At a recent meeting of the board of directors of Greenway Medical Equipment Corporation, the company's chief financial officer, Robert Abies, presented a draft set of financial statements for the year. It is Greenway's corporate policy that the directors be given an opportunity to review the financial statements before they are finalized.
Following the meeting, Mr. Abies received a memo from Dr. Clarise Locklier that included questions about the draft financial statements. Dr. Locklier is a relatively new member of the board of directors and is not familiar with some of the accounting terms and concepts used in the statements. Before voting on approval of the financial statements at the next board meeting, she has several questions she would like to have answered.
MEMORANDUM
To: Robert Abies, CFO
From: Dr. Clarise Locklier, Director
Re: Draft financial statements
I have carefully reviewed the financial statements that you presented to the board last week. Being a physician, I do not have a lot of experience reading accounting information and I am confused about several items presented in the financial statements. I hope that you will clarify the following points for me.
1. I always thought that revenues are reported on the statement of earnings, so I was confused to see unearned revenues listed as a liability on the balance sheet. How can revenues be reported on the balance sheet? As well, if these revenues haven't been earned, shouldn't they be reported in a later period—when they have been earned—rather than in the current period?
2. In one of the notes to the financial statements, you state that the liability for warranty costs is based on an estimate, rather than on the actual warranty repair costs. If we know what our actual costs were for the year, why do we need to use an estimate?
3. I notice that in the current liabilities section of the balance sheet you have listed an item called "current portion of long-term debt." How can debt be current and long-term at the same time? Also, since the long-term debt is also included as a liability on the balance sheet, aren't we overstating our liabilities if we report the debt in this manner?
I would appreciate a response to these questions prior to our next board meeting, so that I can feel more comfortable approving the financial statements.
Thank you for your time in addressing these matters.
Required:
As Robert Abies, prepare a memo to Dr. Locklier addressing her concerns.