Should financial statements be taken at face value when buying a business?
No. The potential buyer of a business as a whole (or the controlling interest in a business) should have in hand the latest financial statements of the company. The financial statements are the essential point of reference but are just a good point of departure for many questions. For example, are book values good indicators of the current market and replacement values of the company’s assets? Current values usually are close to book values for some assets—marketable securities, accounts receivable, and FIFO-based inventory. On the other hand, book values of LIFO-based inventory, long-term operating assets depreciated by accelerated methods, and land purchased many years ago may be far below current market and replacement values. Cash is usually a hard number, although a buyer should be aware that there may be some window dressing. Every asset other than cash presents potential valuation problems. For example: a business may not have written off all of its uncollectible accounts receiv
