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’s taxes. Although the claim is being contested, counsel for the company has confirmed the client’s expectation of recovery.
The type of disclosure should be made in conjunction with any change in accounting policy that has a material effect.
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.
(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.
Picasso Company is a wholesale distributor of packaging equipment and supplies. The company’s sales have averaged about $900,000 annually for the 3-year period 2015–2017. The firm’s total assets at the end of 2017 amounted to $850,000.
The president of Picasso Company has asked the controller to prepare a report that summarizes the financial aspects of the company’s operations for the past 3 years. This report will be presented to the board of directors at their next meeting.
In addition to comparative financial statements, the controller has decided to present a number of relevant financial ratios which can assist in the identification and interpretation of trends. At the request of the controller, the accounting staff has calculated the following ratios for the 3-year period 2015–2017.
Acid-test (quick) ratio
Accounts receivable turnover
Debt to assets ratio
Long-term debt to assets ratio
Sales to fixed assets (fixed asset turnover)
Sales as a percent of 2015 sales
Gross margin percentage
Net income to sales
Return on assets
Return on common stockholders’ equity
In preparation of the report, the controller has decided first to examine the financial ratios independent of any other data to determine if the ratios themselves reveal any significant trends over the 3-year period.
a) The current ratio is increasing while the acid-test (quick) ratio is decreasing. Using the ratios provided, identify and explain the contributing factor(s) for this apparently divergent trend.
Jane Ellerby and Sam Callison are discussing the recent fraud that occurred at LowRental Leasing, Inc. The fraud involved the improper reporting of revenue to ensure that the company would have income in excess of $1 million. What is fraudulent financial reporting, and how does it differ from an embezzlement of company funds?
(Post-Balance-Sheet Events) For each of the following subsequent (post-balance-sheet) events, indicate whether a company should (a) adjust the financial statements, (b) disclose in notes to the financial statements, or (c) neither adjust nor disclose.
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