Explanation of Going Concern Opinion and Analysis for GeoPetro

Essay Questions

1. Assumethat you have received copies of the financial statements for PepsiCo for the years ending December 31, 2014 and  Answer the following questions:
   1. Ifyou were a banker, why would you need information from PepsiCo’s financial statements?
   2. Ifyou were a potential investor in PepsiCo stock, what information would you want from their financial statements?
   3. Ifyou were a labor negotiator for a union that represents a group of PepsiCo’s employees, which financial statement would provide you with the most useful information?

2. Determine what accounting assumption principle has been violated in each situation below:

• Melissa is the owner of Missy’s Tea Shop, a sole proprietorship. She purchases a new computer for her personal use at home. Melissa records the computer as an asset of Missy’s Tea Shop.
• Houston Electronics purchased an office building several years ago for $500,000. The office building could be sold today for $850,000. The accountant will now show the building as an asset on the books for $850,000.
• Henry is a new accountant for Acme Foods. He is extremely busy and has decided that he can prepare the financial statements every two years.
• The Candle Store is having financial problems. It has no plans to liquidate, but decides to use market value to report their assets since they plan on moving to a smaller store.

3. You evaluate loan requests as part of your job at Eastwood National Bank.  One loan request you received is from Surfer Dude Supplies, a small company.  Richard Tracy, the CEO, is requesting $105,000 and brings you a statement of accounts for his first year of operations ended December 31.
   
   
4. Dividends, you have learned, are a distribution of income, not an expense. What is the difference? Why can’t the corporation list them as an expense, since dividends are just another amount of money paid out to somebody?
   
   
5. Read the following case and answer the questions that follow:

GeoPetro is independent oil and natural gas Company with headquarters in San Francisco, California. It recently received an audit opinion that expressed a going concern paragraph. The following is an excerpt from GeoPetro’s 2012 report:

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company has incurred recurring net losses that have resulted in an accumulated deficit of $49.7 million as of December 31, 2012. Also, the Company has limited cash and working capital to fund its future operations. These factors raise substantial doubt about the ability of the Company to continue as a going concern. Management’s plans regarding those matters are also described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties.

Required:

1. What is the general purpose of an auditors’ report?
2. What is a going concern? Define it in yourwords, don’t quote the book.
3. Are losses, restructuring, and the disposal of segments necessarily precursors to the demise of the company?
4. What, in your words, are the auditors saying about these particular companies?

6. All businesses are subject to various types of legal proceedings. Merck & Co. Inc., a global health care company that manufacturers prescription medicines, has been a defendant in a number of product liability lawsuits. In the notes to Merck’s 2012 financial statements, the company states: “There are various other pending legal proceedings involving the Company, principally product liability and intellectual property lawsuits. While it is not feasible to predict the outcome of such proceedings, in the opinion of the Company, either the likelihood of loss is remote or any reasonably possible loss associated with the resolution of such proceedings is not expected to be material to the Company’s financial position, results of operations or cash flows either individually or in the aggregate.”

Required:

Explain in your own words what Merck means by this statement. In particular, include what they mean by “material” and “remote.” Who is in the best position to determine the outcome of a lawsuit?

7. Presentedbeloware condensed data from the financial statements of Unique Factory for 2015 and 2014. The figures are expressed in thousands. Use this information to answer the questions that follow.

Statement A	2015	2014
Total current assets	$  82,309	$  80,080
Property, plant & equipment
(net of accumulated depreciation)	63,451	62,724
Investments	303	1,061
Other assets	3,438	2,606
Total assets	$149,501	$146,471
Total current liabilities	$  33,928	$  28,668
Long-term debt	20,491	25,676
Deferred income taxes and contingencies	4,174	5,208
Total liabilities	$  58,593	$  59,552
Total stockholders' equity	90,908	86,919
Total liabilities & stockholders' equity	$149,501	$146,471
Statement B	2015	2014
Net sales	$209,203	$174,206
Cost of sales	136,225	114,284
Gross profit	72,978	59,922
Selling, general and administrative expenses	63,895	53,520
Other income (expense)	693	(118)
Income (loss) before income taxes	9,776	6,284
Income tax expense	3,534	2,388
Net income (loss)	$    6,242	$   3,896

Required: Based on the information provided, is Unique Factory considered a business or non-business entity? How do you know by examining the financial statements?