A.4. Statement of owners equity and notes to FS

Question 1

What is the statement of changes in stockholders’ equity?

Answer 1

The statement of changes in stockholders’ equity reports the changes in each account in the stockholders’ equity section of the balance sheet and in total stockholders’ equity during the year and reconciles the beginning balance in each account with the ending balance.

Question 2

How is the statement of changes in stockholders’ equity constructed?

Answer 2

It is prepared in columnar form, with a column for each individual account and a column for total stockholders’ equity. The first line contains the beginning balances; the sources of the changes are listed below and identified in the leftmost column; and the final line contains the ending balances in each account. The statement should be prepared for every year that comparative financial statements are presented.

Question 3

What is the purpose of notes to financial statements?

Answer 3

They serve to supplement and explain the information presented on the face of the financial statements.

General purpose financial reporting requires notes to financial statements to present a thorough picture of a company’s financial position and the results of its operations. The notes are used to explain the items presented in the main body of the financial statements and the methods used to determine the amounts reported. The notes can also provide further breakdown and analysis of certain accounts that are deemed important. Disclosure in the notes can provide additional relevant information that can be important to fully understanding the financial statements.

Notes to financial statements are not considered to be part of a full set of financial statements but are a required part of general purpose financial reporting, which is defined as a full set of financial statements plus the notes to financial statements and other required supplemental information.

Question 4

What are accounting policies?

Answer 4

The accounting principles a company uses and considers appropriate to present fairly its financial statements.

Question 5

How are accounting policies reported?

Answer 5

In the first note to the financial statements a summary of significant accounting policies is disclosed or in a seperate summary preceding the notes to the financial statements.

Question 6

What is included in the disclosure of accounting policies?

Answer 6

• a selection from acceptable alternatives available
• any principles or methods that are uniqut to the industry
• any unusual or innovative applications of GAAP

Commonly required:

• basis of consolidation used
• depreciation methods used
• information on amortization of intangibles
• inventory pricing
• recognition of revenue from contracts with customers
• recognition of revenue from leasing operations

Question 7

What are the limitations of financial statements in general?

Answer 7

• Measurements are made in terms of money, so qualitative aspects of a company are not included.
  Only transactions recorded in the accounting records are in the financial statements.
• Information supplied by financial reporting involves estimation, classification, summarization, judg-
  ment, and allocation.
• Financial statements primarily reflect transactions that have already occurred; consequently, many
  aspects of them are based on historical cost.
• Only transactions involving the company are reflected in that company’s financial reports. However,
  transactions of other companies, such as competitors, may be very important.
• Financial statements are based on the going-concern assumption.54 If the going-concern assumption
  is invalid and the business is facing liquidation, the appropriate attribute for measuring financial state-
  ment items is liquidation value. If a business will be liquidated, it is not appropriate to use historical
  cost, fair value, net realizable value, or any other valuation measure for a going-concern’s financial
  statements.