The materiality concept, also called the materiality constraint, states that financial

information is material to the financial statements if it would change the opinion or view
of a reasonable person. In other words, all important financial information that would
sway the opinion of a financial statement user should be included in the financial
statements.
The concept of materiality is relative in size and importance. Some financial information
might be material to one company but might be immaterial to another. This is somewhat
obvious when you think about a small company verses a large company. A large and
material expense to a small company might be small an immaterial to a large company
because of their size and revenue. The main question that the materiality concept
addresses is does the financial information make a difference to financial statement users.
If not, the company doesn't have to worry about including it in their financial statements
because it is immaterial.
Most of the time financial information materiality is judged on qualitative and
quantitative characteristics. Professionals are often left up to their experience and good
judgmeA large company has a building in the hurricane zone during Hurricane Sandy.
The company building is destroyed and after a lengthy battle with the insurance company,
the company reports an extra ordinary loss of $10,000. The company has net income of
$10,000,000. The materiality concept states that this loss is immaterial because the
average financial statement user would not be concerned with something that is only .1%
of net income.
- Assume the same example above except the company is a smaller company with only
$50,000 of net income. Now the loss is 20% of net income. This is a substantial loss for
the company. Investors and creditors would be concerned about a loss this big. To the
smaller company, this $10,000 would be considered material.
- A small company bookkeeper doesn't do a very good job of keeping track of expenses.
Most random expenses get recorded in the miscellaneous expense account. At the end of
the year the miscellaneous expense account has a total of $1424.25 in it. The total net
income of the company is $36,940. The miscellaneous account is immaterial to the
overall financial picture of the company and there is no need to reclassify the expenses in
it
nt to understand what is material and what isn't.

Q3) ), notes and bonds are marketable securities the U.S. government sells in order
to pay off maturing debt and to raise the cash needed to run the federal government.
When you buy one of these securities, you are lending your money to the
government of the United States.
T-bills are short-term obligations issued with a term of one year or less, and because
they are sold at a discount from face value, they do not pay interest before maturity.
The interest is the difference between the purchase price and the price paid either at

maturity (face value) or the price of the bill if sold prior to maturity.
Treasury notes and bonds, on the other hand, are securities that have a stated
interest rate that is paid semi-annually until maturity. What makes notes and bonds
different are the terms to maturity. Notes are issued in two-, three-, five- and 10-year
terms. Conversely, bonds are long-term investments with terms of more than 10
years.
To learn more about T-bills and other money market instruments, see What Fuels The
National Debt and our Money Market Tutorial. For further reading on bonds, see our
Bonds Basics Tutorial

Investors following a buy-and-hold strategy can encounter circumstances that might

compel them to sell a bond prior to maturity for the following reasons:
1. They need the principal. While buy-and-hold is generally best used as a longerterm strategy, life does not always work out as planned. When you sell a bond
before maturity, you may get more or less than you paid for it. If interest rates
have risen since the bond was purchased, its value will have declined. If rates
have declined, the bonds value will have increased.
2. They want to realize a capital gain. If rates have declined and a bond has
appreciated in value, the investor may decide that its better to sell before maturity
and take the gain rather than continue to collect the interest. This decision should
be made carefully, as the proceeds of the transaction may have to be reinvested at
lower interest rates.
3. They need to realize a loss for tax purposes. Selling an investment at a loss can be
a strategy for offsetting the tax impact of investment gains. Bond swapping can
help achieve a tax goal without changing the basic profile of your portfolio.
4. They have achieved their return objective. Some investors invest in bonds with
the objective of total return, or income plus capital appreciation or growth.
Achieving capital appreciation requires an investor to sell an investment for more
than its purchase price when the market presents the opportunity
5)As we saw in the previous section, debt paid in installments is systematically
retired over
the term to maturity so that at the designated maturity date the outstanding
balance is zero.
On the other hand, when a maturity amount is specified as in our earlier
illustrations, any
discount or premium has been systematically reduced to zero as of the maturity
date and
the debt is retired simply by paying the maturity amount. Sometimes, though,
companies
choose to retire debt before its scheduled maturity. In that case, a gain or a loss
may result.
Earlier we noted that a call feature accompanies most bonds to protect the issuer
against
declining interest rates. Even when bonds are not callable, the issuing company
can retire
bonds early by purchasing them on the open market. Regardless of the method,
when debt of

any type is retired prior to its scheduled maturity date, the transaction is referred
to as early
extinguishment of debt .
To record the extinguishment, the account balances pertinent to the debt
obviously must
be removed from the books. Of course cash is credited for the amount paidthe
call price
or market price. The difference between the carrying amount of the debt and the
reacquisition
price represents either a gain or a loss on the early extinguishment of debt.
When the
debt is retired for less than carrying value, the debtor is in a favorable position
and records a
gain. The opposite occurs for a loss. Lets continue an earlier example to
illustrate the retirement
of debt prior to its scheduled maturity ( Illustration 1417 ).
For instance, in its income statement for the third quarter of 2011, Cyberonics,
Inc. , an
epilepsy management company, reported a gain on the early extinguishment of
debt in each
of its first two quarters.
6)

DEFINITION of 'Investment'

An asset or item that is purchased with the hope that it will generate income or
appreciate in the future. In an economic sense, an investment is the purchase of
goods that are not consumed today but are used in the future to create wealth. In
finance, an investment is a monetary asset purchased with the idea that the asset
will provide income in the future or appreciate and be sold at a higher price.

