PROBLEM 2–1 Consider the following claim from a business observer:

An accountant’s job is to conceal, not to reveal. An accountant is not asked to give outsiders an accurate picture of what’s going on in a company. He is asked to transform the figures on a company’s operations in such a way that it will be impossible to recreate the original figures.

An income statement for a toy company doesn’t tell how many toys of various kinds the company sold, or who the company’s best customers are. The balance sheet doesn’t tell how many of each kind of toy the company has in inventory, or how much is owed by each customer who is late in paying his bills.

In general, anything that a manager uses to do his job will be of interest to some stockholders, customers, creditors, or government agencies. Managerial accounting differs from financial accounting only because the accountant has to hide some of the facts and figures managers find useful. The accountant simply has to throw out most of the facts and some of the figures that the managers use when he creates the financial statements for outsiders.
The rules of accounting reflect this tension. Even if the accountant thought of himself as working only for the good of society, he would conceal certain facts in the reports he helps write. Since the accountant is actually working for the company, or even for the management of the company, he conceals many facts that outsiders would like to have revealed.
Required:

a. Discuss this observer’s misgivings on the role of the accountant in financial reporting.

b. Discuss what type of omitted information the business observer is referring to.

PROBLEM 2–1 Equity valuations in today’s market are arguably too high. Many analysts assert that price-toearnings ratios are so high as to constitute an irrational valuation “bubble” that is bound to burst and drag valuations down. Skeptics are especially wary of the valuations for high-tech and Internet companies. Proponents of the “new paradigm” argue that the unusually high price-to-earnings ratios associated with many high-tech and Internet companies are justified because modern business is fundamentally different. In fact, many believe these companies are still, on average, undervalued.
They argue that these companies have invested great sums in intangible assets that will produce large future profits. Also, research and development costs are expensed. This means they reduce income each period and are not reported as assets on the balance sheet. Consequently, earnings appear lower than normal and this yields price-to-earnings ratios that appear unreasonably high.
Required:
Assess and critique the positions of both the skeptics and proponents of this new paradigm.