You are reviewing the December 31, 2012 financial statements of Ellie's Antiques that is considering an initial public offering of its shares. The following items come to your attention
To obtain a comprehensive understanding of the financial statements of Ellie's Antiques and assess its potential for an initial public offering, you should thoroughly analyze the following items:
1. Revenue recognition: Examine how the company recognizes its revenue. Typically, revenue should be recognized when it is earned and realizable. Check if the company follows the appropriate revenue recognition principles and policies consistent with accounting standards (e.g., revenue recognition criteria under generally accepted accounting principles- GAAP).
2. Expenses: Review the breakdown of expenses in the financial statements. Identify major expense categories and analyze if they are proportionate to the company's operations. Look out for any unusual or extraordinary expenses that might affect profitability.
3. Assets: Evaluate the company's assets, such as cash, accounts receivable, inventory, and property, plant, and equipment. Verify if they are fairly stated and if the valuation methods used are appropriate for each asset category. Assess the company's liquidity and solvency based on the composition and value of its assets.
4. Liabilities: Examine the company's liabilities, including accounts payable, loans, and other financial obligations. Determine if they are accurately reported and classified. Analyze the company's ability to meet its short-term and long-term obligations.
5. Equity: Review the equity section of the financial statements to understand the company's capital structure and ownership distribution. Assess if any changes in equity have been adequately disclosed and if there are any restrictions or contingencies associated with shareholder rights.
6. Notes to the financial statements: Pay close attention to the footnotes accompanying the financial statements. These disclosures provide additional information on accounting policies, significant transactions, commitments, and uncertainties. Understand the implications of these disclosures on the company's financial position and performance.
7. Auditor's report: Evaluate the auditor's report, which provides an independent opinion on the fairness of the financial statements. Assess the level of assurance provided by the auditor and any qualifications or limitations mentioned in the report.
By thoroughly examining these items and considering their implications, you can gain a comprehensive understanding of Ellie's Antiques' financial statements and make informed decisions regarding its potential for an initial public offering.