CHAPTER 24
Presentation and Disclosure in Financial Reporting
ASSIGNMENT CLASSIFICATION TABLE (BY TOPIC)
Topics
Questions
Brief
Exercises
Exercises
Problems
Concepts
for Analysis
* 1. The disclosure principle; type
of disclosure.
2, 3, 22
1, 2, 3
* 2. Role of notes that accompany
financial statements.
1, 4, 5
1, 2
1, 2, 3, 4
* 3. Subsequent events.
6
3
1, 2
1
4, 10
* 4. Segment reporting; diversified
firms.
7, 8, 9,
10, 11
4, 5, 6, 7
3
2
5
* 5. Interim reporting.
12, 13, 14,
15
6, 7
* 6. Audit opinions and fraudulent
reporting.
20, 21
9
* 7. Discussion and analysis.
16, 17
* 8. Earnings forecasts.
18, 19
8
*9. Interpretation of ratios.
23, 24, 25,
26
4, 5, 6
5
*10. Impact of transactions on ratios.
8
3
11
*11. Liquidity ratios.
8
4, 5, 6
3, 5
*12. Profitability ratios.
4, 5, 6
3, 5
*13. Coverage ratios.
4, 5, 6
*14. Activity ratios.
27
8, 9
4, 5, 6
3
*15. Comprehensive ratio problems.
4, 5, 6
3, 5
*16. Percentage analysis.
26
4
3, 4
*17. First-time adoption of IFRS.
38, 39
28, 29, 30,
31, 32,
10, 11, 12
13, 14, 15
7, 8
ASSIGNMENT CLASSIFICATION TABLE (BY LEARNING OBJECTIVE)
Learning Objectives
Brief
Exercises
Exercises
Problems
Concepts
for
Analysis
1. Describe the full disclosure principle
and how it is implemented.
1, 2
1, 2, 3, 4,
9
events, major business segments, and
interim reporting.
4. Describe other reporting issues related
to implementation of the full disclosure
principle.
8
*5. Explain financial statement analysis.
8, 9
4, 5, 6
3, 4, 5
*6. Describe first-time adoption of IFRS.
10, 11, 12,
13, 14, 15
7, 8
ASSIGNMENT CHARACTERISTICS TABLE
Description
Level of
Difficulty
Time
(minutes)
Subsequent events.
Moderate
10–15
Subsequent events.
Moderate
10–15
Segmented reporting.
Moderate
Ratio computation and analysis; liquidity.
Simple
20–30
Analysis of given ratios.
Moderate
20–30
Ratio analysis.
Moderate
30–40
Opening statement of financial position.
Moderate
10–15
Opening statement of financial position, disclosure.
Moderate
15–20
Subsequent events.
Complex
40–50
Segment reporting.
Moderate
24–30
Ratio computations and additional analysis.
Moderate
35–45
Horizontal and vertical analysis.
Simple
40–60
Dividend policy analysis.
40–50
General disclosures, inventories, property, plant,
and equipment.
Simple
10–20
Disclosures required in various situations.
Moderate
20–25
Disclosures, conditional and contingent liabilities.
Simple
25–30
Subsequent events.
Moderate
20–25
Segment reporting.
Moderate
30–35
Interim reporting.
Simple
20–25
Treatment of various interim reporting situations.
Moderate
30–35
Financial forecasts.
Moderate
25–30
Disclosure of estimates—ethics.
Moderate
15–20
Reporting of subsequent events—ethics.
Simple
10–15
Effect of transactions on financial statements and ratios.
Moderate
25–35
ANSWERS TO QUESTIONS
1. The major advantages are: (1) additional information pertinent to specific financial statements can
be explained in qualitative terms, (2) supplementary data of a quantitative nature can be provided to
2. The full disclosure principle in accounting calls for reporting in financial statements any financial
facts significant enough to influence the judgment of an informed reader. Disclosure has increased
3. The benefit of reconciling the effective tax rate and the statutory rate is that an investor can
determine the actual taxes paid by the enterprise. Such a determination is particularly important if
4. (a) The increased likelihood that the company will suffer a costly strike requires no disclosure in
the financial statements. The possibility of a strike is an inherent risk of many businesses. It,
along with the risks of war, recession, etc., is in the category of general news.
