Question

Concepts for Analysis 71 Barenboim buys shell houses from a manufacturer in unassembled of all lumber, roofing, doors, win- new area, Barenboim buys uses are erected at a total cost he display houses is the unas- torn down or altered into new dows, and similar materials necessary to complete a shell house. Upon ons in a land as a site for its local warehouse, field office, and display hous 630,000 to $44,000 including the cost of the unassembled packages. Th bled packages, inasmuch as erection is a short, low-cost operation. ( models every 3 to 7 years. Sample display houses have little salvage value because d nearly as much as the cost of an unassembled package. Instructions value because dismantling and moving costs amount to A choice must be made between (1) expensing the costs of sampl display houses in the periods in which the expendi- riod. Discuss the advantages of each method (a) ture is made and (2) spreading the costs over more than one per b) Would it be preferable to amortize the cost of display houses on the basis of (1) the passage of ti shell houses sold? Explain. (AICPA adapted) CA2-9 WRITING (Qualitative Characteristics) Recently, your uncle, Carlos Beltran, who knows 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. are 10-year débentures which promise a look at Neville's financial statements, you would not feel comfortable 40% rate of return. Neville manufactures novelty/party items. You have told Uncle Carlos that, unless you can take a about such an investment. Believing that this is the chance of a lifetime, Uncle Carlos has procured a recent, unaudited financial statements which are a year old. These statements we these statements, and they are quite impressive. The balance sheet showed a debt-to-equity ratio of 0.10 and, for the year shown, the company reported net income of $2,424,240. copy of N eville's most re prepared by Mrs. Andy Neville. You peruse ancial statements are not shown in comparison with amounts from other years. In addition, no significant closures about inventory valuation, depreciation methods, loan agreements, etc. are availabl Instructions rite a letter to Uncle Carlos explaining why it would be unwise to base an investment decision on the financial statements that has provided to you. Be sure to éxplain 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 (a ately 20 years) at great expense. The expense recognition principle requires that expenses be recognized as assets are 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 occurs Instructio
CA2-9

Answer 1

Investment:-

Investment is a process by which a person buy a goods or product for not mmediate consumption but for future income or wealth creation. Investor always wants to get more and more profit from the investment. There is no short to take decision about invest in a company. Before invest in a company one should properly analyse the financial reports of the company. Financial statement provides an insight weather their money is used for those purpose only for which they have invested it and the money is used in the best possible manner. The investor can know about financial strength and interest paying capacity of the business.

Financial Statements:-

Financial statements are the end product of financial accounting in a set of financial statements prepared by the accountant of a business enterprise that purport to reveal the financial position of the enterprise, the result of its recent activities and an analysis of what has been done with earnings. It is also known as financial reports. It is prepared on the basis of recorded facts,accounting convention,postulates and personal judgement. Financial statements are the basis for decision making by the management as well as other outsiders such as creditors,investors,suppliers,customer,employees,goverment and general public.

For the decision making of investment mainly three statements are required. These are:-

(A)Balance Sheet

(B)Income Statement

(C)Cash Flow Statement

Balance Sheet:-

Balance sheet is a tabular statement of summary of company's assets(fixed asset,current asset,investments,cash balances etc.) and liabilities(share capital,reserves and surpluses,secured and unsecured loans,current liabilities and provisions etc).It is one of the important statements showing the financial strength of the company. It shows on the one hand the properties that it utilises and on the other hand the sources of those properties. The balance sheet prepared on a particular date. The balance sheet of a company must give a true and fair view of the affairs of the company as at the end of the financial year. The balance sheet must be in the form prescribed or as near thereto as circumtances admit or in such other form as may be approved by the central goverment either in generally or in any particular case. The companies are also required to give figures for the previous year alongwith the current year's figures. According to act the account must be audited and any copy of it cannot be issued,circulated or published without auditor's report.

Some details of the item must be shown in the ''notes'' under the balance sheet such method of depriciation,method of inventory calculation,any off-balance sheet items,any loan agreements,scedule of investment,conversion of foreign currency

But the Neville Corp. balance sheet is not audited so we cannot assure that the report is free from any mistakes or error,any window dressing. And it is also not recorded according to act because it has not shown the previous year comparing figures so we cannot figure out if there is any loopholes in the statement or not. There is no notes available regarding the methods of calculation so it is hard to understand the depriciation method or anything. So it is not a trustable report for investment purpose. And also they have not provided the copy of income statement and cash flow which is also crucial for decision making.

Income Statement:-

This is a statement prepared to show the operatioanl position of the concern. It is a statement of revenue earned and expenditure incurred to earn the revenue. This statement prepared for a paticular period like quaterly,half-yearly ao yearly. The statement may be prepared in the form of Manufacturing Account to find out the cost of production,in the form of Trading Account to determine the gross profit or gross loss,in the form of a Profit and Loss Account to determine the net profit or net loss.

Income statement should clearly give operational profit,income and expenditure on non-operational items,the amount set aside for known liabilities,amount provided for income-tax and other taxes,amount trasferred to various reserves etc. The items relating to previous year should also be shown separately.

Cash Flow Statement:-

It is statement which describes the inflows(sources) and outflows(uses) of cash and cash equivalents in an enterprise during a specified time period. This statement enumerates net effects of various business transactions on cash and its equivalents and takes into account receipts and disbursements of cash. A cash flow statement summerises the causes of changes in cash position of a business enterprise between dates of two balance sheet. It is must be prepared according to Accounting Standard-3. Which describes cash flow should report cash flows during the period classified by operating(sale of goods,revenue from services,interest/dividend received,payment of purchse,payment of operating expenses),investing(purchase and sale of assets,purchase and sale of debt/equity,loans and advances) and financing(issue of equity shares,borrowing,repayment of debt) activities.

Debt-Equity Ratio:-

This ratio indicates the relationship between the external equities or the outsiders funds and the internal equities or the shareholder's funds.

Debt-Equity Ratio:-Outsiders Funds(Debentures,bonds,mortgagesor bills of outsiders)/Shareholder's Funds(Equity and preference share capital,capital and revenue reserves,reserves for accumlated losses etc).

Conclusion:-

But the Neville Corp. balance sheet is not audited so we cannot assure that the report is free from any mistakes or error,any window dressing. May be there is chances of inflating earnings and understating expenses. And it is also not recorded according to act because it has not shown the previous year compative figures so we cannot figure out if there is any loopholes in the statement or not and cannot compare the performance year by year. There is no notes available regarding the methods of calculation so it is hard to understand the depriciation method or anything. So it is not a trustable report for investment purpose. And also they have not provided the copy of income statement and cash flow which is also crucial for decision making.