A disclosure is additional information provided in a financial statement. Accounting regulations are country specific: they define a country’s accounting practice and penalties for lack of compliance. International financial reporting standards set the global benchmark for accounting.
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GAAP accounting principles guide USA firms. The financial accounting standard board develops GAAP as per mandate from security and exchange commission. Sarbanes-Oxley act further regulates United States of America corporate disclosures.
The purpose of a disclosure is to give investors a clear view of operation of a firm hence protecting them from fraudulent accounting practices. They are two forms of disclosure. The first form of disclosures gives details on accounting policies and methods of a firm. The second form of disclosure provides asset and liability information of interest to shareholders (Kieso, D., et al., 2010).
Inventory disclosure: first disclosure is accounting policy for inventory. Second, inventory write-down amount and reversals. Thirdly, a firm may opt to use inventory as a pledge to undertake a liability. In order to create a true picture of a firm’s inventory: this additional information is essential to disclose.
Fourthly, international accounting standards 2 provides for disclosure of inventory expenses on sale of a firm products by indicating it at cost price (Beechy, T. & Conrod, D., 2002,P.34).
Cash and cash equivalent disclosures include cashless investing and financing transactions excluded from the cash flow statement. Secondly, is disclosure of the components of cash and cash equivalents.
Thirdly, is disclosure of cash and cash equivalents that cannot be accessed by the firm inclusive of the reasons detailed in management notes. It is also critical not to forget, accounting policy used for cash and cash equivalents among the disclosures.
Trade accounts receivable disclosures start with the disclosure of accounting policy for trade accounts receivable. This policy disclosure will further include information on the establishment of allowance doubtful trade receivables rate.
Thirdly, a disclosure of a previous financial period’s un-recoverable debts collection. GAAP dictate financial receivable disclosures include a roll forward of the allowance for credit losses by portfolio segment. The recorded investment in financing receivables for each portfolio segment disclosed in the allowance roll forward (Nelson, M., et al., 2010).
In the term cash and cash equivalent, cash includes bank cash and check deposits. Furthermore, it includes total cash in hand in the form of notes and coins. Cash equivalents are short-term financial instruments held by a firm. For both, cash and short-term instruments, currency denomination include local and foreign currencies.
Cash equivalents have ease of convertibility to cash while also having maturities of less than three months. Cash and cash equivalents are current assets. Their changes form a cash flow statement. These changes occur in three forms of transaction, which make up a cash flow statement: operating, investing and financing activities (Beechy, T. & Conrod, D., 2002,P.6).
A cash flow statement preparation is either direct or indirect. Based on international accounting standards 7, direct method is where by determination of cash from operations is by getting the differences between cash received from customers and cash paid to suppliers of goods and services and employees.
Whereas, indirect method, it includes adjusting the following items in profit before tax: non-cash income and expenses, incorrectly classified items and working capital changes.
Operating activities are the revenue generating activities of the business and examples of such cash flows: sales, cash for stock procurement, and wages among others. Investing activities involve acquisition and disposal of non-current assets.
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Examples of such cash flows include proceeds on sale of non-current assets, cash used for acquisition of non-current assets and investment income received (not accrued). Financing activities are those activities that will either lead to an increase or decrease in shareholders’ funds and long-term liabilities (Kieso, D., et al., 2010).
In conclusion, the purpose of provision of financial statement disclosures is improving investor ability to make informed decisions. When investors choose not to analyse inventory, receivables, cash and cash equivalents disclosures it increases their vulnerability to potential firm and market shocks.
Beechy, T., & Conrod, D. (2002). Intermediate Accounting. (Vol. 1,pp. 16-17). New York, NY: McGraw-Hill Ryerson, Limited.
Kieso, D., Warfield, T.,& Weygandt, J., (2010). Intermediate accounting (13th ed.). Hoboken, NJ: John Wiley & Sons.
Nelson, M., Sepe, J.,& Spiceland, D., (2010). Intermediate Accounting. New York, NY: McGraw-Hill Ryersmon, Limited.