Chapter 2

Book: INTERMEDIATE ACCOUNTING KIESO, WEYGANDT, AND WARFIELD, 16th edition

Homework # 2b

Your friend Donald is trying to convince you to invest in the bonds of the Build-A-Wall Company and tell you that if you act now you will get a 30% return on your investment. You ask Donald for the most recent financial statement so that you can make a rational decision on whether or not to invest in the company.

Donald has procured and gives to you a copy of Build-A-Walls most recent financial statements. The statements are unaudited and are dated 12/31/2015, nearly 10 months ago. These statements were prepared by the owners wife. You look at the income statement and notice that it consists of three lines, total revenue, total expenses and net income. You look at the balance sheet and notice that there is no information provided about its inventory or depreciation methods. There is a building listed in the asset section of the balance sheet which your friend tells you is the home of the owner of the business, but that he does have an office in one of the rooms. Finally you notice that the statements show only the activity and balances of 2015.

Required:

Prepare a short e-mail to Donald advising him why it would be unwise to invest in the company. Refer to any qualitative characteristics, assumptions, and principles that might have been violated in your answer.