1. The balance sheet does not set forth the capital stock account at par value, which would define some level of minimum legal liability. 2. The balance sheet does not include any accrual for either state or federal income taxes even though the partnership reported pretax income.

FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
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Answer 1 & 2 only. 

Exercise 1 (LO 1) Characteristics of a partnership's financial statements. A client
of yours is considering investing in a partnership and has been analyzing the financial state-
ments of the partnership. Their analysis has resulted in the following observations that that they
are hoping you could address:
1. The balance sheet does not set forth the capital stock account at par value, which would
define some level of minimum legal liability.
2. The balance sheet does not include any accrual for either state or federal income taxes even
though the partnership reported pretax income.
3. In analyzing the income statement, your client noted that no salaries to partners were listed as
an expense even though they know that existing partners received a salary from the partnership.
4. Interest on a partner's capital balance is used as a means of allocating profits; however, no
such interest appears on the income statement.
Provide a response to each of your client's observations regarding the partnership's financial
statements.
Transcribed Image Text:Exercise 1 (LO 1) Characteristics of a partnership's financial statements. A client of yours is considering investing in a partnership and has been analyzing the financial state- ments of the partnership. Their analysis has resulted in the following observations that that they are hoping you could address: 1. The balance sheet does not set forth the capital stock account at par value, which would define some level of minimum legal liability. 2. The balance sheet does not include any accrual for either state or federal income taxes even though the partnership reported pretax income. 3. In analyzing the income statement, your client noted that no salaries to partners were listed as an expense even though they know that existing partners received a salary from the partnership. 4. Interest on a partner's capital balance is used as a means of allocating profits; however, no such interest appears on the income statement. Provide a response to each of your client's observations regarding the partnership's financial statements.
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