A small equipment company is preparing its annual financial statements in anticipation of applying for a loan. During the last week of the year, the company received a shipment of inventory but has not paid for it. The invoice indicates that the company owes $5,000 for the purchase. The owner, Randy Ray, has decided to omit this asset and the related liability from the year-end balance sheet, reasoning that it is okay because he is omitting both of them, which means there is no difference in owners equity.

For this assignment you are to address the following:

  • What is your opinion of Randy s reasoning? (1 paragraph)
  • Explain the circumstances under which Randy s decision would be acceptable under GAAP and circumstances under which it would definitely be unacceptable. (3 to 4 paragraphs).