Identify errors using GAAP; prepare a classified balance sheet; and calculate the current ratio. An inexperienced accountant has put together a balance sheet for Art Objects Inc. The balances shown are at September 30,2009. (LO 1, 3, 5)
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Assets |
Liabilities and Equity |
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|
Current assets: |
Current liabilities |
||
|
Prepaid insurance |
$30000 |
Accounts receivable |
$2000 |
|
Cash |
6000 |
Other Long-term assets |
5000 |
|
Land |
28000 |
Salaries payable |
8000 |
|
Other current assets |
5000 |
Intangible assets |
35000 |
|
Interest receivable |
2000 |
Accounts payable |
4000 |
|
Total current assets |
71000 |
Total current liabilities |
54000 |
|
Account payable |
42000 |
Shareholder”s equity |
|
|
Building |
36000 |
Retained earnings |
52000 |
|
Equipment |
18000 |
Common stock |
47000 |
|
Intangible assets |
6000 |
Short-term note |
20000 |
|
Total non current assets |
102000 |
Total shareholders equity |
119000 |
|
Total assets |
$173000 |
Total liabilities and equity |
$173000 |
Required
a. Identify the errors in the balance sheet.
b. Using good form, prepare a corrected, classified balance sheet.
c. Calculate the current ratio using the corrected amounts from the balance sheet prepared in b. What doest his ratio measure? Discuss the implications of Art Objects” current ratio.
d. Explain why it is important to properly follow GAAP when preparing financial statements.