Markus O'Realius is considering the purchase of Caesar Company. The potential seller has provided Markus with a copy of the business's financial statements for the last three years. The financial statements reveal total assets of $350,000 and total liabilities of $150,000. The seller is asking $300,000 for the business. Markus believes that the business is worth only about $200,000, the amount of owners' equity reported on the balance sheet. He has asked your assistance in determining a price to offer for the business.
Write a memo to Markus explaining why he should not interpret the balance sheet as an accurate measure of the value of the business. Describe limitations of financial statements that might mean that the market value of the business was higher (or lower) than the financial statement amounts.
This question was answered on: Jul 11, 2017
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