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    R&R Equipment: Opinion of Financial Statement omission of inventory transaction.

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    R&R Equipment Company is preparing its annual financial statements in anticipation of applying for a loan. During the last week of the year, R&R received a shipment of inventory but has not paid for it. The invoice indicated that R&R owes $5,000 for the purchase. The owner of R&R, 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.

    1. What is your opinion of Randy's reasoning?

    2. Discuss circumstances under which Randy's decision would be acceptable under GAAP and circumstances which it would definitely be unacceptable.

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    Solution Preview

    1) Since, during the last week of the year R&R has received the shipment of inventory, even though it has not paid for it, R&R is bound to include it in the account. It is true that the inventory asset goes up and so does the liability of the company. However, the objective of the financial ...

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