WFU Law School
Law & Valuation
Chapter 3 - Accounting Basics

Chapter 3 - Problems

These problems cover:

  • balance sheet
  • income statement
  • cash flow

[cross reference to business valuation chapter]

"Bush told his senior aides Tuesday that he 'didn't want to see any stories' quoting unnamed administration officials in the media anymore, and that if he did, there would be consequences, said a senior administration official who asked that his name not be used."

--Joseph L. Galloway and James Kuhnhenn, “Bush orders officials to stop the leaks” (Philadelphia Inquirer, October 16; also cited in Washington Post, October 21, 2003)

Use the financial statemnets for Albega Corporation:
Balance Sheet
December 31, 20xx
Current Assets   Current Liabilities
$ 50,000

Accounts Payable

$ 60,000

Accounts receivable
(net of allowance for bad debts of $5,000)

Notes payable (including current portion of long-term debt)
$ 40,000

Inventory (FIFO)


Income taxes payable

$ 25,000
Total current assets
Total current liabilities
Fixed Assets

Long Term Liabilities
5-year notes payable



$ 50,000
Total Liabilities
$ 75,000
$ 50,000

Common stock
($1.00 par value; 1,000 shares authorized, issued and outstanding)

$ 1,000


Paid-in capital in excess of par value

$ 49,000

Accumulated depreciation

$ 50,000
Retained earnings
Net fixed assets

Total Shareholders' Equity

Total Liabilities
and shareholders' equity

Income Statement
Years ended December 31, 1998 - 2000
Net sales

Cost of goods sold and operating expenses

Cost of goods sold



Selling and administrative expenses
Operating Income
$ 81,000
Interest on long-term notes
Income before income taxes
$ 68,000
Income taxes
Net income
$ 50,000
Net income per share
(1,000 shares outstanding)
$ 50

1. What is the effect on the Acme Balance Sheet of each of the following transactions? Consider each transaction separately.

a. Acme borrows $20,000, payable in 3 years at 8% interest, to purchase a parcel of land.

b. Acme purchases a parcel of land for $20,000 cash.

c. Acme collects $5,000 of accounts receivable.

d. Acme buys $10,000 of inventory on credit, with the total amount payable in 6 months.

e. Acme pays off $5,000 of a note due in 180 days.

2. What is the value of each of the following and what does each tell you about Acme?

a. Net working capital.

b. Current ratio.

c. Net quick assets.

d. Quick assets ratio.

e. Book value of conunon shares.

f. Asset coverage of debt.

g. Debt/equity ratio.

h. Earnings per share

i. Return on equity

j. Cash flow

3. Value Albega Corporation using the following methods: What are the advantages and disadvantages of each approach?

a. Book value

b. Liquidation value [some assumptions]

c. Cash flow or earnings [some assumptions]

d. Comparable [some assumptions]

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Chapter 3 - Accounting Basics

©2003 Professor Alan R. Palmiter

This page was last updated on: March 21, 2004