Here are many different methods of valuing assets, recognizing revenues, and assigning costs.
Financial statement users must be aware of the accounting policies used by enterprises so that sound economic decisions can be made.
The accounting policies usually appear in a separate section called “Summary of Significant Accounting Policies” or as the first note of the notes to the financial statements.
According to ASC 850, Related-Party Disclosures, financial statements are required to disclose material related-party transactions other than compensation arrangements, expense allowances, or other similar items that occur in the ordinary course of business.
A related party is essentially any party that controls or can significantly influence the management or operating policies of the company to the extent that the company may be prevented from fully pursuing its own interests.
In addition to the measurement accounting principles that guide the values placed on the elements included in a balance sheet, there are accounting principles specifying the informative disclosures that are necessary because, without the information they provide, the financial statements would be misleading.
Parenthetical explanations have an advantage over both notes to the financial statements and supporting schedules.
Parenthetical explanations place the disclosure prominently in the body of the statement instead of in a note or schedule where it is more likely to be overlooked. The notes to the financial statements would contain the following: Note 1: Inventories are stated at the lower of cost or market.
Cost is determined using the first-in, first-out (FIFO) method.
Example: Among the current assets, the following might be shown if ,500,000 of accounts receivable were pledged as collateral for a ,200,000 bank loan: Accounts receivable pledged as collateral on bank loan payable ,500,000 Included in the current liabilities would be the following: Bank loan payable—collateralized by accounts receivable ,200,000 – Valuation allowances are used to reduce or increase the carrying amounts of certain assets and liabilities.
Accumulated depreciation reduces the carrying value of property, plant, and equipment, and a bond premium (discount) increases (decreases) the face value of a bond payable as shown in the following illustrations: Equipment ,000,000 – A supporting schedule might be used to provide additional detail about an item in the financial statements.