You work as an accountant for a small land development company that desperately needs additional financing to continue in business. The president of your company is meeting with the manager of a local bank at the end of the month to try to obtain this financing. The president has approached you with two ideas to improve the company’s reported financial position. First, he claims that because a big part of the company’s value comes from its knowledgeable and dedicated employees, you should report their “ Intellectual Abilities” as an asset on the balance sheet. Second, he claims that by report-ing the company’s land on the balance sheet at its cost, rather than the much higher amount that real estate appraisers say it’s really worth, the company is understating the true value of its assets.
Required:
1. Thinking back to Chapter 1, why do you think the president is so concerned with the amount of assets reported on the balance sheet?
2. What accounting concept introduced in Chapter 2 relates to the president’s first suggestion to report “ Intellectual Abilities” as an asset?
3. What accounting concept introduced in Chapter 2 relates to the president’s second suggestion to report the land’s current value?
4. Who might be hurt by the president’s suggestions, if you were to do as he asks? What should you do?