5. Transactions between related parties are disclosed to insure that the users of the financial state–
ments understand the basic nature of some of the transactions. Because it is often difficult to
Questions Chapter 24 (Continued)
6. “Subsequent events” are of two types:
(1) Those which affect the financial statements directly and should be recognized therein through
appropriate adjustments.
(2) Those which do not affect the financial statements directly and require no adjustment of the
account balances but whose effects may be significant enough to be disclosed with appropriate
figures or estimates shown.
7. Diversified companies are enterprises whose activities are segmented into unrelated industries. The
accounting problems related to diversified companies are: (1) the problem of defining a segment
8. After the company decides on the segments for possible disclosure, a quantitative test is made to
determine whether the segment is significant enough to warrant actual disclosure. A segment is
identified as a reportable segment if it satisfies one or more of the following tests.
(a) Its revenue (including both sales to external customers and intersegment sales or transfers) is
10% or more of the combined revenue (sales to external customers and intersegment sales or
transfers) of all the company’s operating segments.
Questions Chapter 24 (Continued)
9. IFRS requires that a company report:
(a) General information about its operating segments.
(b) Segment profit and loss and related information.
10. An operating segment is a component of an enterprise:
(a) That engages in business activities from which it earns revenues and incurs expenses.
(b) Whose operating results are regularly reviewed by the company’s chief operating decision
maker to assess segment performance and allocate resources to the segment.
11. One of the major reasons for not providing segment information is that competitors will then be
able to determine the profitable segments and enter that product line themselves. If this occurs
12. Interim reports are unaudited financial statements prepared either four times a year or every six
months. A complete set of interim financial statements is often not provided because this
13. The accounting problems related to the presentation of interim data are as follows:
(a) The difficulty of allocating costs, such as income taxes, pensions, etc., to the proper interim
14. A company records losses from inventory write-downs in an interim period similar to how it would
record them in annual financial statements. However, if an estimate from a prior interim period
Questions Chapter 24 (Continued)
15. One suggestion has been to normalize the fixed nonmanufacturing costs on the basis of seasonal
sales. The problem with this method is that future sales are unknown and hence a great deal of
subjectivity is involved. Another approach is to charge as a period charge those costs that are
16. The management commentary section covers three financial aspects of an enterprise’s business—
liquidity, capital resources, and results of operations. It requires management to highlight favorable or
17. Management has the primary responsibility for the preparation, integrity, and objectivity of the com-
pany’s financial statements. If management wishes to present information in a certain way, it may
do so. If the auditor objects because IFRS is violated, some type of modified opinion is called for.
LO: 3,4, Bloom: K, Difficulty: Simple, Time: 3-5, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication
18. Arguments against providing earnings projections:
(a) No one can foretell the future. Therefore forecasts, while conveying an impression of precision
about the future, will nevertheless inevitably be wrong.
19. Arguments for providing earnings forecasts are:
(a) Investment decisions are based on future expectations; therefore, information about the future
20. The auditor expresses a “clean” or unmodified opinion when the client’s financial statements
present fairly the client’s financial position and results of operations on the basis of an
examination made in accordance with generally accepted auditing standards, and the statements
Questions Chapter 24 (Continued)
21. Fraudulent financial reporting is intentional or reckless conduct, whether by act or omission, that
results in materially misleading financial statements. Fraudulent financial reporting can involve
many factors and take many forms. It may entail gross and deliberate distortion of corporate records,
such as inventory count tags, or falsified transactions, such as fictitious sales or orders. It may entail
the misapplication of accounting policies. Company employees at any level may be involved, from
that encourage individuals and companies to engage in fraudulent financial reporting and are present
to some degree in all companies. If the right combustible mixture of forces and opportunities is
present, fraudulent financial reporting may occur.
A frequent incentive for fraudulent financial reporting that improves the company’s financial appear–
ance is the desire to obtain a higher price from an equity or debt offering or to meet the expectations
Financial pressure resulting from bonus plans that depend on short-term economic performance.
This pressure is particularly acute when the bonus is a significant component of the individual’s
total compensation.
Opportunities for fraudulent financial reporting are present when the fraud is easier to commit and
when detection is less likely. Frequently these opportunities arise from:
Questions Chapter 24 (Continued)
*22. It has been said that “everything is relative,” and this is certainly true of financial statement data.
