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Unformatted text preview: which is the historical cost less accumulated amortization. Estimated market value is not a generally accepted accounting principle for recording property, plant, and equipment. The $38,000 difference ($98,000 – $60,000) reduces total assets and reduces retained earnings. In fact, retained earnings becomes negative suggesting that there may have been several years of operating losses. The effect of the corrections also changes the debt‐to‐equity ratio: Prior to the correction ($94,000 ÷ $85,000) 1.11 After the correction ($94,000 ÷ $47,000) 2.00 This suggests that the company has assumed a larger debt burden than indicated on the original statement of financial position. Before making a final decision on investing in this company, you should examine the past three years of audited income statements and the past two years of audited statements of financial position to identify positive and negative trends for this company. You can also compare this company's debt‐to‐equity ratio to that of the industry. You should also learn as much about the industry as you can by reviewing recent articles on economic and technological trends which may have an impact on this company....
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This note was uploaded on 02/01/2013 for the course BUSI 293 taught by Professor Aziz during the Summer '12 term at The University of British Columbia.
- Summer '12