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Topic
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Which of the following facts concerning fixed assets should be included in the summary of significant accounting policies?
Depreciation method Composition
No Yes
Yes Yes
Yes No
No No
C. The summary of significant accounting policies requires that the methods of depreciation used by a firm be disclosed. The composition of plant assets must also be disclosed, but not in the summary of significant accounting policies. The composition information typically is disclosed in another footnote.
Which of the following should be disclosed in a summary of significant accounting policies?
A. Basis of profit recognition on long-term construction contracts.
B. Future minimum lease payments in the aggregate and for each of the five succeeding fiscal years.
C. Depreciation expense.
D. Composition of sales by segment.
A. The summary of significant accounting policies footnote presents information that helps assist users in understanding the recognition, measurement, and disclosure decisions made by the firm.
GAAP allows many choices. In the long-term construction contracts area, GAAP allows both the completed contract and percentage of completion methods. The result of applying each method significantly affects both the Income Statement and Balance Sheet.
A user is much better equipped to evaluate the firm’s financial performance and position with the knowledge of the revenue recognition method used by the firm.
So why is depreciation expensive included in the summary of accounting policies in the first question but not the second?
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