You work as an accountant for a small land development company that desperately needs additionalfinancing to continue in business. The president of your company is meeting with the manager of alocal bank at the end of the month to try to obtain this financing. The president has approached youwith two ideas to improve the company’s reported financial position. First, he claims that because abig part of the company’s value comes from its knowledgeable and dedicated employees, you shouldreport their “Intellectual Abilities” as an asset on the balance sheet. Second, he claims that by reporting the company’s land on the balance sheet at its cost, rather than the much higher amount that realestate 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 amountof assets reported on the balance sheet?2. What accounting concept introduced in Chapter 2 relates to the president’s first suggestion toreport “Intellectual Abilities” as an asset?3. What accounting concept introduced in Chapter 2 relates to the president’s second suggestionto 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 shouldyou do?
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 reporting 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?
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