Reference no: EM132175220

Problem - Read the case first. This is a pharmaceutical research firm dedicated to developing new medicines.

CASE STUDY: Applied Scientific Methods (ASM) is a small pharmaceutical research firm dedicated to developing new medicines. Last year, ASM raised the necessary research funds for a public offering of shares, since the shares are listed on the stock exchange. His business plan is to spend the $ 21 million raised from the sale of shares to finance a two-year research program that will result in a marketable drug that will generate $ 300 million in sales during the first three years of production. Once in production, the annual costs of manufacturing the drug and continues

Accounting for the Financial Management Process 81 the selling expenses will be $ 10 million. After the first years of production, competing firms will have three products that will significantly reduce sales. At the end of the first year of research on the new drug, $ 10.5 million have been invested in research and ASM continues to believe that the new drug is a viable product. that the external CPA used by ASM be requested to prepare the company's annual financial reports for the first year of investigation. If the business plan is successful, the company will have profits of $ 249 million in five years ($ 300 million in reduced revenues in $ 21 million in research expenses over two years and three years of sales minus $ 30 million in production costs and sales). Regardless of the final profitability of the medication, this year ASM spent $ 10.5 million and had no sales revenue. The most conservative approach is to record events as they occurred, with the company spending $ 10.5 million, with no income to offset expenses, and the company recording a loss of $ 10.5 million during the year. An alternative presentation would be to match current expenses with future revenues. Under this approach, the accountant would record $ 10.5 million in expenses as capital investment and the company would have no income or expenses for the first year. The balance sheet of the company at the end of the first year would show $ 10.5 million remaining in cash ($ 21 million raised from the sale of shares less the first costs of $ 10.5 million) and a capital asset in research valued at $ 10.5 million. Capital assets are items of value greater than the minimum, such as buildings and equipment, which have a relatively long life. Elements such as investment in research are included in the category of capital assets. The accountant would follow the same procedure in the second year, with the cash going to zero and the capital asset in research would increase to $ 21 million. Over the next three years, the asset of $ 21 million would be reduced to zero and annual costs in the amount of $ 7,000,000 ($ 21 million divided by three) would be used as an expense offset by sales revenue.

1. Which of the approaches, in this case, more accurately reflects the financial operations of the company for its first year of operation?

2. What are the two accounting approaches offered?

3. Consider these two acceptable approaches? Explain your reasons.