Identify errors using GAAP; prepare a classified balance sheet; and calculate the current ratio. An inexperienced accountant has put together a balance sheet for Wings and
Things Inc. The balances shown are at June 30,2011. (LO 1, 3, 5)
| Assets | Liabilities and Equity | ||
| Current assets: | Current liabilities | ||
| Cash | $27000 | Prepaid insurance | $2000 |
| Accounts receivable | 6000 | Interest receivable | 5000 |
| Land | 30000 | Salaries payable | 8000 |
| Supplies | 5000 | Intangible assets | 39000 |
| Operating expenses | 2000 | Accounts payable | 3000 |
| Total current assets | 70000 | Total current liabilities | 57000 |
| Salaries payable | 46000 | Shareholder”s equity | |
| Building | 36000 | Retained earnings | 40000 |
| Equipment | 13000 | Common stock | 62000 |
| Intangible assets | 6000 | Short-term note | 10000 |
| Total noncurrent assets | 101000 | Total shareholders equity | 112000 |
| Total assets | $171000 | Total liabilities and equity | $169000 |
Required
a. Identify the errors in the balance sheet.
b. Using good form, prepare a corrected, classified balance sheet.
c. Calculate the current ratio using the corrected amounts from the balance sheet prepared in b. What does this ratio measure? Discuss the implications of Wings and Things” current ratio.
d. Explain why it is important to properly follow GAAP when preparing financial statements.
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