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 further 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 no errors or omissions exist, state so. 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 to invest.

Transcribed Image Text:

DEWEY, CHEETUM, AND HOWE, INC. Balance Sheet For the Year Ending December 31, 2004 Accounts receivable Cash Inventory Furniture and fixtures Delivery truck Buildings (estimated market value) Total assets Accounts payable Payroll taxes payable Notes payable (due in three years) Mortgage payable Total liabilities Contributed capital Retained earnings Total stockholder's equity $ 8,000 1,000 8,000 52,000 12,000 98,000 $179,000 $ 16,000 13,000 15,000 50,000 $ 94,000 $ 80,000 5,000 $ 85,000