The chief significance of financial statement data is not so much in the absolute amounts
presented but in their relative significance; that is, in the conclusions reached after comparing
*23. Your friend should be advised that in order to interpret adequately and to evaluate financial statement
data, an individual must:
*24. Percentage analysis consists of reducing a series of related amounts to a series of percentages
of a given base while ratio analysis is the computation of any specific ratio of one figure to
*25. Cost of goods sold is used for two reasons: first, cost must be used rather than retail value
because the average inventory figures are on a cost basis. Second, since measurement of the
*26. The relationship of asset turnover to the return on assets is as follows:
Sales
X
Net Income
=
Net Income
Questions Chapter 24 (Continued)
*27. (a) Common-size analysis is reduction of all dollar amounts in the financial statements to a
percentage of a base amount.
(b) Vertical analysis is the expression percentage-wise of each item on a financial statement in
*28. When countries accept IFRS for use as accepted accounting policies, companies need guidance
to ensure that their first IFRS financial statements contain high quality information. IFRS No. 1
*29. The transition date is the beginning of the earliest period for which full comparative IFRS
*30. The characteristics of high quality information in a company’s first IFRS financial statements are
that information be transparent, provide a suitable starting point, and have a cost that does not
exceed the benefits.
LO: 6, Bloom: C, Difficulty: Simple, Time: 3-5, AACSB: None, AICPA BB: None, AICPA FC: Reporting, AICPA PC: Communication
*31. The steps in preparing the opening IFRS statement of financial position include the following:
1. Include all assets and liabilities that IFRS requires.
*32. The IASB allows exemptions to retrospective application because in some cases adjustments
relating to prior periods cannot be reasonably determined. In other cases it is impracticable to
*33. The IASB identified three required exemptions to retrospective application in first-time adoption of
IFRS. They are estimates, hedge accounting, and non-controlling interests.
Questions Chapter 24 (Continued)
*34. Elective exemptions to retrospective application in first-time adoption of IFRS include all of the
following: share-based payment transactions, fair value or revaluation as deemed cost, leases,
*35. The deemed cost exemption to retrospective application allows companies to measure property,
plant, and equipment at fair value at the transition date and use that fair value as their deemed
*36. A company that elects the deemed cost exemption is not required to continue using revaluation
accounting subsequent to first-time adoption.
The IASB decided the reconstructed cost data might be less relevant to users compared to fair
*37. A company must present at least one year of comparative information under IFRS upon first-time
adoption of IFRS. An entity’s first IFRS financial statements shall include at least three
statements of financial position, two statements of comprehensive income, two separate income
SOLUTIONS TO BRIEF EXERCISES
BRIEF EXERCISE 24.1
The reader should recognize that the firm has an obligation for lease payments
of approximately €5,711,000 for the next three years. In certain situations,
this information is very important in determining: (1) the ability of the firm to
use additional lease financing, and (2) the nature of maturing commitments
BRIEF EXERCISE 24.2
The reader should recognize that there are dilutive securities outstanding
BRIEF EXERCISE 24.3
Net income will decrease by €10,000 (€160,000 – €170,000) as a result of the
adjustment of the liability. The settlement of the liability is the type of sub–
sequent event which provides additional evidence about conditions that
BRIEF EXERCISE 24.4
It should be emphasized that because a company discloses its segmental
results, this does not diminish the necessity for providing consolidated results
as well. Sometimes individuals become confused because they believe that
BRIEF EXERCISE 24.5
BRIEF EXERCISE 24.6
¥90 + ¥25 + ¥50 + ¥34 + ¥150 = ¥349 = total profits of profitable segments.
BRIEF EXERCISE 24.7
¥500 + ¥550 + ¥250 + ¥400 + ¥200 + ¥150 + ¥475 = ¥2,525 = total assets.
