Description
This quiz explores the significance of notes accompanying financial statements, highlighting the importance of accounting policies and methods. It delves into key concepts like sales recognition and the cost principle, providing a comprehensive understanding of how these notes enhance financial representation.
