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Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881

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Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881
Textbook Problem
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Case 2-63 Analysis of the Accounting Cycle

Susan Eel wants to sell you her wholesale fish store. She shows you a balance sheet with total assets of $50,000 and total liabilities of $20,000. According to the income statement, last year’s net income was $40,000;

When examining the accounting records, you notice that several accounts receivable in the $10,000 to $11000 range are not supported by source documents. You also notice that there is no source documentation to support the $30,000 balance in the building account and the $10,000 balance in the equipment account. Susan tells you that she gave the building and refrigeration equipment to the business in exchange for stock. She also says that she has not had time to set up and monitor any paperwork for accounts receivable or accounts payable.

Required:

Assuming that you would like to purchase the company. what would you do to establish a reasonable purchase price?

To determine

Introduction:

A typical financial statement consists of income statement, balance sheet and statement of cash flows. In order to recognize an event in the financial statement, the event must have an influence on the elements of the financial statement like revenue, expense, assets, liabilities and stockholder’s equity. The source documents are material evidence of transaction which supports the authenticity of a business transaction.

To purchase the company what needs to be done to establish a reasonable purchase price, basis assumption.

Explanation

The absence of source documents compromises the reliability of the financial information presented in the financial statements. In order to estimate the purchasing price of the business, the factors like value of assets, liabilities, and equity and future prospects of the business is evaluated appropriately...

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