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Worked-example setupScope and assumptions
- Granite Harbor is fictional, and the stated accounting treatments are supplied only for statement-reading practice.
- The example does not estimate enterprise value, test impairment, determine recognition, or replace a complete policy and note review.
- Period
- Current annual statements and notes
- Units
- USD millions
- Rounding
- Whole USD millions; no rounding required
Problem
Granite Harbor reports $420 million of total assets, $160 million of equity, and $180 million of net income. Its market capitalization is $1.4 billion. The notes state that land remains at historical cost, a material brand was developed internally, inventory uses LIFO, and the warranty liability depends on expected failure rates. Management calls reported equity “the accounting value of the company” and net income “repeatable earnings.” Evaluate those claims.
Sort the evidence
| Fact | Limit | What the statement supports | Evidence still needed |
|---|---|---|---|
| Internally developed brand has no separate carrying amount | Recognition | No recognized brand asset appears | Applicable recognition rule, spending, and operating evidence |
| Land remains at historical cost | Measurement basis | The carrying amount follows the stated basis | Acquisition date, later costs, impairment review, and any fair-value analysis used for another purpose |
| LIFO is used | Policy and comparability | Inventory and cost of goods sold follow that policy | Peer methods, price changes, quantities, and any LIFO disclosure |
| Warranty liability uses expected failures | Estimate | The recognized liability reflects a supported estimate | Claim history, current product data, assumptions, and sensitivity |
| Current classification affects working capital | Classification | Current totals follow the stated operating-cycle and maturity decisions | Contracts, operating cycle, restrictions, and later-event evidence |
Conclusions
The $160 million equity total is the checked residual of $420 million of recognized assets less $260 million of recognized liabilities. The $1.24 billion difference from market capitalization is also arithmetically checked. Neither calculation assigns value to an omitted item. Reported equity is not a supported estimate of the company's market value. The $1.4 billion market capitalization does not prove that the accounting is wrong or supply amounts for missing assets.
The $180 million net-income total is a controlled period result. It does not, by itself, establish repeatable earnings. Recognition boundaries, inventory policy, and the warranty estimate affect its timing and comparability. A forecast must examine the notes, changes in estimates, product and price evidence, and any unusual or disposal items.
This review preserves the reported totals. It changes the claims made from them and identifies the evidence needed for a better comparison.
Verified calculation · scoped sums
The curriculum loader recomputed this example before it entered the site build. Expand any structured input to inspect the stated facts.
- amounts
- 4 fields
Inspect data
{
"market_capitalization": 1400,
"reported_equity_offset": -160,
"total_assets": 420,
"total_liabilities": -260
}- totals
- 2 fields
Inspect data
{
"market_to_book_gap": [
"market_capitalization",
"reported_equity_offset"
],
"reported_equity": [
"total_assets",
"total_liabilities"
]
}Recomputed result
| Measure | Value |
|---|---|
| market to book gap | 1,240 |
| reported equity | 160 |