Question 6

Question 6 (10 marks) Recently, your Uncle Karl Beltran, who knows that you always have your eye out for a profitable investment, has discussed the possibility of your purchasing some company bonds. He suggests that you may wish to get in on the "ground floor" of this deal. The bonds being issued by Neville AG are 10-year debentures which promise a 40% rate of return. Neville manufactures novelty/ party items. You have told Neville that, unless you can take a look at its financial statements, you would not feel comfortable about such investment. Believing that this is the chance of a lifetime, Uncle Karl has procured a copy of Neville's most recent, unaudited financial statements, which are a year old. These statements were prepared by Mrs. Andy Neville. You peruse these statements, and they are quite impressive. The statement of financial position showed a debt to equity ratio of 0.10 and, for the year shown, the company reported net income of $2,424,240. The financial statements are not shown in comparison with amounts from other years. In addition, no significant note disclosures about inventory valuation, depreciation methods, loan agreements, etc. are available. Required: Write a letter to Uncle Karl explaining why it would be unwise to base an investment decision on the financial statements that he has provided to you. Be sure to explain why these financial statements are neither relevant nor a faithful representation. (10 marks) [Total for Question 6: 10 marks]