Short Case Scenario 14-1

question 63

Essay

Short Case Scenario 14-1
Mary Ann has always loved to cook and is interested in starting a catering business. Being aware of the failure rate of new businesses, she is considering buying an existing catering business that is up for sale. The current owners claim that the business is highly profitable, but Mary Ann has her doubts. She wonders why the owners would be so interested in selling the business if it is such a money maker. Furthermore, the price that they are asking seems high to Mary Ann. Without any formal training in accounting, Mary Ann asks a friend, Rolanda, for advice.
-Mary Ann begins to express some doubts to the sellers after a close examination of the financial statements and auditor's report.The sellers claim that they have a number of contracts that are in the works but that are not reflected in the financial statements.According to GAAP,where are transactions recognized in the financial statements?

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Definitions:

Market Price

The current price at which goods or services can be bought and sold in a marketplace, determined by supply and demand.

Profit

Profit represents the financial gain obtained when the revenue from business activities exceeds the expenses, costs, and taxes involved in operating the business.

Industry Supply

The total output of a specific good or service that all producers in an industry are willing to sell at different price levels.

Industry Demand

The total demand for the products or services produced by a specific industry, reflecting the collective demand of all consumers in the market.