Recently, your Uncle Warren, who knows that you always have your eye out for a profitable investment, has discussed the possibility of your purchasing some corporate bonds that he just learned of. He suggests that you may wish to get in on the ground floor of this deal. The bonds being issued by Jingle Corp. are I 0-year debentures, which promise a 40% rate of return. Jingle manufactures novelty and party items.
You have told Uncle Warren that unless you can cake a look at Jingle financial statements, you would not feel comfortable about such an investment. Thinking that this is the chance of a lifetime, Uncle Warren has obtained a copy of Jingle's most recent, unaudited financial statements, which are a year old. These statements were prepared by Mrs.
Jingle. You look over these statements, and they are quite impressive.
The statement of financial position showed a debt to equity ratio of 1:10 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, there are no significant note disclosures about inventory valuation, depreciation methods, Joan agreements, and so on.
Instructions
Write a letter to Uncle Warren explaining why it would be unwise to base an investment decision on the financial statements that he has given you. Refer to the concepts developed in this chapter.