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Unformatted text preview: 1 W IKI A RT G ALLERY , I NC . The Setting Wiki Art Gallery (WAG) is a privately owned business started in 2002 by two university students. Rob Wilco combined his entrepreneurial business interests with Stephen Conleys knowledge of artwork to create an online art gallery that they named WAG. WAGs start-up years were challenging. The owners contributed their savings to the company but initially earned little return on their significant investments of money and time. Propelled by a belief that their work would pay off, they persevered. Now it appears their luck is changing. WAG became profitable in late 2008 and has reported a sizable net income for the year ended September 30, 2010. Both owners are excited by this turn of events because Stephen recently received a large inheritance, which will allow him to buy-out Rob at the very time Rob is eager to leave WAG and embark on a new career. Realizing that he has limited accounting knowledge, Stephen has approached you for advice. As a private company, WAGs shares do not have a readily determinable price. Consequently, Stephen and Rob have agreed to calculate the buy-out price using an estimate of WAGs share value based on WAGs net income for the year ended September 30, 2010. Although Rob has been a reliable friend and business partner in the past, Stephen is concerned that WAGs financial results could be misstated, especially because WAG is not required to obtain an annual audit. Stephen would like you to advise him of the risk that the WAGs financial results could be misstated, given that the purchase price he will pay Rob will be based on WAGs net income for 2010. Background Information WAG obtains revenues from two sources. First, WAG purchases art from promising artists and sells it to individuals and traditional art galleries. Second, WAG charges an annual artists fee in exchange for displaying their work in its online galleries. WAGs expenses relate to Robs salary, the cost WAG has paid for the artwork it sells, depreciation on WAGs computer equipment, Web site maintenance, and other administrative costs (e.g., bad debts, interest, income taxes). A summary of significant events occurring during the year ended September 30, 2010, is presented in Exhibit 1. WAGs comparative income statements for the years ended September 30, 2010 and 2009, are presented in Exhibit 2. Excerpts from WAGs notes to the financial statements are presented in Exhibit 3. Your Task Stephen has asked you, an experienced financial accountant and business adviser, to prepare a report that identifies and evaluates financial reporting decisions that may have influenced WAGs recently reported financial results. Specifically, for each financial reporting decision, you are to (a) state whether Rob has applied appropriate accounting methods and judgments, (b) describe alternatives that could instead have been applied, and (c) explain in what ways Robs methods and judgments have affected...
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- Fall '10