Reference no: EM131739030

Assignment-

Objective

This assignment has four objectives:

1. Exercise your critical thinking skills: reading carefully and thoughtfully, piecing together information from multiple sources, and drawing upon knowledge you (should) have learned during the semester;

2. Assess the content and validity of financial reporting information;

3. Search for relevant accounting guidance in the FASB ASC and apply it to the accounting/financial reporting issues you encounter;

4. Produce a written report addressed to your client, summarizing your findings and recommendations.  Your report must be written and organized in such a manner that your non-accountant client can grasp it, and it is clear you are responding to each of the four points in your task for each issue.

Scenario

Bling 4 U is a privately owned business started in 2012 by two partners.  Hilda Fairbairn combined her entrepreneurial business interests with Frodo Baggins's knowledge of antique jewelry and certain semiprecious stones (amber, amethyst, jet, lapis lazuli) to create an online jewelry store which they named Bling 4 U (B4U).  B4U's start-up years were challenging.  Both owners contributed all their savings to the company, but initially earned little return on their significant investments of money and time.  Now, it appears their luck is changing.  B4U finally became profitable in late 2015 and has reported a sizable net income for the year ended September 30, 2017.  Both owners are excited by this turn of events.  In the summer of 2016, Frodo had indicated he would like to buy out Hilda, which coincided with Hilda's interest in leaving B4U and embarking on a new career.  Realizing that he has limited accounting knowledge, Frodo has approached you for advice.  As a private company, B4U's shares do not have a readily available price.  Consequently, Frodo and Hilda have agreed to calculate the buy-out price using an ''earnings multiplier'' equal to five times B4U's GAAP-based net income for the year ended September 30, 2017.   Although Hilda has been a reliable friend and business partner in the past, Frodo is concerned that B4U's fiscal 2017 results could be misstated or biased because B4U does not undergo an annual audit.  Frodo would like you to advise him whether B4U's fiscal 2017 net income fairly reports the company's financial success, given that the purchase price he will pay Hilda will be based on B4U's 2017 net income.

Background Information

Frodo explained that B4U obtains revenues from two sources.  First, B4U purchases antique jewelry from estate and garage sales and sells it to individuals and traditional antique stores.  Second, B4U charges annual artist fees in exchange for allowing makers of modern art jewelry to display their work in its online store.  B4U's expenses relate to salaries, the cost B4U incurs to buy the jewelry it sells, depreciation on B4U's computer equipment, website maintenance, and other administrative costs (e.g., bad debts, interest, income taxes).  B4U has many transactions with individual jewelry artists and customers throughout the year.  Frodo described some of the particularly significant events that happened during the year ended September 30, 2017, which are summarized in Exhibit 1.  He also provided comparative income statements for the years ended September 30, 2017 and 2016 (see Exhibit 2), and excerpts from B4U's notes to the financial statements (see Exhibit 3).

Your Task

Frodo has asked your team of experienced financial accountants and business advisers to prepare a report that identifies and evaluates Hilda's financial reporting choices and methods (and/or possible errors in the proper application of US GAAP) that may have resulted in a biased measure of B4U's 2017 financial success. Specifically, for each accounting judgment or method that Hilda has applied that might distort B4U's 2017 net income, you should:

(1) Describe the choice/method/error;

(2) Evaluate and explain whether it is allowed under U.S. GAAP;

Frodo is asking you to focus on accounting and financial reporting issues rather than business decisions, given that his current primary focus is on the correctness and fairness of B4U's 2017 net income. For instance, if a particular item relates to revenue Frodo wants you to advise him on the accounting issues and how the item might affect reported net income - not whether the choice might result in more or fewer sales to customers.  He will consult with you about business decisions after his purchase of B4U, but for now he wants you to focus on providing the accounting advice he currently needs.

Attachment:- Assignment File.rar