This paper is a financial accounting paper. It begins with a fictional company, and asks for a pro forma income statement and balance sheet on that company, given a bunch of accounts. The some errors are revealed, and without having enough information to actually make a decision you have to talk about what you would do about all of these different problems.
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, this cannot be done. If we assume $12,000 in inventory (though this is unlikely), we can process this. Very little changes -- not the size of the firm nor the profits, until we can determine how much inventory we have.
Again, with the physical inventory count, this needs to be reconciled. If anything, the physical inventory count should be lower than the accounting records because there was a sale that was not recorded. So the nature of this discrepancy must be determined. We cannot simply guess as to what happened and then make an adjustment. We actually have to investigate these things and find out, so that are adjustments are accurate. Thus we cannot at this time make changes to the financial statements.
1) The errors make a mess of the income statement and balance sheet. The revenues have been understated. To some extent, COGS has also been understated, but we do not know by how much. Thus, the net income is going to be understated as well as the result of the missing transaction. On the balance sheet, cash is understated. There is also the matter of the inventory discrepancy. I am not going to guess as to what happened, since there are many potential explanations. There could have been more inventory produced than we realized, or some inventory has not yet shipped but was recorded as having been shipped. In any event, we need more information before we can process these transactions accurately.
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