Question

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

1. Why do we need so manystatements?

The balance sheet gives the company’s 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, couldn’t 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 can’t 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 GeoPetro’s 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. Management’s 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 auditors’report?
2. What is a going concern? Define it in your words, don’t 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 Merck’s 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 Company’s 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?

Answer 1

1) Accounting reports refer to different kind of financial statements prepared for a particular time frame to ascertain the financial position of the entity . They help us to understand different financial aspects of business such as-

- Through balance sheet, we get a bird's eye view of our liabilities and assets at a particular time.

- Thorugh Income statement we get to know in detail how much profit or loss has been incurred and a study can be conducted through it like which expenses can be reduced.

- Through cash flow statement we get to know where our cash is locked and from where we are generating cash

These all reports help in navigating business in the right direction in a smooth manner.

2) Different statements provide different information such as balance sheet provides details of assets and liabilities while the income statement provides details of income and losses. Showing them as a single statement will become cumbersome and it will not be easily understandable and readable which are basic proponents of any accounting report.

3)The Balance sheet provides a concrete figure of profit or loss incurred during an accounting period but it doesn't provide details of expenses which are incurred such as how much wages are paid or how much electricity bill has been paid. Similarly retained earnings are part of balance sheet and we see a final figure of it at the end of the financial year, but during a year different reserves which are part of retained earnings can be subtracted or added. So to get detailed information about it a separate statement of retained earnings is made

4) An entity distributes dividend out of its current profits or past reserves to the shareholders of the entity who are considered as an owner of the company. It is not an expense as expense refers to any amount of money which is spent to generate any future revenue or economic benefits. But when we pay a dividend it is like an owner is taking a part of his share from the entity. No future revenue or economic benefit is going to arise from it. Just like drawings are not considered an expense, in similar way dividends, are not an expense