E-Antiques Inc. is an internet-based market for buyers and sellers of antique furniture and jewellery. The company allows sellers of antique items to list descriptions of those items on the E-Antiques website. Interested buyers review the website for antique items and then enter into negotiations directly with the seller for purchase. E-Antiques receives a commission for each transaction.
The company, founded in 2000, initially obtained capital through equity funding provided by the founders and through loan proceeds from financial institutions. In early 2012, E-Antiques became a publicly held company when it began selling shares on a national stock exchange. Although the company had never generated profits, the stock offering generated huge proceeds based on favourable expectations for the company, and the share price quickly increased to above $100 per share.
Management used the proceeds to pay off loans to financial institutions and to reacquire shares issued to the company founders. Proceeds were also used to fund purchases of hardware and software to support the online market. The balance of unused proceeds is currently held in the company’s bank accounts.
REQUIRED
a. Before performing analytical procedures related to the capital acquisition and repayment cycle accounts, consider how the process of becoming publicly held would affect accounts at E-Antiques Inc. Describe whether each of the following balances would increase, decrease, or experience no change between 2011 and 2012 because of the public offering.
(1) Cash.
(2) Accounts receivable.
(3) Property, plant, and equipment.
(4) Accounts payable.
(5) Long-term debt.
(6) Common shares.
(7) Retained earnings.
(8) Dividends.
(9) Revenues.
b. During 2012, the share price for E-Antiques plummeted to around $19 per share. No new shares were issued during 2012. Describe the impact of this drop in share price on the following accounts for the year ended December 31, 2012:
(1) Common shares.
(2) Retained earnings.
c. How does the decline in share price affect your assessment of client business risk and acceptable audit risk?