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