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What is the full disclosure principle in accounting? Why has disclosure increased substantially in the last 10 years?

Short Answer

Expert verified

The full disclosure relates to the imperative data, which is expanding due to the complexity of the business environment.

Step by step solution

01

Meaning of Full Disclosure Principle

Full disclosure can be term as an accounting principle that compels the management of an organization to disclose all relevant and material financial information, whether monetary or non-monetary, to creditors, investors, and stockholders.

02

Explaining the full disclosure principle in accounting and explaining why it has grown significantly over the past 10 years.

The full disclosure principle in accounting calls for the description of any financial truth in the financial statements that is sufficient to influence the judgment of an educated user.

Disclosure has expanded since the complexity of the business environment, the need for convenient data, and the desire for more information on the enterprise for control and observation purposes.

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Most popular questions from this chapter

Picasso Company is a wholesale distributor of packaging equipment and supplies. The companyโ€™s sales have averaged about \(900,000 annually for the 3-year period 2015โ€“2017. The firmโ€™s total assets at the end of 2017 amounted to \)850,000.

The president of Picasso Company has asked the controller to prepare a report that summarizes the financial aspects of the companyโ€™s operations for the past 3 years. This report will be presented to the board of directors at their next meeting.

In addition to comparative financial statements, the controller has decided to present a number of relevant financial ratios which can assist in the identification and interpretation of trends. At the request of the controller, the accounting staff has calculated the following ratios for the 3-year period 2015โ€“2017.

2015

2016

2017

Current ratio

1.80

1.89

1.96

Acid-test (quick) ratio

1.04

0.99

0.87

Accounts receivable turnover

8.75

7.71

6.42

Inventory turnover

4.91

4.32

3.42

Debt to assets ratio

51.0%

46.0%

41.0%

Long-term debt to assets ratio

31.0%

27.0%

24.0%

Sales to fixed assets (fixed asset turnover)

1.58

1.69

1.79

Sales as a percent of 2015 sales

1.00

1.03

1.07

Gross margin percentage

36.0%

35.1%

34.6%

Net income to sales

6.9%

7.0%

7.2%

Return on assets

7.7%

7.7%

7.8%

Return on common stockholdersโ€™ equity

13.6%

13.1%

12.7%

In preparation of the report, the controller has decided first to examine the financial ratios independent of any other data to determine if the ratios themselves reveal any significant trends over the 3-year period.

Instructions

b) In terms of the ratios provided, what conclusion(s) can be drawn regarding the companyโ€™s use of financial leverage during the 2015โ€“2017 period?

Madrasah Corporation issued its financial statements for the year ended December 31, 2017, on March 10, 2018. The following events took place early in 2018.

  1. On January 10, 10,000 shares of \(5 par value common stock were issued at \)66 per share.
  2. On March 1, Madrasah determined after negotiations with the Internal Revenue Service that income taxes payable for 2017 should be \(1,270,000. On December 31, 2017, income taxes payable were recorded at \)1,100,000.

Instructions

Discuss how the preceding post-balance-sheet events should be reflected in the 2017 financial statements.

(Ratio Computations and Additional Analysis) Bradburn Corporation was formed 5 years ago through a public subscription of common stock. Daniel Brown, who owns 15% of the common stock, was one of the organizers of Bradburn and is its current president. The company has been successful, but it currently is experiencing a shortage of funds. On June 10, 2018, Daniel Brown approached the Topeka National Bank, asking for a 24-month extension on two \(35,000 notes, which are due on June 30, 2018, and September 30, 2018. Another note of \)6,000 is due on March 31, 2019, but he expects no difficulty in paying this note on its due date. Brown explained that Bradburnโ€™s cash flow problems are due primarily to the companyโ€™s desire to finance a \(300,000 plant expansion over the next 2 fiscal years through internally generated funds. The commercial loan officer of Topeka National Bank requested the following financial reports for the last 2 fiscal years

BRADBURN CORPORATION

BALANCE SHEET

MARCH 31

Assets

2018

2017

Cash

\) 18,200

\( 12,500

Notes receivable

148,000

132,000

Accounts receivable (net)

131,800

125,500

Inventories (at cost)

105,000

50,000

Plant & Equipment (net of depreciation)

1,449,000

1,420,500

Total assets

\)1,852,000

\(1,740,500

Liabilities and Stockholdersโ€™ Equity

Accounts payable

\) 79,000

\( 91,000

Notes payable

76,000

61,500

Accrued liabilities

9,000

6,000

Common stock (130,000 shares, \)10 par)

1,300,000

1,300,000

Retained earnings*

388,000

282,000

Total liabilities and stockholdersโ€™ equity

\(1,852,000

\)1,740,500

*Cash dividends were paid at the rate of \(1 per share in the fiscal year 2017 and \)2 per share in the fiscal year 2018.

BRADBURN CORPORATION

INCOME STATEMENT

FOR THE FISCAL YEARS ENDED MARCH 31

2018

2017

Sales revenue

\(3,000,000

\)2,700,000

Cost of goods sold*

1,530,000

1,425,000

Gross margin

1,470,000

1,275,000

Operating expenses

860,000

780,000

Income before income taxes

610,000

495,000

Income taxes (40%)

244,000

198,000

Net income

\( 366,000

\) 297,000

Depreciation charges on the plant and equipment of \(100,000 and \)102,500 for fiscal years ended March 31, 2017, and 2018, respectively, are included in the cost of goods sold.

Instructions

(a).Compute the following items for Bradburn Corporation.

3. Inventory turnover for fiscal year 2018.

Okay. Last fall, someone with a long memory and an even longer arm reached into that bureau drawer and came out with a moldy cheese sandwich and the equally moldy notion of corporate forecasts. We tried to find out what happened to the cheese sandwichโ€”but, rats!, even recourse to the Freedom of Information Act didnโ€™t help. However, the forecast proposal was dusted off, polished up and found quite serviceable. The SEC, indeed, lost no time in running it up the old flagpoleโ€”but no one was very eager to salute. Even after some of the more objectionable featuresโ€”compulsory corrections and detailed explanations of why the estimates went awryโ€”were peeled off the original proposal.

Seemingly, despite the Commissionโ€™s smiles and sweet talk, those craven corporations were still afraid that an honest mistake would lead them down the primrose path to consent decrees and class action suits. To lay to rest such qualms, the Commission last week approved a โ€œSafe Harborโ€ rule that, providing the forecasts were made on a reasonable basis and in good faith, protected corporations from litigation should the projections prove wide of the mark (as only about 99% are apt to do).

Instructions

  1. What are the arguments for preparing profit forecasts?

(Disclosure of Estimates) Nancy Tercek, the financial vice president, and Margaret Lilly, the controller, of Romine Manufacturing Company are reviewing the financial ratios of the company for the years 2017 and 2018. The financial vice president notes that the profit margin on sales ratio has increased from 6% to 12%, a hefty gain for the 2-year period. Tercek is in the process of issuing a media release that emphasizes the efficiency of Romine Manufacturing in controlling cost. Margaret Lilly knows that the difference in ratios is due primarily to an earlier company decision to reduce the estimates of warranty and bad debt expense for 2018. The controller, not sure of her supervisorโ€™s motives, hesitates to suggest to Tercek that the companyโ€™s improvement is unrelated to efficiency in controlling cost. To complicate matters, the media release is scheduled in a few days.

Instructions

  1. Give your opinion on the following statement and cite reasons: โ€œBecause Tercek, the vice president, is most directly responsible for the media release, Lilly has no real responsibility in this matter.โ€
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