Your best friend from home writes you a letter about an investment opportunity that has come her way. A company is raising money by issuing shares and wants her to invest $ 20,000 (her recent inheritance from her great- aunt’s estate). Your friend has never invested in a company before and, knowing that you are a financial analyst, asks that you look over the statement of financial position and send her some advice. An unaudited statement of financial position, in only moderately good form, is enclosed with the letter:
DEWEY, CHEETUM, AND HOWE INC.
Statement of Financial Position
For the Year Ending December 31, 2015
Trade receivables............. $ 8,000
Cash................ 1,000
Inventory.............. 8,000
Furniture and fixtures......... 52,000
Delivery truck............ 12,000
Buildings (estimated market value)..... 98,000
Total assets............. $ 179,000
Trade payables............ $ 16,000
Payroll taxes payable.......... 13,000
Long-term notes payable......... 15,000
Mortgage payable........... 50,000
Total liabilities............. 94,000
Contributed capital........... 80,000
Retained earnings........... 5,000
Total shareholders’ equity......... 85,000
Total liabilities and shareholders’ equity... $ 179,000
There is only one footnote, and it states that the building was purchased for $ 65,000, has been depreciated by $ 5,000 on the books, and still carries a mortgage (shown in the liability section). The footnote further states that, in the opinion of the company president, the building is “easily worth $ 98,000.”
Required:
1. Draft a new statement of financial position for your friend, correcting any errors you note. (If any of the account balances need to be corrected, you may need to adjust the balance of retained earnings accordingly.) If no errors or omissions exist, say so.
2. Write a letter to your friend explaining the changes you made to the statement of financial position, if any, and offer your comments on the company’s apparent financial condition based only on this information. Suggest other information your friend might want to review before coming to a final decision on whether to invest.