Essay Case Study 1

3539 Words Dec 7th, 2013 15 Pages
FACULTY ECONOMICS AND BUSINESS

EBA 6113 ACCOUNTING FOR MANAGERS
INDIVIDUAL ASSIGNMENT
ASSIGNMENT 1 (BASED ON CASE STUDY)

LECTURER: MR. MICHAEL TINGGI
DUE DATE: 9TH MARCH 2013

Done by:
Satnam Singh 13030035

CASE 1 1.0 An accountant prepared a balance sheet for a business. In the balance sheet, the equity of the owner was shown next to the liabilities. This confused the owner, who argued: My equity is my major asset and so should be shown as an asset on the balance sheet. How would you explain this misunderstanding to the owner?

As an accountant, we must first establish what the definition of asset is and what the definition of equity is. An asset is defined as a resource with economic value that an
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So in conclusion, if we show equity under asset in the balance sheet, it will not only be unbalanced but because equity is what forms the assets along with its liabilities. Therefore, we explain that equity will represent that book value of the company as it shows the minimum value of the business in the firm (Walther et al, 2012).

2.0 The accountant goes on to explain that the the balance sheet shows how much a business is worth. Do you agree with this statement? Discuss.

The balance sheet of a business can help provide a value of an entire institution with all other factors being taken into account. However, accountants cannot tell you what a business is worth because it’s not really an accounting aspect of work. Accountants prepare financial statements; they calculate a value on the business and report this value in its financial report. Therefore, it can be said that the statement mention is untrue.
This is because from the business point of view the balance sheet does not indicate how much a business may be worth. What is available is only a set of values representing the assets, liabilities and equity of a business. The values obtained from the balance sheet can show how a business is performing but not its worth in value. The performance of the business can be shown by studying the various ratios; such as the current ratio, gearing ratio, acid test, and so on which gives us an idea of how the firm is doing.

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