materiality

Examples of materiality in the following topics:

• Gain Contingencies

  • The disclosure of gain contingencies is affected by the materiality concept and the conservatism constraint.
  • Materiality is a concept or convention within auditing and accounting that relates to the importance/significance of an amount, transaction, or discrepancy.
  • For example, an auditor expresses an opinion on whether financial statements are prepared, in all material aspects, in conformity with generally accepted accounting principles (GAAP).
  • Professional judgment is required to determine what is material and what isn't.
  • A material gain contingency that is both probable and reasonably estimated can be disclosed in the notes to financial statements.

• Categories of Goods Included in Inventory

  • Most manufacturing organizations usually divide their "goods for sale" inventory into raw materials, work in process, and finished goods.
  • Raw materials - Materials and components scheduled for use in making a product.
  • A raw material is the basic material from which a product is manufactured or made.
  • Latex, iron ore, logs, crude oil, and salt water are examples of raw materials.
  • Distinguish between the raw materials, work in process, finished goods and goods for resale

• Current Guidelines for Expense Recognition

  • Two weeks later, the raw material is delivered to the company's warehouse.
  • Under the matching principle, the expense related to the raw material is not incurred until delivery.
  • Using the same example from above, the delivery of the raw material is insufficient to cause the cost of those goods to be recognized as an expense.
  • The raw material will be used to make items that will be sold to the public.
  • When the items that used the raw materials are sold, then the costs related to the raw material are recognized.

• Internal Controls

  • Internal controls over a company's inventory are meant to ensure that management has an accurate count of what materials and goods it has available for sale and to protect those goods from being spoiled, stolen or otherwise made unavailable for sale.
  • For example, assume a set amount of raw material is acquired by the company.
  • When the company receives that material, the amount should be noted in the inventory management system.
  • As the material is processed into the goods for resale, the amount of raw material used should be deducted from the "raw material inventory" and the amount of goods that result from the process should be added to the "finished goods inventory. " As each finished item is sold, the "finished goods inventory" should be decreased by that amount.

• Events Triggering Disclosure

  • Events that trigger disclosure should be based on an accountant's assessment of materiality.
  • Although the outcome of these matters cannot be predicted with certainty, and some of them may be disposed of unfavorably to the Company, management has no reason to believe that their disposition will have a materially adverse effect on the consolidated financial position of the Company. "
  • Events that trigger disclosure should be based on an accountant's assessment of materiality, especially when facing decisions related to the full disclosure principle.
  • Disclosures will normally include details to materiality decisions in the notes to financial statements.
  • Events that trigger disclosure should be based on materiality and the full disclosure principle

• Nature of Inventory

  • A canned food manufacturer's materials inventory includes the ingredients to form the foods to be canned, empty cans and their lids (or coils of steel or aluminum for constructing those components), labels, and anything else (solder, glue, etc.) that will form part of a finished can.
  • The firm's work in process includes those materials from the time of release to the work floor until they become complete and ready for sale to wholesale or retail customers.
  • Raw materials - materials and components scheduled for use in making a product.
  • Work in process, WIP - materials and components that have began their transformation to finished goods.

• Fundamental Concepts in Accounting

  • Materiality, only items material in amount or in their nature will affect the true and fair view given by a set of accounts.

• Components of Inventory Cost

  • Parts and raw materials are often tracked to particular sets (e.g., batches or production runs) of goods, then allocated to each item.
  • Overhead costs are often allocated to sets of produced goods based on the ratio of labor hours or costs or the ratio of materials used for producing the set of goods.

• Involuntary Conversion

  • An asset exchange with commercial substance will cause future cash flows to materially change.
  • For non-monetary asset exchanges without commercial substance, the expectation is that the exchange will not materially alter future cash flows.

• Loss Contingencies

  • For losses that are material, but may not occur and their amounts cannot be estimated, a note to the financial statements disclosing the loss contingency is reported.
  • However, in management's opinion, the final resolution of all legal matters will not have a material adverse effect on the Company's financial position.