Week Six - managed to adhere to the Cost Principle(however...

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Week Six Discussion Having a “third party” borrow $500,000 to buy a franchise just so Sewell can turn around and buy it back sounds an awful lot like a money laundering tactic. Something is only worth what someone will pay for it. To figure out what it “should” be worth, we have independent appraisers who are supposed to be unbiased. Unfortunately, those appraisers’ decisions will be swayed by the financial statements which are supposed to follow the Reliability Principle. The data should be verifiable…in this case, because of the underhanded tactics used by Sewell, the information is verifiable. Because of his underhanded tactics, he also
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Unformatted text preview: managed to adhere to the Cost Principle (however crookedly) by recording the asset at its actual cost. He really paid $500,000 to acquire the franchise back. Unfortunately for potential investors, they will be paying a much higher price for stock in the corporation based on inflated financial information. In actuality, the franchise is only worth $50,000, and some poor schmuck will end up paying $500,000 because Sewell used unethical tactics to falsely portray the corporation in a superior financial position....
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