Recently your Uncle Carlos Beltran, who knows that you always have your eye out for a profitable investment, has discussed the possibility of your purchasing some corporate bonds. He suggests that you may wish to get in on the ground floor of this deal. The bonds being issued by Neville Corp. are 10-year debentures which promise a 40% rate of return. Naville manufactures novelty/party items. You have told Neville that, unless you can take a look at its financial statements, you would not feel comfortable about such an investment. Believing that this is the chance of a lifetime, Uncle Carlos has procured a copy of Navill’s most recent. Believing that this is the chance of a lifetime, Uncle Carlos has procured a copy of Neville’s most recent, unaudited financial statements which are a year old. These statements were prepared by Mrs. Andy Neville. You peruse these statements and they are quite impressive. The statement of financial position showed a debt-to-equity ratio of 0.10 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 no significant note disclosures about inventory valuation, depreciation methods, load agreements, etc, are available.
Instructions
Write a letter to Uncle Carlos explaining why it would be unwise to base an investment decision on the financial statements that he has provided to you. Be sure to explain why these financial statements are neither relevant nor a faithful representation.