CHAPTER 24 Full Disclosure in Financial Reporting ASSIGNMENT CLASSIFICATION TABLE BY TOPIC Topics Questions Brief Exercises Exercises Problems Concepts for Analysis 1 2 3 1 2 3 4 4 12 5 6 7 8 9 11 10 11 13 1 The disclosure principle type of disclosure 2 3 23 2 Role of notes that accompany financial statements 1 4 5 1 2 3 Subsequent events 6 3 1 2 4 Segment reporting diversified firms 7 8 9 10 11 4 5 6 7 3 5 Discussion and analysis 12 13 6 Interim reporting 16 17 18 19 20 21 14 15 22 23 24 28 7 Audit opinions and fraudulent reporting 8 Earnings forecasts 9 Interpretation of ratios 10 Impact of transactions on ratios 11 Liquidity ratios 12 Profitability ratios 13 Coverage ratios 1 2 5 3 3 5 3 5 3 5 3 4 4 5 6 4 5 6 4 5 6 4 5 6 4 5 6 4 5 6 14 Activity ratios 25 26 8 9 4 5 6 3 15 Comprehensive ratio problems 16 Percentage analysis 24 27 17 International Accounting 29 30 31 This material is dealt with in an Appendix to the chapter 8 8 24 1 ASSIGNMENT CLASSIFICATION TABLE BY LEARNING OBJECTIVE Brief Exercises Exercises Problems Learning Objectives 1 Review the full disclosure principle and describe implementation problems 2 Explain the use of notes in financial statement 1 2 3 1 2 preparation business segments 3 Discuss the disclosure requirements for major 4 5 6 7 3 4 Describe the accounting problems associated with interim reporting 5 Identify the major disclosures in the auditor s report 6 Understand management s responsibilities for financials 7 Identify issues related to financial forecasts and projections 8 Describe the profession s response to fraudulent financial reporting 9 Understand the approach to financial statement analysis 11 Explain the limitations of ratio analysis 12 Describe techniques of comparative analysis 13 Describe techniques of percentage analysis 10 Identify major analytic ratios and describe their calculation 8 9 4 5 6 3 5 6 1 2 3 4 24 2 ASSIGNMENT CHARACTERISTICS TABLE Item Description Level of Difficulty Time minutes E24 1 E24 2 E24 3 E24 4 E24 5 E24 6 P24 1 P24 2 P24 3 P24 4 P24 5 C24 1 C24 2 C24 3 C24 4 C24 5 C24 6 C24 7 C24 8 C24 9 C24 10 C24 11 C24 12 C24 13 C24 14 Post balance sheet events Post balance sheet events Segmented reporting Ratio computation and analysis liquidity Analysis of given ratios Ratio analysis Subsequent events Segmented reporting Ratio computations and additional analysis Horizontal and vertical analysis Dividend policy analysis General disclosures inventories property plant and equipment Disclosures required in various situations Disclosures required in various situations Disclosures conditional and contingent liabilities Post balance sheet events Segment reporting Segment reporting theory Segment reporting theory Interim reporting Treatment of various interim reporting situations Financial forecasts Disclosure of results ethics Reporting of subsequent events ethics Effect of transactions on financial statements and ratios Simple 10 20 Moderate Moderate Moderate Simple Moderate Moderate Difficult Moderate Moderate Simple Difficult Moderate Moderate Simple Moderate Moderate Simple Moderate Simple Moderate Moderate Moderate Simple Moderate 10 15 15 20 5 10 20 30 20 30 30 40 40 50 24 30 35 45 40 60 40 50 20 25 20 25 24 30 20 25 30 35 20 25 24 30 20 25 30 35 24 30 15 20 10 15 24 35 24 3 ANSWERS TO QUESTIONS 1 2 3 4 5 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 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 in creased because of the complexity of the business environment the necessity for timely informa tion and the desire for more information on the enterprise for control and monitoring purposes The benefit is that an investor can determine the actual taxes paid by the enterprise Such a de termination 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 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 dis closed 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 Transactions between related parties are disclosed to insure that the users of the financial state ments understand the basic nature of some of the transactions Because it is often difficult to sepa rate 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 6 Subsequent events are of two types 1 Those which affect the financial statements directly and should be recognized therein through appropriate adjustments 2 Those which do not affect the financial statements directly and require no adjustment of the account balances but whose effects may be significant enough to be disclosed with appropriate figures or estimates shown a Probably adjust the financial statements directly b Disclosure c Disclosure d Disclosure e Neither adjustment nor disclosure necessary f Neither adjustment nor disclosure necessary g