Suppose a new management team is in charge of Wild Roses Inc., a micro-brewery. Assume Wild Roses Inc.'s new top executives rose through the company ranks in the sales and marketing departments and have little appreciation for the details of accounting. Consider the following conversation between two executives:
Stephen Federer,
President:
"I want to avoid the hassle of adjusting the books every time we need financial statements. Sooner or later we receive cash for all our revenues, and we pay cash for all our expenses. I can understand cash transactions, but all these accruals confuse me. If I cannot understand our own accounting, I'm fairly certain the average person who invests in our company cannot understand it either. Let's start recording only our cash transactions. I bet it won't make any difference to anyone."
Kate McNamara,
Chief Financial Officer:
"Sounds good to me. This will save me lots of headaches. I'll implement the new policy immediately."
Write a business memo to the company president giving your response to the new policy. Identify at least five individual items (such as specific accounts) in the financial statements that will be reported incorrectly. Will outside investors care?