1. What information do users of accounting reports need?Discuss.

1. Why do we need so manystatements?

The balance sheet gives the companys status at the end of a chosen accounting period. It includes the results of all the operations that took place during this period. Why do we need to have an income statement and statement of retained earnings, which simply expand upon the retained earnings account? If we wanted detail, couldnt we just include it as part of the retained earnings section of the balance sheet?

2. Dividends, you have learned, are a distribution of income, not an expense. What is the difference? Why cant the corporation list them as an expense, since dividends are just another amount of money paid out tosomebody?
3. Read the following case and answer the questions thatfollow:

GeoPetro is independent oil and natural gas company with headquarters in San Francisco, California. It recently received an audit opinion that expressed a going concern paragraph. The following is an excerpt from GeoPetros 2012 report:

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company has incurred recurring net losses that have resulted in an accumulated deficit of $49.7 million as of December 31, 2012. Also, the Company has limited cash and working capital to fund its future operations. These factors raise substantial doubt about the ability of the Company to continue as a going concern. Managements plans regarding those matters are also described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of theseuncertainties.

Required:

1. What is the general purpose of an auditorsreport?
2. What is a going concern? Define it in your words, dont quote thebook.
3. Are losses, restructuring, and the disposal of segments necessarily precursors to the demise of thecompany?
4. What, in your words, are the auditors saying about these particularcompanies?

4. All businesses are subject to various types of legal proceedings. Merck & Co. Inc., a global health care company that manufacturers prescription medicines, has been a defendant in a number of product liability lawsuits. In the notes to Mercks 2012 financial statements, the company states: There are various other pending legal proceedings involving the Company, principally product liability and intellectual property lawsuits. While it is not feasible to predict the outcome of such proceedings, in the opinion of the Company, either the likelihood of loss is remote or any reasonably possible loss associated with the resolution of such proceedings is not expected to be material to the Companys financial position, results of operations or cash flows either individually or in theaggregate.

Required:

Explain in your own words what Merck means by this statement. In particular, include what they mean by material and remote. Who is in the best position to determine the outcome of a lawsuit?