*BRIEF EXERCISE 24.8
(a) X + $500,000 = 5X
$500,000 = 4X
$125,000 = Current liabilities
(b) Cost of goods sold last year = $200,000 X 5 = $1,000,000
$1,000,000 ÷ 8 = $125,000 = Average inventory in current year
LO: 5, Bloom: AP, Difficulty: Moderate, Time: 15-20, AACSB: Analytic, AICPA BB: Critical Thinking, AICPA FC: Reporting, AICPA PC: Problem Solving
*BRIEF EXERCISE 24.9
Cost of Goods Sold
= Inventory Turnover
Average Inventory
= 9
= 12
Average Inventory
*BRIEF EXERCISE 24.10
Becker’s opening statement of financial position will be dated January 1,
*BRIEF EXERCISE 24.11
*BRIEF EXERCISE 24.12
Inventory ……………………………………………………………….. 15,000
Retained Earnings ………………………………………….. 15,000
LO: 6, Bloom: AP, Difficulty: Simple, Time: 5-7, AACSB: Analytic, AICPA BB: Critical Thinking, AICPA FC: Reporting, AICPA PC: Problem Solving
*BRIEF EXERCISE 24.13
*BRIEF EXERCISE 24.14
*BRIEF EXERCISE 24.15
The deemed cost exemption can be used to measure property, plant and
equipment and intangible assets in certain situations. This exemption can
SOLUTIONS TO EXERCISES
EXERCISE 24.1 (10–15 minutes)
(a) The issuance of ordinary shares is an example of a subsequent event
which provides evidence about conditions that did not exist at the
(b) The changed estimate of taxes payable is an example of a subsequent
event which provides additional evidence about conditions that existed at
EXERCISE 24.2 (10–15 minutes)
1.
(a)
4.
(b)
7.
(c)
10.
(c)
2.
(c)
5.
(c)
8.
(c)
11.
(a)
EXERCISE 24.3 (5–10 minutes)
(a) Revenue test: 10% X €102,000 = €10,200.
Segments W (€60,000) and Y (€23,000) both meet this test.
*EXERCISE 24.4 (20–30 minutes)
Computations are given below which furnish some basis of comparison of
the two companies:
Plunkett
Ltd.
Herring
Plc.
Composition of current assets
Inventories
Receivables
Cash
Computation of various ratios
Current ratio
3.03 to 1
3.26 to 1
(£910 ÷ £300)
(£1,140 ÷ £350)
Acid-test ratio
1.13 to 1
1.78 to 1
Accounts receivable turnover
(£1,500 ÷ £302)
Inventory turnover
Cash to current liabilities
(£120 ÷ £300)
Herring Ltd. appears to be a better short-term credit risk than Plunkett Plc.
Analysis of various liquidity ratios demonstrates that Herring Ltd. is
stronger financially, all other factors being equal, in the short–term.
Comparative risk could be judged better if additional information were
*EXERCISE 24.5 (20–30 minutes)
(a) The acid-test ratio is the current ratio with the subtraction of inventory
and prepaid expenses (generally insignificant relative to inventory) from
current assets. Any divergence in trend between these two ratios would
(b) Financial leverage has definitely declined during the three-year period.
This is shown by the steady drop in the long-term debt-to-assets ratio,
(c) The company’s investment in plant and equipment has decreased
during the three-year period 2017–2019. This conclusion is reached by
using the sales to fixed assets (fixed asset turnover) and sales as a
*EXERCISE 24.6 (30–40 minutes)
(a) The current ratio measures overall short-term liquidity and is an indicator
of the short-term debt-paying ability of the firm.
The quick ratio also is a measure of short-term liquidity. However, it is
a measure of more immediate liquidity than the current ratio and is an
Net income to equity is a profitability ratio. It measures the return on
shareholders’ investment and is used to evaluate the company’s
success in generating income for the benefit of its shareholders (i.e.,
management effectiveness).
(b) The two ratios that each of the four entities would specifically use to
examine Howser Ltd. are as follows:
Citizens National Bank might employ the current or quick ratio and the
total liabilities to equity ratio.
*EXERCISE 24.6 (Continued)
(c) Howser Ltd. appears to have a strong current/liquidity position as evi-
denced by the current and quick ratios that have been improving over
the three-year period. In addition, the current ratio is greater than the
industry average and the quick ratio is just slightly below. However,
the increase in the current ratio could be due to an increase in inventory
levels. This fact is confirmed by the deteriorating inventory turnover ratio
that is also below the industry average. Overstock or obsolete inventory
conditions may exist.
*EXERCISE 24.7 (10–15 minutes)
(a) 1. Dividends Payable ……………………………………… 45,000
Retained Earnings ……………………………….. 45,000