In: Accounting
Identify two examples of the most commonly required disclosure on accounting policies. How are those examples useful to financial statement users? Analyze Verizon Communications’ disclosure on accounting policies, and give your opinion on whether or not the information is helpful for decision making.
The principle of disclosure is to disclose all material facts and accounting policies in the financial statements.
Examples: Two common examples are depreciation method, and inventory valuation.
There are so many so many depreciation methods like, straight-line method, double declining balance method, MACRS depreciation method. A firm has to disclose which method it follows.
Similarly there is FIFO method, LIFO method, weighted average method, of inventory valuation. A firm has to follow any one out of these and has to disclose such method.
Users of financial statements like, shareholders, lenders, tax authorities, getting help out of these disclosures for future decision making. Depreciation reduces net income; if straight-line method is used, it has equal impact on each-year’s profit; if MACRS is followed today’s profit would be lower than future profit. Similarly at the rising price a firm should follow LIFO method instead of FIFO method; this is required for saving cash resource. Users used to see whether the firm is efficient enough in this regard.
Company V. C: (1) The firm disclosed that they have followed Generally Accepted Accounting Principle (GAAP) while recording accounts. (2) Another thing the management disclosed is that the firm uses estimation when required like, allowance for bad debt accounts.
Both these are important for users for their decision making – since GAAP is followed all the records are up-to-date and based on principle; the chance of reliability would be high. Since there is estimation of doubtful debts, the accounts are maintained through conservatism; there is no over expectation.