Question

Concepts for Analysis 71 Barenboim buys shell houses from a manufacturer in unassembled r dows, and similar materials necessary to complete a shell house. Upon or leases land as a site for its local warehouse, field office, and display hou of $30,000 to $44,000 including the cost of the unassembled packages. The sembled packages, inasmuch as erection is a short, low-cost operation. Old ssmpie models every 3 to 7 years. Sample display houses have little salvage value because dis nearly as much as the cost of an unassembled package. lumber, roofing, doors, win a new area, Barenboim buys ses are erected at a total cost he display houses is the unas- orn down or altered into new g and moving costs amount to (a) A choice must be made between (1) expensing the costs of sample display houses in the periods in which the expendi- each method ture is made and (2) spreading the costs over more than one period b) Would it be preferable to amortize the cost of display houses on the basis of (1) the passage of time or (2) the number of (AICPA adapted) shell houses sold? Explain. CA2-9 WRITING (Qualitative Characteristics) Recently, your uncle, Carlos Beltran, who knows that you always have your eye out for a profitable investment, has discussed the possibility of your purchasing some corporate bonds. He suggests that you may wish to get in on the "ground floor of this deal. The bonds being issued by Neville Corp.ane 10-year debentunes which promise a 40% rate of return. Neville manufactures novelty/party items. You have told Uncle Carlos that, unless you can take a look at Neville's financial statements, you would not feel comfortable about such an investment. Believing that this is the chance of a lifetime, Uncle Carlos has procured a copy of Neville's most recent, unaudited financial statements which are a year old. These statements were prepared by Mrs. Andy Neville. You peruse these statements, and they are quite impressive. The balance sheet showed a debl-to-equity ratio of 0.10 and, for the year shown, the company reported net income of $2,424,240. The financial statements are not shown in comparison with amounts from other years. In addition, no significant note dis- closures about inventory valuation, depreciation methods, loan agreements, etc. are available. Instructions Write a letter to Uncle Carlos explaining why it would be unwise to base an investment decision on the financial statements that he has provided to you. Be sure to explain why these financial statements are neither relevant nor representationally faithful. CA2-10 ETHICS (Expense Recognition Principle) Anderson Nuclear Power Plant will be "mothballed" at the end of its useful life (approximately 20 years) at great expense. The expense recognition principle requires that expenses be recognized as assets are used up or liabilities are incurred. Accountants Ana Alicia and Ed Bradley argue whether it is better to allocate the expense of mothballing over the next 20 years or ignore it until mothballing ocurs Instructions Answer the following questions. (a) What stakeholders should be considered? (b) What ethical issue, if any, underlies the dispute? (c) What alternatives should be considered? (d) Assess the consequences of the alternatives. le) What decision would you recommend? CA2-11 (Cost Constraint) The AICPA Special Committee on Financial Reporting proposed the following constraints related to financial reporting 1. Business reporting should exclude information outside of management's expertise or for which management is not the best source, such as information about competitors. 2. Management should not be required to report information that would significantly harm the company's competitive position 3. Management should not be required to provide forecasted financial statements. Rather, management should provide infor- 4. Other than for financial statements, management need report only the information it knows. That is, management should 5. Companies should present certain elements of business reporting only if users and management agree they should be re- 6. Companies should not have to report forward-looking information unless there are effective deterrents to unwarranted mation that helps users forecast for themselves the company's financial future. be under no obligation to gather information it does not have, or does not need, to manage the business ported-a concept of flexible reporting litigation that discourages companies from doing so.
CA2-9

Answer 1

Dear sir ,

It is not wise to invest in your company on the basis of your unaudited financial statements . Because as a fund provider , I would like to know what is the trend of profits of your company . In case , the profits you have earned are lesser than that of the previous years , then it would make me not to invest in your company . For this purpose, I want a comparative financial statements . Secondly , I am not able to know which accounting policies and procedures you follow to value your assets and what is the impact on the profits also .

Thirdly , there is not any disclosure for the loan agreement made by you . And I also want an assurance that would you provide the rate of return as specified by you in the contracts .

As the financial statement are one year old , it can't be said that the company is earning profits in this year too and also the financial statements are unaudited, there are mere possibilities of fraud or error in the financial statements .

Thus , the financial statements are neither relevent nor representationally faithful.