Accounting Policies in Financial Statements, Research Paper Example

The four types of accounting policies that are typically disclosed in the first note accompanying the financial statements are basis of consolidation, depreciation methods, inventory methods, and cash and cash equivalents.  (Georgiades, May 19, 2008). If a company owns between 0 and 20 percent of another company’s stock, the investment should be recorded at cost. A stake between 20 and 50 should be recorded using equity method but if the stake exceeds 50 percent, the company should identify investment as an acquisition and prepare consolidated financial statements (McBride). A company may identify an affiliate as an acquisition even with less than 50 percent stake if it exerts considerable influence on the operations of the affiliate company (Codjia).

Depreciation refers to the normal wear and tear of assets. The companies have several options when it comes to choosing a depreciation method such as straight line, accelerated, and declining balance. Straight line depreciation method results in an equal amount of depreciation each year over the life of an asset. Accelerated depreciation method is used for assets with short useful lives. IRS has devised a table of rates to assist with accelerated depreciation method. Declining balance method results in larger depreciation amounts in earlier years (Griffin).

Inventory methods refer to the ways the companies value their inventory on hand. Two of the most commonly used inventory methods as FIFO and LIFO. FIFO stands for first-in-first-out and assumes that inventory items purchased earlier are used/sold earlier, thus, the remaining inventory reflects latest acquisition costs. LIFO stands for last-in-first-out and assumes that inventory items purchased lately are used/sold earlier, thus, the remaining inventory reflects early acquisition costs. Cash and cash equivalents refer to extremely liquid assets that are or can be instantly converted into cash such as marketable securities and treasury bills.

References

Codjia, M. (n.d.). What Are the Criteria for Consolidation of Financial Statements? Retrieved October 2, 2012, from http://smallbusiness.chron.com/criteria-consolidation-financial-statements-24695.html

Georgiades, G. (May 19, 2008). Accounting Policies. In GAAP Financial Statement Disclosures Manual 2008-2009 (pp. 2.08-2.09). CCH, Inc.

Griffin, D. (n.d.). What Are the Methods of Depreciation? Retrieved October 2, 2012, from http://smallbusiness.chron.com/methods-depreciation-5194.html

McBride, C. (n.d.). Financial Statement Consolidation Rules. Retrieved October 2, 2012, from http://smallbusiness.chron.com/financial-statement-consolidation-rules-5230.html