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:

There is only one footnote, and it states that the building was purchased for \(\$ 65,000\), has been amortized 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 correspondingly.) If no errors or omissions exist, state 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.

Transcribed Image Text:

DEWEY, CHEETUM, AND HOWE, INC. Statement of Financial Position For the Year Ending December 31, 2010 Trade receivables Cash Inventory Furniture and fixtures Delivery truck Buildings (estimated market value) Total assets Trade payables Payroll taxes payable Long-term notes payable Mortgage payable Total liabilities Share capital $ 8,000 1,000 8,000 52,000 12,000 98,000 $179,000 $ 16,000 13,000 15,000 50,000 $ 94,000 Retained earnings Total shareholders' equity $ 80,000 5,000 $ 85,000