E2-8b (full disclosure principle) presented below are a number of

E2-8B (Full Disclosure Principle) Presented below are a number of facts related to Baez, Inc. Assume that no mention of these facts was made in the financial statements and the related notes.


Assume that you are the auditor of Baez, Inc. and that you have been asked to explain the appropriate accounting and related disclosure necessary for each of these items.

(a) During the year, an assistant controller for the company embezzled $15,000. Baez’s net income for the year was $2,300,000. Neither the assistant controller nor the money has been found.

(b) Baez has reported its ending inventory at $2,100,000 in the financial statements. No other information related to inventories is presented in the financial statements and related notes.

(c) The company changed its method of depreciating equipment from the double-declining balance to the straight-line method. No mention of this change was made in the financial statements.

(d) Equipment purchases of $170,000 were partly financed during the year through the issuance of a $110,000 note payable. The company offset the equipment against the note payable and reported plant assets at $60,000.

(e) The company decided that, for the sake of conciseness, only net income should be reported on the


income statement. Details as to revenues, cost of goods sold, and expenses were omitted.

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