In addition to the measurement accounting principles that guide the values placed on the elements included in the 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.
The following five disclosure techniques are used in varying degrees in contemporary financial statements:
Notes to the financial statements
Valuation allowances (sometimes referred to as “contra” amounts)
Information is sometimes disclosed by means of parenthetical explanations appended to the appropriate balance sheet caption. For example
|Common stock ($10 par value, 200,000 shares authorized, 150,000 issued)||$1,500,000|
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.
If the information cannot be disclosed in a relatively short and concise parenthetical explanation, a note disclosure is used. For example
|Inventories (see note 1)||$2,550,000|
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 ...