Chapter 17, Problem 1QC

To determine

Annual Report: the Annual report is a detailed report about a company’s activities during a particular period that is its accounting period. It is prepared for the stockholders of the company and the general public. It is used to analyze the financial position of the company based on the financial statements included in this report.

To Identify: The part of L Company’s annual report that is written by the company and could present a biased view of financial conditions and results.

Answer to Problem 1QC

Option ‘b’ is correct.

Explanation of Solution

Management’s discussion and analysis of financial condition and result of operations (MD&A).

Management’s discussion and analysis of financial condition and result of operations (MD&A) is the opinion about the company’s future. It is written by company’s management and informs about their thoughts and understandings of financial statements of the company. The management can be biased in this discussion by focusing even on small achievements and ignoring the future hurdles, which the company might face during operations.

Option a: Balance Sheet.

The balance sheet is the part of financial statements which is audited by auditors. The company prepares the balance sheet and sends it to auditors. Auditors will analyze and approve it only if it is prepared according to the rules. The balance sheet cannot be biased.

So, Option a is incorrect.

Option c: Auditor’s Report.

Auditors report is written by the auditor and not by the management of the company. Auditor audits the financial statements prepared by the company and prepares an auditor’s report. It can’t be biased.

So, Option b is incorrect.

Option d: Income Statement.

The income statement is prepared by the company as a part of financial statements. Financial statements than audited by the auditors. Hence, the Income statement cannot be biased.

So, Option c is incorrect.

Conclusion

So option ‘b’ is correct among the given options.