Case Study 1
EBA 6113 ACCOUNTING FOR MANAGERS
ASSIGNMENT 1 (BASED ON CASE STUDY)
LECTURER: MR. MICHAEL TINGGI
DUE DATE: 9TH MARCH 2013
Satnam Singh 13030035
CASE 1 1.0 An accountant prepared a balance sheet for a business. In the balance sheet, the equity of the owner was shown next to the liabilities. This confused the owner, who argued: My equity is my major asset and so should be shown as an asset on the balance sheet. How would you explain this misunderstanding to the owner?
As an accountant, we must first establish what the definition of asset is and what the definition of equity is. An asset is defined as a resource with economic value that an …show more content…
The balance sheet can be interpreted by using the accounting ratios mentioned above and comparing it over a period of time. This would help to determine the performance of the company i.e. whether there is improvement or where improvement may be needed. Using all these accounting ratios can also help us determine the part performance and prospects for a company and its financial strength. There are certain things that need to be seen in the balance sheet; such as the increased rates of profit on shareholders’ funds, capital employed and sales. There must be adequate liquidity so that debts can be paid and also to show that funds are not underutilized. Based on the stable gearing ratio, it shows the stability of the company in the long run. Also, the efficiency in maximizing sales from business investment as well as a satisfactory return on the investment made by the shareholders.
From the balance sheet we can derive what is owned by the company in terms of assets, and what is owed by the company i.e. its liabilities which can then be used to increase its net worth. We can get the net worth value of the company by using the formula shown below;
NET WORTH = TOTAL ASSETS – TOTAL LIABILITIES
However, this net worth may only show the book value of the company in the terms of the equity that the owners own within the company but not its worth in the sense of how much the business may be valued at.
Thus, from here it should be stated that one way to show how a