Aggregated Financial Data Rodisco Company purchased 90 percent of the stock of Mutual Company 4 years ago. When it prepares financial statements, Rodisco Corporation reports the amount it paid to acquire its ownership of Mutual Company as an investment in its balance sheet and it reports the amount of dividends received from Mutual Company during the year as dividend income. Since Mutual Company needs to generate cash to invest in new facilities, it has paid only a very small dividend each of the last 4 years. A shareholder of Rodisco recently read the report of a financial analyst and learned that Mutual Company had doubled its sales and its net income each of the last 4 years.

a. Why do the financial statements of Rodisco not appear to be prepared in accordance with generally accepted accounting principles?

b. What changes in Rodisco’s income statement would appear if generally accepted accounting principles were applied?

c. What changes in Rodisco’s balance sheet would appear if generally accepted accounting principles were applied?

d. Why is it important that Rodisco prepare its financial statements in accordance with generally accepted accounting principles in this case?