Which of the following is a key requirement for the proper formatting of financial statements?

• A. Only the final totals need to be described.
• B. Descriptions are optional if the statement is audited.
• C. Subtotals should be omitted to simplify the statement.
• D. All subtotals must be clearly described and labeled.

Answer: (D)

Verified step by step guidance

1. Understand the purpose of financial statements: Financial statements are formal records of the financial activities and position of a business, and they must be clear and informative to users such as investors, creditors, and management.
2. Recognize the importance of subtotals: Subtotals are intermediate calculations that summarize specific sections of the financial statement, such as total revenue, total expenses, or total assets. These subtotals provide clarity and help users understand the financial data more effectively.
3. Learn the requirement for labeling: Each subtotal must be clearly described and labeled to ensure that users can interpret the financial statement accurately. For example, 'Total Revenue' or 'Net Income' should be explicitly stated.
4. Avoid common misconceptions: It is incorrect to omit subtotals or descriptions, even if the statement is audited. Proper formatting and labeling are essential regardless of the auditing status.
5. Apply this principle consistently: When preparing or reviewing financial statements, ensure that all subtotals are clearly labeled and described to maintain transparency and compliance with accounting standards.