Making a Decision as a Financial Analyst: Preparing and Analyzing a Balance Sheet

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 of stock 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 balance sheet and send her some advice. An unaudited balance sheet, in only moderately good form, is enclosed with the letter.

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 also states that, in the opinion of the company president, the building is "easily worth $98,000."
Required:
1. Draft a new balance sheet for your friend, correcting any errors you note. (If any of the account balances need to be corrected, you may need to adjust the retained earnings balance correspondingly.) If there are no errors or omissions, so state.
2. Write a letter to your friend explaining the changes you made to the balance sheet, 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 toinvest.

Transcribed Image Text:

DEWEY, CHEETUM, AND HOWE, INC. Balance Sheet For the Year Ending December 31, 2012 $ 8,000 Accounts receivable Cash 1,000 8,000 Inventory Furniture and fixtures 52,000 Delivery truck Buildings (estimated market value) 12,000 98,000 Total assets $179,000 $ 16,000 Accounts payable Payroll taxes payable Notes payable (due in three years) Mortgage payable 13,000 15,000 50,000 $ 94,000 Total liabilities $ 80,000 Contributed capital Retained earnings 5,000 Total stockholders' equity $ 85,000