You are approached by the management of a small start-up company that is planning to go public. The founders are unsure about how aggressive they should be in their accounting decisions as they come to the market. John Smith, the CEO, asserts: “We might as well take full advantage of any discretion offered by accounting rules, since the market will be expecting us to do so.” What are the pros and cons of this strategy? As the partner of a major audit firm, what type of analysis would you perform before deciding to take on a new start-up that is planning to go public?
Answer to relevant QuestionsIn 2009, Larry Summers, former Secretary of the Treasury, observed that “in the past 20-year period, we have seen the 1987 stock market crash. We have seen the Savings & Loan debacle and commercial real estate collapse of ...Rate the pharmaceutical and lumber industries as high, medium, or low on the following dimensions of industry structure.A finance student states, “I don’t understand why anyone pays any attention to accounting earnings numbers, given that a ‘clean’ number like cash from operations is readily available.” Do you agree? Why or why not?Refer to the Creative Technology example on delaying write-downs of current assets. How much excess inventory do you estimate Creative Technology is holding in March 2005 if the firm’s optimal days’ Inventory is 100 ...Two years after a successful public offering, the CEO of a biotechnology company is concerned about stock market uncertainty surrounding the potential of new drugs in the development pipeline. In his discussion with you, the ...
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