Knowing that you have some accounting experience, your friend David has sought your advice regarding a business that he intends purchasing. The balance sheet for the business shows total assets of $170 000 and total liabilities of $100 000, out of which $40 000 is a bank loan. A review of the business operations show that a considerable portion of the inventory is obsolete stock for which there is limited demand. Further, many of the accounts receivable are overdue by more than 60 days. The accounts receivable and inventory are carried at their gross amount and cost value respectively on the balance sheet.

As you are an Accounting student, you have been asked to advise the following:

1. Explain to David the form of organisation he can adopt for the business? Briefly discuss the advantages and disadvantages of each form of organisation.
2. David has a very limited understanding of the terms Assets and Liabilities. Explain to David the three essential characteristics necessary to consider an item either as an asset or a liability.
3. On the basis of the information provided, David believes the business is worth $70 000. Advise him on the accuracy of his assessment.
4. Explain to David how the accounts receivable and inventory should be valued on the balance sheet. If the business was to apply the correct measurement basis, determine the effect on: (1) profit and (2) assets.
5. If David decides to buy the business explain to him the impact of business's financing decision