A friend of yours, Diana Maher, recently completed an undergraduate degree in science and has just started working with a biotechnology company. Diana tells you that the owners of the business are trying to secure new sources of financing which are needed in order for the company to proceed with development of a new health care product.

Diana said that her boss told her that the company must put together a report to present to potential investors.

Diana thought that the company should include in this package the detailed scientific findings related to the Phase I clinical trials for this product. She said, “I know that the biotech industry sometimes has only a 10% success rate with new products, but if we report all the scientific findings, everyone will see what a sure success this is going to be! The president was talking about the importance of following some set of accounting principles. Why do we need to look at some accounting rules? What they need to realize is that we have scientific results that are quite encouraging, some of the most talented employees around, and the start of some really great customer relationships. We haven't made any sales yet, but we will. We just need the funds to get through all the clinical testing and get government approval for our product. Then these investors will be quite happy that they bought in to our company early!”

Instructions

(a) What is financial reporting? Explain to Diana what is meant by generally accepted accounting principles.

(b) Comment on how Diana's suggestions for what should be reported to prospective investors conforms to the qualitative characteristics of accounting information. Do you think that the things that Diana wants to include in the information for investors will conform to financial reporting guidelines?