Financing

A.) Major subsidiaries and associated entities, including consolidated

and nonconsolidated structures.
1. The company has established and continuing nurturing its relationship
with manufacturers of MP3 player, personal video recorders, and digital
video recording equipment.
B.) Debt structure and related terms, including off balance sheet financing
arrangements and leasing arrangements.
1. In conjunction with the need to make significant product improvement
every year or two, New Technology Inc. enters into a seven-year lease
to open another manufacturing facility located in Malaysia.
2. New Technology, Inc also finance sources through their secondary
source of funds that is through entering into a debt arrangement or
utilizing advances from customers.
C.)Beneficial owners (local and foreign and their business reputation and
experience) and related parties.
1. Beneficial owners include assemblers who use NTIs product in their
equipment whose benefits of ownership, such as substantial
allowances awarded to them may be derived while significant risks
associated with ownership is carried by NIT until the product is resold
to end customers.
Others
1. New Technology, Inc. is primarily equity financed that is essentially
referring to the sale of an ownership interest to raise funds for business
purposes. For example, selling of stocks.
2. NIT has been able to limit its capital investment recently financed out
of its operating cash flow for new manufacturing and clean room
equipment. However, due to the establishment of a new facility in
Malaysia, huge capital investment is needed to start operations as
planned.
Developing a Knowledgeable Perspective about the Entity and
the Financial Statements
The financial aspect of the firm is strengthen due to its good working
relationship with several manufactures that led to an increase of sales with
its corresponding low costs resulting in an additional funds that can be

utilized for other investment purposes, research and development project

and other significant expenditures for expansion.
As stated in the case, initial acceptance of products in the marketplace
affects product profitability. So the company believes that product
improvements made annually or every two years are beneficial. Therefore,
opening another research and manufacturing facility in Malaysia helps to
speed up the formulation of product design and manufacturing process. This
boosts market share and generate an increasing profit.
Debt Financing should also consider by NIT in their extensive capital
investment needed this year. It would take time for owners to sell their
business interest considering that huge amount of money is needed. It is a
form of an aggressive growth strategy.
There are no. of benefits received by assemblers such as the
allowances, price protection and the right to return. Right to return is
only granted to certain assemblers. On the other hand, NIT will suffer
from the risk of ownership until the product is sold to end users. It
means that they suffer the loss, if any while others incur benefit.
Assessing the Risk of Material Mistatement
Long-term leases creates a more complex negotiations. Commercial
leases can be lengthy and complex and negotiating a long term lease that
satisfies everyone can be challenging. This might lead to disagreements
that may result to biased information in the financial statements. In
addition to this, If the property isnt properly cared for during the term of
the lease, maintenance and repair costs can be high. These costs are
considered to be expenses that reduce net income or might incur a loss.
Hence, it triggers one to conceal true information for them to present an
income for NIT to remain competitive and to pull more investors.
Finance Reporting
1. In anticipation of going public, NIT has followed SEC Staff Accounting
Bulletin 101, Revenue Recognition in Financial Statements.
Staff Accounting Bulletin (SAB) No. 101 provides guidance on the
recognition, presentation, and disclosure of revenue in financial
statements filed with the Commission. SABs are not rules or
interpretations of the Commission. Rather, they represent
interpretations and practices followed by the staff of the Office of the
Chief Accountant and the Division of Corporation Finance in
administering the disclosure requirements of the federal securities
laws.

2. The company allocates 12% of sales to research and development of

new products and the company hold several patents that have allowed
it to compete effectively for market share.
3. In addition to consumer demand, sales revenue is also dependent upon
the pricing and sales terms.
Developing a Knowledgeable Perspective about the Entity and the
Financial Statements
Due to length revenue generation processes such as submitting of
blanket purchase orders in a quarterly basis, it took time for revenue to be
reported. This has led NIT to use SEC Staff Accounting Bulletin 101, Revenue
Recognition in Financial Statements as their basis in recognizing revenue. It
allows the entity to report revenue before a sales transaction has occurred or
before the seller has performed under the terms of a sales contract.
Research and development expenses is not always corollary with the amount
of revenue generated. It is less risky for NIT to allocate at a fixed percentage
of revenue to R/D because increasing its investment might not give an
assurance of a satisfying return.
Assessing the Risk of Material Mistatement
Complex accounting such as the plan of NIT to enter into a long-term lease
might increase the risks if incorrect estimation or misapplication of GAAP.
The revenue recognition principle states that, under the accrual basis of
accounting, you should only record revenue when an entity has substantially
completed a revenue generation process; thus, you record revenue when it
has been earned. This principle included in GAAP is different from what the
rules provided in the SEC Staff Accounting Bulletin 101, Revenue Recognition
in Financial Statements. Therefore, not following GAAP inhibits the entity to
produce more accurate, more faithful financial statements that constitute
better representations of actual circumstances than its main competitor.