Recently, your Uncle Jim, who knows that you always have your eye out for a profitable investment, has discussed the possibility of your purchasing some corporate bonds that he just heard about. He suggests that you may wish to get in on this deal before others do. The bonds are being issued by Merry Corp. are 10-year debentures, which promise a 40% rate of return. Merry manufactures novelty and party items.
You have told Uncle Jim that unless you can take a look at Merry’s financial statements, you would not feel comfortable about such an investment. Thinking that this is the chance of a lifetime, Uncle Jim has obtained a copy of Merry’s most recent, unaudited financial statements, which are a year old. These statements were prepared by Mrs. Merry. You look over these statements, and they are quite impressive.
The statement of financial position showed a debt to equity ratio of 1:10 and, for the year shown, the company reported net income of $2,424,240.
The financial statements are not shown with comparison to amounts from other years. In addition, there are no note disclosures about inventory valuation, depreciation methods, loan agreements, and so on.
Write an email to your Uncle Jim explaining why it would be unwise to base an investment decision on the financial statements that he has given you.