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Financial Statement Review
Costa Company
Balance Sheet
Assets
Cash
Accounts Receivable
Equipment (net of depreciation)
Inventory
Total Assets
Liabilities
Accounts Payable
Long-term Debt
Total Liabilities
Stockholder's Equity
Common Stock
Paid in Capital
Retained Earnings
Total Stockholder's Equity
Total Liabilities and Stockholder
Equity
Costa Company
Income Statement
Revenue
Cost of Goods Sold
Gross Profit
Expenses
Depreciation Expense
Insurance
Marketing
Misc Expense
Property Taxes
Salaries
Utilities
Rent
Total Expenses
Net Income
Balance Sheet errors effect the presentation of assets, liabilities, and equity where the Income Statement errors effect the classification of revenues and expenses (Kieso, Weygandt, & Warfield 2008, p 1174). The physical count of inventory shows the asset was overstated by $10,000. The omission of the sales transaction and the check showed the cash to be understated by $5,000 and the retained earnings to be overstated by $5,000. On the Income Statement, the Cost of Goods sold was understated by $410,000, Revenue was understated by $5,000, and Net Income was overstated by $5,000.
In determining profitability, the gross profit rate measures sales over cost of goods sold where profit margin ratio measures sales over all expenses (Kimmel, Weygandt, Kieso, 2007, p 235). The gross profit rate is 66% (412,610/624,400) where the profit margin ratio is 13.5% (84,100/624,400). The company does show profitability, but to determine the actual profitability, one would need to compare with industry average and competitors (Kimmel 2007).
The financial position appears to be good where the current ratio, current assets/current liabilities (cash + accounts receivable + inventory / accounts payable), is 9.3%, showing the ability to pay short-term obligations (McClure, 2011). The long-term debt/noncurrent liabilities (equipment) is 32%, which shows the ability to pay long-term debt in case of solvency. In order to determine how well the inventory is managed, prior year financial statements would need to be compared to current financial statements and evaluated for inventory fall and the rise of cash.
Bibliography
Kieso, D.W. (2008). Intermediate Accounting, 12th ed. Hoboken, NJ: John Wiley & Sons, Inc.
Kimmel, P.W. (2007). Financial Accounting, 4th ed. Hoboken, NJ: John Wiley & Sons, Inc.
McClure, B. (2011, June 12). How to analyze a company's financial position. Retrieved from Investopedia: http://www.investopedia.com/articles/fundamental/04/063004.asp
Financial Accounting Costa Company Income Statement Revenue COGS Gross Profit less Depreciation Expense Insurance Marketing Misc Exp Property Taxes Rent Salaries Utilities Operating Expenses Net Income Balance Sheet Assets Cash Accounts Receivable Inventory Equipment Total Assets Liabilities Accounts Payable Long-Term Debt Total Liabilities Shareholders' Equity Common Stock Paid-In Capital Retained Earnings Total Equity Total L&SE With these two statements, there are two adjustments that have been requested. The $12,000 check cannot be processed yet. The sale needs to be recorded. The problem is that the sale will include inventories that moved, but without knowing what inventories were moved and what the markup would be,
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