Ok, the case is this.
Six months ago, you closed your business. Now, a person has expressed an interest in acquiring the business. The potential buyer requests a current balance sheet, but you provide her with the one that was prepared just prior to closing.
1) Will the balance sheet be acceptable by the buyer and her accountant?
2) Which GAAP(s) affect this situation? Explain.
Here is my answeres:
1) I think that this balance sheet is obsolutely acceptable, because it shows how this business was doing before closing.
2) I think that this affects The Continuing Concern Concept, because this balance sheet shows that this business will continue to operate.
Is this correct?
Here is the second case:
Martha Higgins is currently trying to borrow some money from the bank. She has listed her personal automobile(25$000) On the business balance sheet to make the statement look more attractive.
1) Is this a resonable this to do? No, this is not a resonable thing to do.
2) Which GAAP(s) affect this situation? This affects The business entity concept. It states that the accounting for business organization and personal affairs must be on a separate balance sheet.
Is this right?
For the first case:
1) The balance sheet may be acceptable to the buyer and her accountant. However, they might also request an updated balance sheet to have a more accurate understanding of the business's current financial situation. Although the balance sheet shows how the business was doing before closing, it may not accurately reflect the business's current financial position after being closed for six months.
2) While your mention of the Continuing Concern Concept is not incorrect, the more applicable GAAP for this situation would be the Full Disclosure Principle. This principle requires that financial statements, such as balance sheets, include all information necessary for the reader (in this case, the prospective buyer) to obtain an accurate understanding of the financial situation. To be in compliance with the Full Disclosure Principle, you should disclose that the balance sheet is from six months ago and possibly provide an updated balance sheet if requested.
For the second case:
1) You are correct that this is not a reasonable thing to do.
2) You are also correct that the GAAP affecting this situation is the Business Entity Concept. This concept requires that personal and business transactions are kept separate and not combined on a balance sheet. By listing her personal automobile on the business balance sheet, Martha Higgins is violating this principle.
Let's break down your answers step by step:
For the first case:
1) You mentioned that the balance sheet prepared just prior to closing will be acceptable because it shows how the business was doing before closing. This answer is not entirely accurate. The potential buyer is requesting a current balance sheet to assess the financial position of the business at present. Providing an outdated balance sheet may not accurately reflect the business's current financial status. It is advisable to provide the most up-to-date balance sheet to the buyer and her accountant.
2) The GAAP that affects this situation is the Going Concern Concept, not the Continuing Concern Concept as you mentioned. The Going Concern Concept assumes that the business will continue to operate in the foreseeable future. However, since you closed your business six months ago, this concept no longer applies. Hence, the balance sheet prepared just before closing may not provide an accurate depiction of the business's current financial position.
For the second case:
1) You correctly identified that listing Martha Higgins' personal automobile on the business balance sheet to make it look more attractive is not a reasonable thing to do. Mixing personal assets with business assets on the balance sheet can be misleading and is not in line with proper accounting practices.
2) The GAAP that affects this situation is the Business Entity Concept, just as you mentioned. The concept stipulates that business organizations and personal affairs must be accounted for separately. Therefore, Martha Higgins' personal automobile should not be included on the business balance sheet.
In summary, your response to the first case needs some adjustment, while your response to the second case is correct.
For the first case, your answers are partially correct, but let me provide you with a more comprehensive explanation:
1) The potential buyer may or may not find the balance sheet acceptable. Generally, buyers and their accountants prefer to have current and up-to-date financial statements to assess the financial health of the business. The fact that you provided a balance sheet prepared just prior to closing might raise concerns about the accuracy and relevance of the information. The buyer may request an updated balance sheet to have a clearer picture of the business's current financial status.
2) The Generally Accepted Accounting Principles (GAAP) that affect this situation include:
- The Matching Principle: This principle states that expenses should be recognized in the same accounting period as the related revenues. Providing a balance sheet based on outdated information could misrepresent the current financial position of the business and potentially lead to the misallocation of expenses and revenues.
- The Materiality Convention: This convention requires that financial statements disclose all material information that could impact the users' evaluation of the business's financial position. Presenting an outdated balance sheet may not accurately represent the business's true financial condition and could be misleading to potential buyers.
Regarding the second case, your answers are correct:
1) Listing a personal automobile on the business balance sheet is not a reasonable thing to do. Personal assets should not be included in the business balance sheet unless they are legitimately being used for business purposes.
2) The GAAP that affects this situation is the Business Entity Concept. It states that the accounting for business organizations and personal affairs must be kept separate. Including personal assets such as the automobile on the business balance sheet violates this concept and can mislead users of the financial statements.