The reporting approaches we use for investments differ according to how the
approaches
account for one or more of the four critical events that an investor experiences in
the life of
an investment:
1. Purchasing the investment.
2. Recognizing investment revenue (interest in the case of debt, dividends in the
case of
equity).
3. Holding the investment during periods in which the investments fair value
changes
(and thus incurring unrealized holding gains and losses, since the security has
not yet
been sold).
4. Selling the investment (and thus incurring realized gains and losses, since the
security
has been sold and the gains or losses actually incurred).
As shown in Illustration 121 , when the investor lacks significant influence over
the
investee, the investment is classified in one of three categories: held-to-maturity
securities

(HTM), trading securities (TS), and available-for-sale securities (AFS). Each type of
investment
has its own reporting method. However, regardless of the investment type,
investors
can elect the fair value option that we discuss later in the chapter and classify
HTM
and AFS securities as TS. The key difference among the reporting approaches is
how we
account for unrealized holding gains and losses (critical event number 3 above),
as shown in
Illustration 122.

PAThe investor lacks significant influence

over the operating and financial policies
of the investee:
Investments in debt securities for which the investor has the positive intent and ability to
hold to maturity
Held-to-maturity (HTM)investment reported at amortized cost* Investments held in an
active trading
accountTrading securities (TS)investment reported at fair value (with unrealized
holding
gains and losses included in net income) Other Securities available-for-sale (AFS)
investment reported at fair value (with unrealized holding gains and losses excluded from net
income and reported in
other comprehensive income)*The investor has significant influence over the operating
and financial policiesof the investee:Typically the investor owns between20% and 50% of
the voting stock of the
investeeEquity methodinvestment cost adjustedfor subsequent earnings and dividends
ofthe investee*
The investor controls the investee:The investor owns more than 50% ofthe investee
Consolidationthe financial statements ofthe investor and investee are combined as ifthey
are a single company
Real World Financials

Note 1 (in part): Securities

Debt securities which management has the intent and ability to hold to maturity are
classified as held-to-maturity (HTM) and reported at amortized cost. Debt securities that
are bought and held principally for the purpose of resale in the near term are classified as
trading and are carried at fair value with unrealized gains and losses included in trading
account profits (losses). Other debt securities are classified as AFS and carried at fair value
with net unrealized gains and losses included in accumulated OCI on an aftertax basis.

Illustration 123 provides a description from a recent annual report of how the
Bank of
America accounts for its debt investments in each of the three reporting
categories.
* If the investor elects the fair value option, this type of investment also can be accounted for using the same approach
thats used for trading securities, with the investment reported at fair value and unrealized holding gains and

) In certain business operations, taking a physical inventory is impossible or

impractical. In such a situation, it is necessary to estimate the inventory cost.
2)

Two very popular methods are 1)- retail inventory method, and 2)- gross profit (or gross
margin) method. The retail inventory method uses a cost to retail price ratio. The physical
inventory is valued at retail, and it is multiplied by the cost ratio (or percentage) to
determine the estimated cost of the ending inventory.

The gross profit method uses the previous years average gross profit margin (i.e. sales
minus cost of goods sold divided by sales). Current year gross profit is estimated by
multiplying current year sales by that gross profit margin, the current year cost of goods
sold is estimated by subtracting the gross profit from sales, and the ending inventory is
estimated by adding cost of goods sold to goods available for sale....
Businesses that sell goods need to implement effective inventory control to keep track of
assets. Businesses use two primary methods to calculate the ending inventory value: the gross
profit or the retail inventory method. These two methods of inventory control have practical
applications for business that cannot perform physical inventories on a regular basis.
Performing a physical inventory is not always possible for a variety of reasons, including a lack
of manpower, natural disasters and other inventory issues.
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The Retail Method

When a retail merchandiser wants to value or estimate the ending inventory, she can choose
to use the retail method. The application of this method will only work, however, for businesses
that sell merchandise with a consistent markup. This inventory method calculates the ending
inventory by subtracting the actual sales from the goods available for sale at a retail level. The
retail method is not a very accurate method of inventory evaluation because this method does
not account for merchandise lost at the retail level.

Disadvantages
When calculating inventory using the retail method, the best a business can hope for is a
realistic estimate. If the business has price fluctuations at the retail level due to sales or
promotions, the retail method of inventory becomes ineffective. The retail method also makes
historical assumptions about the pricing of the merchandise at the retail level. Additionally,
when using the retail method, a business will eventually have to take a physical inventory to
balance the actual inventory levels and the inventory levels recorded in the companys books.
Related Reading: How to Calculate Using the Gross Profit Method

Gross Profit Method

The gross profit method uses the company's gross profit percentage to come up with the
ending inventory. Just like the retail method, the gross profit method does not require a
physical inventory. This method relies on the historical average gross profit to calculate the
ending inventory. Typically, a company will use its income statement to calculate gross profit
and average the results over time.

Reliability
A business should not use either the gross profit or the retail inventory method if the goal is to
obtain an accurate evaluation of inventory levels. The gross profit method uses historical bases
and inventory losses to calculate an approximation of ending inventory levels. Too many
variables can affect the total outcome when using this method. The gross profit method can,
however, have a beneficial use for merchandise resellers where unit costs are not a factor in
assessing inventory valuation.

2)22T A