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Chapter 2: 8E (page 67)

(Full Disclosure Principle) Presented below are a number of facts related to Weller, Inc. Assume that no mentionof these facts was made in the financial statements and the related notes.

Instructions

Assume that you are the auditor of Weller, Inc. and that you have been asked to explain the appropriate accounting and related disclosure necessary for each of these items.

(a) The company decided that, for the sake of conciseness, only net income should be reported on the income statement. Details as to revenues, cost of goods sold, and expenses were omitted.

(b) Equipment purchases of \(170,000 were partly financed during the year through the issuance of a \)110,000 notes payable. The company offset the equipment against the notes payable and reported plant assets at \(60,000.

(c) Weller has reported its ending inventory at \)2,100,000 in the financial statements. No other information related to inventories is presented in the financial statements and related notes.

(d) The company changed its method of valuing inventories from weighted-average to FIFO. No mention of this change was made in the financial statements.

Short Answer

Expert verified
  1. Company must disclose every monetary transaction of the business-related revenues, expenses etc.
  2. Show the asset as $170,000 and a liability of $110,000.
  3. Disclose the information related to inventory in the footnotes of the balance sheet.
  4. Disclose the valuation method change in the financial statements' footnotes.

Step by step solution

01

Meaning of Financial Statement

The financial statement is defined as the statement prepared to find out the financial position and performance of the business.

02

Explanation for statement (a)

The company is doing wrong. The company must disclose all the transactions related to the business without hiding anything from the financial statements. The company must disclose revenues and expenses which generate the net income only then the users of the financial statements can know whether the company is earning profit or loss.

03

Explanation for statement (b)

The company must show the proper accounting treatment in the financial statements. The company must show the asset as $170,000 and a liability of $110,000. The company must record all the transactions of the business without hiding anything from the financial statements.

04

Explanation for statement (c)

The company must disclose the information related to inventory in the footnotes of the balance sheet and also the method that is used to value the inventory. If the valuation method of inventory is not mentioned in the footnotes, the balance of the inventory might vary based on the method.

05

Explanation for statement (d)

The company must disclose the change of valuation method from the weighted average method to the FIFO method in the footnotes of the financial statements.The company should also explain the change in the balance of the inventory because of the change in the inventory method.

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Most popular questions from this chapter

Wayne Cooper has some questions regarding the theoretical framework in which GAAP is set. He knows that the FASB and other predecessor organizations have attempted to develop a conceptual framework for accounting theory formulation. Yet, Wayne鈥檚 supervisors have indicated that these theoretical frameworks have little value in the practical sense (i.e., in the real world). Wayne did notice that accounting rules seem to be established after the fact rather than before. He thought this indicated a lack of theory structure but never really questioned the process at school because he was too busy doing the homework. Wayne feels that some of his anxiety about accounting theory and accounting semantics could be alleviated by identifying the basic concepts and definitions accepted by the profession and considering them in light of his current work. By doing this, he hopes to develop an appropriate connection between theory and practice.Instructions

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