What is an example of an item typically excluded from financial statements due to the materiality principle?

• A. A small office supply purchase
• B. A major piece of machinery
• C. An investment property
• D. A long-term bank loan

Answer: (A)

The materiality principle in accounting states that all information that could affect the decision-making of users of financial statements should be disclosed. However, it also allows for the exclusion of insignificant items that wouldn’t influence the decisions of an informed user.

A small office supply purchase is generally considered immaterial because its cost is relatively low compared to the overall financial picture of the company. Consequently, such minor purchases can be combined or aggregated for simplicity and practicality, thus not needing to be itemized on the financial statements. This helps ensure that the statements remain clear and concise, avoiding clutter with numerous trivial items.

In contrast, items such as a major piece of machinery, investment property, or a long-term bank loan significantly impact a company's financial position. These items are typically substantial enough that their omission from financial statements would mislead the users regarding the company’s financial health. Therefore, such items remain included in financial reporting to provide an accurate and comprehensive overview of the company's assets and liabilities.