When First Impressions of Financial Data Mislead

At times, the data presented in firms’ audited financial statements can seem puzzling. This article describes instances in which the reported figures could leave the firm’s stakeholders with a first impression that the data must be in error, as they are difficult to believe or even counterintuitive. As student detectives address the discussion questions provided, they encounter the discretion provided to firms in designating quarterly-reporting periods, computing gross-profit percentages, and influencing the gains and losses reported on disposal of depreciable assets. In addition, their learn that sizable differences between a firm’s current and quick ratios and spectacular returns on stockholders’ equity might not signify what usually is implied when they are encountered by stakeholders. Other situations addressed include a firm with huge gross profits that nevertheless felt it necessary to liquidate, a retailer of discretionary goods that somehow fared much better than a service firm during an economic meltdown, and a firm reporting different amounts for its account changes depending on which financial statement one looks at. A teaching note provides suggested answers to the discussion questions, learning takeaways, and follow-up discussion points for instructors.