d. 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. e. If David decides to buy the business explain to him the impact of business’s financing decision
Knowing that you have some accounting experience, your friend David has sought your advice
regarding a business that he intends purchasing. The
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business operations show that a considerable portion of the inventory is obsolete stock for which there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 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:
a. Explain to David the form of organisation he can adopt for the business? Briefly discuss the
advantages and disadvantages of each form of organisation.
b. 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.
c. On the basis of the information provided, David believes the business is worth $70 000. Advise
him on the accuracy of his assessment.
d. 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.
e. If David decides to buy the business explain to him the impact of business’s financing decision
Please answer question d and e
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