Question

Concepts for Analysis 71 n of all lumber, roofing, doors, win- or leases land as a site for its local warehouse, field office, and display houses. Sample display houses are erected at a total cost Barenboim buys shell houses from a manufacturer in unassembled package dows, and similar materials necessary of $30,000 to $44,000 including to complete a shell house. Upon commencing operations in a new area, Barenboim the cost of the unassembled packages. The chief element of cost of the display houses is the unas- t operation. Old sample models are torn down or altered into nevw inasmuch as erection is a models every 3 to 7 years. Sample display houses have little salvage value because dismantling and moving costs amount to nearly as much as the cost of an unassembled package in the periods in w choice must be made between (1) expensing the costs of sample display houses ture is made and (2) spreading the costs over more than one perio a) A d. Discuss the advantages of each method. (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 bonds. He suggests that you may out for a profitable investment, has discussed the possibility of your purchasing some corporate 40% rate of return. Neville manufactures novelty/party items. recent, unaudited financial statements which are a year old. These statements were the company reported net income of $2,424,240. closures about inventory valuation, depreciation methods, loan agreements, etc. are available. wish to get in on the "ground floor" of this deal. The bonds being issued by Neville Corp. are 10-year debentures which promise a 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 prepared by Mrs. Andy Neville. You peruse 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 financial statements are not shown in comparison with amounts from other years. In addition, no significant note dis. 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) life (a tely 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 occurs. 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. (e) 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 ertain glements of business reporting only if users and management agree they should be re- 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
CA2-9

Answer 1

CA2-9

Letter to Uncle Carlos:

Regarding the investment in bonds of Neville Corp., the financial statements provided to me are not sufficient to take the investment decision because:

1) The financial statements do not pertain to current affairs. They are a year old.

2) The said statements are not being accompanied by schedules or notes or disclosures.

3) The same statements are also not audited by professional accountant or auditor.

4) The net income figure which is presented in the statements could be forged one, ie. through raising the closing inventory level.

5) Only one year’s figures are there in statements. There exists no other figure of any other year nor any comparison with other years. This leads to no access of profitability or growth pattern.

So, as Neville Corp. is a well established and therefore it is essential for it to get its accounts audited with professional. Kindly provide us with the well audited and compared results from the Company, so that any position decision is taken regarding aforesaid investments.

Thanks, Your Investor.