Ch. 4 Accounting Case Study-Choosing Between Two Companies

BAF 3M1
Chapter 4 Case Study Assignment:

Choosing Between Two Companies
Above are shown the balance sheets of two companies. Assume that each of the two
companies has been forced out of business and must sell its assets for cash in order
to pay its debts. Answer all questions in complete sentences.
Questions
1. Are the values shown necessarily the values you could get? Explain. (2 marks)
No, because they often have to claim against the assets. This means that when the
business is selling their assets, it should go to their creditors first. They have a claim in
the assets as they may have provided funds to acquire the assets. As creditors claim
what is owed to them first, businesses must accept any profit or losses afterward. Thus,
the liabilities are the same amount, but the owner’s equity and total assets may change.
In addition, liabilities may increase as businesses may need to add a liquidator’s
expenses to the list. During liquidation, some assets may be sold for less, like furniture
as these goods depreciate with use. However, some assets may appreciate, like land
and buildings, so the value after liquidation could be much higher. Therefore, the values
shown will vary depending on what it is as some may be higher or lower.
BAF 3M1
2. Are there any problems associated with selling the assets? Explain any problems you
see and why they occur. (2 marks)
Certain assets liquidate much more poorly than others. For example, equipment tends
to sell at a lower price than what it was originally bought. This occurs because used
goods must be sold at lower prices or else they cannot compete with the same new
good. A used laptop is often sold at a lower price than a new one of the same model
because people prefer to get a new one over a used one due to the unconscious
assumption that the old one is not as functional and that it has a lower value. Therefore,
selling assets may not always be profitable.
3. Which company would it be better to own? Write a short report (three paragraphs)
explaining your position. Hint: take out your calculator and do some calculations.
(3 marks)
Company B has more assets than Company A, so I initially said Company B.
However, after seeing the owner’s equity, I would rather own Company A as the owner’s
equity is $150 600 which is greater than Company B, which is $111 200. Even though
Company A has $295 400 in assets, they have much less liabilities as they only owe
$144 800. On the other hand, Company B has much more value in assets as it’s worth
$405 100. However, their liabilities adds up to a huge sum of $293 900. Therefore, their
capital is much lower and if given the choice, I would obviously like to be richer so I
would pick Company A.
Also, Company A has more cash than Company B as they have $21 500 in cash
while Company B only has $700. Their bank account is 3 times the amount of their
latter. This demonstrates that the cash flow in Company A is far better than the cash
flow in Company B. With more money in their bank accounts, Company A will be able to
make decisions with more money to fall back on. This gives them more flexibility as it
may act as a safety net.
In addition, when we look at their assets, we come to realize that Company A is
better off during liquidation. For instance, supplies and equipment all liquidate for a
lower value and Company B has $44 900 in assets which includes their supplies and
equipment. These assets tend to sell for lower so they probably will not receive the full
$44 900. On the other hand, Company A has less supplies and equipment assets which
displays that they are not as dependent on the value of theses assets for their company.
Company B is also reliant on accounts receivable as their asset value as it is $59
500. While that amount may eventually be in their bank account, it is not certain that
people will pay them back which is thus risky. On the other hand, Company A is not
reliant on accounts receivable for asset value which is thus less risky.
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BAF 3M1

Chapter 4 Case Study Assignment:

COMMUNICATION: /7 DUE TO D2L DROPBOX

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