CASE 2 Property Value: A Matter of Opinion? You are a loans officer with the Reliable Trust Company in Red Deer, Alberta. On March 30, 20-, a young businessman, Gary Marsden, comes to you in the hope of borrowing $75 000 for a business venture. When you inquire about his personal financial status, he presents you with the balance sheet shown below. Assets Bank Accounts Receivable Furniture Supplies Truck Building Lot Total Assets GARY MARSDEN BALANCE SHEET MARCH 20, 20- $ 2.000 I 500 -9 000 1 300 17 000 375 000 $405 800 Liabilities Accounts Payable Mortgage Payable Total Liabilities Owner's Equity Gary Marsden, Capital Total Liabilities and Equity $ 5 300 180 000 $185 300 220 500 $405 800 When examining this statement, you become concerned about the item Building Lot for $375 000. You have lived in Red Deer for several years and you know that there are not many properties near where the lot is located that are worth that much money. Gary informs you that he bought the property one month ago for $180 000 and that he borrowed the entire sum from his father. This is shown properly on the statement as Mortgage Payable.
Reporting Cash Flows
Reporting of cash flows means a statement of cash flow which is a financial statement. A cash flow statement is prepared by gathering all the data regarding inflows and outflows of a company. The cash flow statement includes cash inflows and outflows from various activities such as operating, financing, and investment. Reporting this statement is important because it is the main financial statement of the company.
Balance Sheet
A balance sheet is an integral part of the set of financial statements of an organization that reports the assets, liabilities, equity (shareholding) capital, other short and long-term debts, along with other related items. A balance sheet is one of the most critical measures of the financial performance and position of the company, and as the name suggests, the statement must balance the assets against the liabilities and equity. The assets are what the company owns, and the liabilities represent what the company owes. Equity represents the amount invested in the business, either by the promoters of the company or by external shareholders. The total assets must match total liabilities plus equity.
Financial Statements
Financial statements are written records of an organization which provide a true and real picture of business activities. It shows the financial position and the operating performance of the company. It is prepared at the end of every financial cycle. It includes three main components that are balance sheet, income statement and cash flow statement.
Owner's Capital
Before we begin to understand what Owner’s capital is and what Equity financing is to an organization, it is important to understand some basic accounting terminologies. A double-entry bookkeeping system Normal account balances are those which are expected to have either a debit balance or a credit balance, depending on the nature of the account. An asset account will have a debit balance as normal balance because an asset is a debit account. Similarly, a liability account will have the normal balance as a credit balance because it is amount owed, representing a credit account. Equity is also said to have a credit balance as its normal balance. However, sometimes the normal balances may be reversed, often due to incorrect journal or posting entries or other accounting/ clerical errors.
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