Question

1. Why are the notes to the financial statements an integral part of the financial statements? Provide an example of what might be in the notes.

2. What is included in the summary of significant accounting policies disclosure? Provide an example of what might be included.

3. How does the role of the FASB differ from that of the Securities and Exchange Commission with regard to the establishment of accounting standards?

Answer 1

1.Ans

The notes (or footnote disclosures) are required by the full disclosure principle because the amounts and line descriptions on the face of the financial statements are not sufficient information. In fact, there may be some large potential losses that cannot be expressed as a specific amount, but they are critical information for lenders, investors, and others. The notes usually begin with the corporation's significant accounting policies. This note describes how revenues were recognized on the income statement, how inventory is accounted for, etc.Following are included in the notes by companies ,

• Nature of business
• Investments
• Employee benefit plans
• Basis of consolidation
• Accounts receivable
• Pensions and postretirement health plans
• Use of estimates
• Inventories
• Fair value measurement
• Revenue recognition
• Property, plant and equipment
• Long-term debt and available credit
• Fiscal periods
• Goodwill and other intangible assets
• Commitments and contingencies
• Foreign currency translation
• Deferred compensation
• Stock options
• Business segments
• Leases
• Stock repurchase program
• Significant customers
• Impairment of long-lived assets
• Accumulated other comprehensive income
• Cash and cash equivalents
• Accrued liabilities
• Recent accounting pronouncements

2.Ans

The Accounting policies is a section of the footnotes that accompany an entity's financial statements, describing the key policies being followed by the accounting department. This summary is usually placed at or near the beginning of the footnotes. The policy summary is mandated by the applicable accounting framework (such as GAAP or IFRS). These frameworks require an entity to disclose its most important policies, the appropriateness of those policies, and how they impact the reported financial position of the entity.

The disclosure of accounting policies is particularly important in situations where an organization chooses to follow policies that depart from the policies generally used within its industry. By perusing these policies, the investment community will have a better understanding of how the accounting policies used could alter the reported financial results and financial position of an entity.

The policy summary can include policies from a broad range of operational and financial areas, including cash, receivables, intangible assets, asset impairment, inventory valuation, types of liabilities, revenue recognition, and capitalized costs.

3.Ans

Financial accounting is concerned with providing useful and accurate information to external users of a company's financial information. This information takes the form of financial statements, footnotes and periodic updates of current events of interest to third parties. Financial statements for publicly traded companies must be prepared in accordance with generally accepted accounting principles (GAAP). Even tough the U.S. Securities and Exchange Commission [the S.E.C.] has statutory authority to establish financial accounting and reporting standards for publicly held companies under the Securities Exchange Act of 1934, the SEC relies on the Financial Accounting Standards Board [a seven member quasi governmental entity] to develop accounting rules and standards to keep financial reporting accurate and honest.

Putting it all together, financial statements filed with the S.E.C. by public companies follow the GAAP accounting guidelines established by the FASB - providing a consistent overview of the view of how companies have performed financially at least in terms of GAAP accounting rules.