Unwise to Make This Investment

¶ … unwise to make this investment for a wide variety of reasons. The promised return indicates the high level of risk inherent in this investment and this risk is born out in the inadequacy of the financial statements. The statements are simply inadequate in so many ways that they are barely worth considering; yet there is little else beyond the statements upon which for me to make an investment decision.

The first major problem with the financial statements is that they are unaudited. Auditing is a critical procedure in the production of financial statements because it acts as verification of the authenticity of the information (Vitez, 2010). Unaudited statements, especially from new, private companies, are not worth the paper they are printed on. Such statements may or may not contain any factual information. Without auditing, there is simply no way for an investor to know for certain that the statements are even remotely accurate.

Even if the statements were audited, there are a number of problems that would negate any hope of a rational investor purchasing these debentures. The first is that the financial statements are a year old. While it may be fascinating from a historical perspective to study these statements, from an investment perspective a reasonable investor would need more timely and accurate information (Richardson, 2002). This is especially true of younger companies, whose fortunes can change swiftly. But even for established companies, it would be unwise to make an investment decision based on year-old statements.

The third major issue with these statements is that they do not have any comparables. Comparables are one of the keys to understanding financial statements (Robinson, 1975). The firm's bottom line number on its own is relatively meaningless. Context is vital, since the bottom line number may actually indicate that the there has been a significant decline in the firm's fortunes. Without such context, however, it is difficult to make an informed evaluation of the statements presented.

The fourth major issue with these statements is that they contain no disclosures. These disclosures are absolutely critical for the interpretation of financial statements (AICPA, 2010). As with the comparables, the disclosures are a means for putting context to the statements. It is imperative for the proper evaluation of financial statements to understand the nature of the inventory valuation, depreciation methods and loan agreements.

The condition of the financial statements is poor. The time length of the investment, at ten years, represents a long time frame for which some degree of firm stability is required. A promise of 40% is meaningless if the firm cannot afford to pay the interest. Indeed, for a firm in what is in all likelihood a mature industry, it is unrealistic that the Will Turner Corp would have the growth needed to cover the cost of these investments. It is unknown what the company intends to do with the money as well. That is important information, because the investor is making an investment in the company's well-being.

In summary, I would not make this investment; it is unwise. There are myriad problems with the financial statements. They are unaudited, which means that the accuracy of the information contained therein cannot be guaranteed. Without auditing, the statements cannot be taken at face value and in fact they could be total fabrications.

The statements do not contain disclosures. Disclosure reveals key details about the business and about the firm's accounting practices that will impact the interpretation of the financial statements. Statements without disclosures are essentially incomplete statements. Changes in simple things like the method of measuring inventory or the method used for depreciation can have a significant impact on the bottom line number, and therefore are essential for the interpretation of both the income statement and the balance sheet.

In addition, there are no comparable figures from other years to lend perspective. Information from a single year is fine and dandy, but it is entirely without context. The context is critical because the state of the firm today is not terribly useful without some sense of where the firm has been in the past. Including the comparable figures from past years is essential because it allows for a trend analysis, from which a significant amount of insight can be derived.