Question

(Disclosures Required in Various Situations) Ace Inc. produces electronic components for sale to manufacturers of radios, television sets, and digital sound systems. In connection with her examination of Ace’s financial statements for the year ended December 31, 2018, Gloria Rodd, CPA, completed field work 2 weeks ago. Ms. Rodd now is evaluating the significance of the following items prior to preparing her auditor’s report. Except as noted, none of these items have been disclosed in the financial statements or notes.

Item 2: Recently Ace interrupted its policy of paying cash dividends quarterly to its stockholders. Dividends were paid regularly through 2017, discontinued for all of 2018 to finance purchase of equipment for the company’s new plant, and resumed in the first quarter of 2019. In the annual report, dividend policy is to be discussed in the president’s letter to stockholders.

Instructions

For each of the above items, discuss any additional disclosures in the financial statements and notes that the auditor should recommend to her client. (The cumulative effect of the four items should not be considered.)

Short answer

Unless cumulative preferred dividends are involved, no recommendation by the CPA is required.

Step-by-step solution

Meaning of Subsequent events

The term "subsequent events" refers to occurrences that occur after a company's fiscal year ends but before its financial results are revealed. To put it another way, the following occurrences occur after the cut-off date but before the corporation submits its financial statements. Depending on the circumstances, further developments may necessitate financial statement disclosure.

Additional disclosure in the financial statements

There is no need for CPA advice unless cumulative preferred dividends are involved. Readers of the financial statements consider the common stock dividend policy of the Board of Directors to be discretionary.

The company is not required to commit to a potential common stock dividend policy or to explain its historical policy in the financial statements, especially because the letter to the president will include the dividend policy. If cumulative preferred dividends are not included in the financial statements, a comment should be included.