Advice to a Potential Investor Century Company was organized 15 months ago as a management consulting fi rm. At that time, the owners invested a total of $50,000 cash in exchange for stock. Century purchased equipment for $35,000 cash and supplies to be used in the business. The equipment is expected to last seven years with no salvage value. Supplies are purchased on account and paid for in the month after the purchase. Century normally has about

$1,000 of supplies on hand. Its client base has increased so dramatically that the president and chief fi nancial offi cer have approached an investor to provide additional cash for expansion. The balance sheet and income statement for the fi rst year of business are as follows:

Century Company Balance Sheet December 31, 2010 Assets Liabilities and Stockholders’ Equity Cash $10,100 Accounts payable $ 2,300 Accounts receivable 1,200 Common stock 50,000 Supplies 16,500 Retained earnings 10,500 Equipment 35,000 Total $62,800 Total $62,800 Century Company Income Statement For the Year Ended December 31, 2010 Revenues $82,500 Wages and salaries $60,000 Utilities 12,000 72,000 Net income $10,500 Required The investor has asked you to look at these fi nancial statements and give an opinion about Century’s future profi tability. Are the statements prepared in accordance with GAAP? Why or why not? Based on these two statements, what would you advise? What additional information would you need to give an educated opinion?

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