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Unformatted text preview: CHAPTER 24 Full Disclosure in Financial Reporting ANSWERS TO QUESTIONS 1. As indicated in the text, the major advantages are: (1) additional information pertinent to specific financial statements can be explained in qualitative terms, or supplementary data of a quantitative nature can be provided to expand on the information in the financial statements, and (2) restrictions on basic contractual agreements can be explained. The types of items normally found in footnotes are: (1) disclosure of accounting methods used, (2) disclosure of contingent assets and liabilities, (3) examination of creditor claims, (4) claims of equity holders, and (5) executory commitments. 2. The full disclosure principle in accounting calls for reporting in financial statements any financial facts significant enough to influence the judgment of an informed reader. Disclosure has increased because of the complexity of the business environment, the necessity for timely information, and the desire for more information on the enterprise for control and monitoring purposes. 3. The benefit is that an investor can determine the actual taxes paid by the enterprise. Such a determination is particularly important if the enterprise has substantial fluctuations in its effective tax rate caused by unusual or infrequent transactions. In some cases, companies only have income in a given period because of a favorable tax treatment that is not sustainable. Such information should be extremely useful to a financial statement reader. 4. (a) The increased likelihood that the company will suffer a costly strike requires no disclosure in the financial statements. The possibility of a strike is an inherent risk of many businesses. It, along with the risks of war, recession, etc., is in the category of general news. (b) A note should provide a description of the extraordinary item in order that the financial statement user has some understanding of the nature of this item. (c) Contingent assets which may materially affect a company’s financial position must be disclosed when the surrounding circumstances indicate that, in all likelihood, a valid asset will materialize. In most situations, an asset would not be recognized until the court settlement had occurred. 5. Transactions between related parties are disclosed to insure that the users of the financial statements understand the basic nature of some of the transactions. Because it is often difficult to separate the economic substance from the legal form in related party transactions, disclosure is used extensively in this area. Purchase of a substantial block of the company’s common stock by A. Belew, coupled with the use of an A. Belew affiliate to act as food broker, suggests that disclosure is needed....
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- Spring '08
- Balance Sheet