Question: (Qualitative Characteristics) Recently, your Uncle Waldo Ralph, who knows that you always have your eye out for a profitable investment, has discussed the possibility of

(Qualitative Characteristics) Recently, your Uncle Waldo Ralph, 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 Cricket Corp. are 10-year debentures which promise a 40% rate of return. Cricket manufactures novelty/party items. You have told Waldo that, unless you can take a look at Cricket’s financial statements, you would not feel comfortable about such an investment. Believing that this is the chance of a lifetime, Uncle Waldo has procured a copy of Cricket’s most recent, unaudited financial statements which are a year old. These statements were prepared by Mrs. John Cricket. 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 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 disclosures about inventory valuation, depreciation methods, loan agreements, etc. are available.

Write a letter to Uncle Waldo 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 reliable.

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