Interpreting financial statements requires

knowledge

of

how

these

statements

are

prepared. Because the Balance Sheet, Income Statement, and Statement of Retained Earnings are
all influenced by management assumptions, it is critical to not take the figures on
these statements at face value and instead perform a thorough examination of these assumptions.
For this weeks discussion question, provide an example of a management assumption that could
have a significant impact on one of the aforementioned financial statements and explain how you
would scrutinize this assumption.
Example:
Your paternal grandfather bought a 1969 Camaro SS in the same year of its production for
$500.20 (like $3,333.34 nowadays) and in your fathers high school prom, your grandfather
gives away his 69 Camaro SS as a prom gift. Now, we are in 2016 and your dad also gave you
as a prom gift your grandfather 69 Camaro SS, but now that we are in 2016, someone gets close
to you to ask for the price of the car and if its on sale. Your 69 Camaro SS is the price listed in +
$45K with all the original accessories, engine, wheels, and without being involved in a car crash
and never restored. You now that there is an excellent deal in case you sell your grandfathers car
with an easy 15 times profit.
The previous example states the Cost Principle as a book value but also involves other
characteristics that raised this American Classic Car. Like the fact that it has gained the name of
Classic has a limited production, the supply, and demand of this car have been raising within the
last ten years. Also because its so difficult to find one in excellent conditions without being
restored, as we mentioned in the example, this car has never been restored once, and that its
what gives value to this type of car.

References
Bates, T., Kidwell, D., & Parrino, R. (p. 50-51, 2014). Fundamentals of Corporate Finance. (3 rd
ed.). Hoboken, New Jersey: Wiley.