7.1. Reading Statements with a Touch of Skepticism

Suppose that you have the opportunity and the ready cash to buy a going business. The business I have in mind is the very one I use as the example in the previous three chapters in which I explain the income statement (Chapter 4), the balance sheet (Chapter 5), and the statement of cash flows (Chapter 6). Of course, you should consider many factors in deciding your offering price. The company's most recent financial statements would be your main source of information in reaching a decision — not the only source, of course, but the most important source for financial information about the business.

I'd recommend that you employ an independent CPA auditor to examine the company's recordkeeping and accounting system, to determine whether the accounts of the business are complete, accurate, and in conformity with generally accepted accounting principles (GAAP). The CPA should also test for possible fraud and any accounting shenanigans in the financial statements. (I discuss accounting and financial reporting fraud in Chapter 15.) As the potential buyer of the business you can't be too careful. You don't want the seller of the business to play you for a sucker.

7.1.1. Recognizing a business's bias

Some people put a great deal of faith in numbers: 2 + 2 = 4, and that's the end of the story. When they see a dollar amount reported to ...

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