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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

In calculating inventory turnover, why is cost of goods sold used as the numerator? As the inventory turnover increases, what increasing risk does the business assume?

The FASB requires a reconciliation between the effective tax rate and the federal governmentโ€™s statutory rate. Of what benefit is such a disclosure requirement?

Olga Conrad, a financial writer, noted recently, โ€œThere are substantial arguments for including earnings projections in annual reports and the like. The most compelling is that it would give anyone interested something now available to only a relatively select fewโ€”like large stockholders, creditors, and attentive bartenders.โ€ Identify some arguments against providing earnings projections.

(Dividend Policy Analysis) Matheny Inc. went public 3 years ago. The board of directors will be meeting shortly after the end of the year to decide on a dividend policy. In the past, growth has been financed primarily through the retention of earnings. A stock or a cash dividend has never been declared. Presented below is a brief financial summary of Matheny Inc.โ€™s operations.

(\(000 omitted)

2018

2017

2016

2015

2014

Sales revenue

\)20,000

\(16,000

\)14,000

\(6,000

\)4,000

Net income

2,400

14,000

800

700

250

Average total assets

22,000

19,000

11,500

4,200

3,000

Current assets

8,000

6,000

3,000

1,200

1,000

Working capital

3,600

3,200

1,200

500

400

Common shares:

Number of shares

Outstanding (000)

Average market price

2,000

\(9

2,000

\)6

2,000

$4

20

-

20

-

Instructions

  1. Comment on the appropriateness of declaring a cash dividend at this time, using the ratios computed in part (b) as a major factor in your analysis.

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

c) Using the ratios provided, what conclusion(s) can be drawn regarding the companyโ€™s net investment in plant and equipment?

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