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Accounting (Text Only)

26th Edition
Carl Warren + 2 others
ISBN: 9781285743615

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BuyFindarrow_forward

Accounting (Text Only)

26th Edition
Carl Warren + 2 others
ISBN: 9781285743615
Textbook Problem
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Adjustments and financial statements

Several years ago, your brother opened Magna Appliance Repairs. He made a small initial investment and added money from his personal bank account as needed. He withdrew money for living expenses at irregular intervals. As the business grew, he hired an assistant. He is now considering adding more employees, purchasing additional service trucks, and purchasing the building he now rents. To secure funds for the expansion, your brother submitted a loan application to the bank and included the most recent financial statements (which follow) prepared from accounts maintained by a part-time bookkeeper.

Chapter 3, Problem 3.3CP, Adjustments and financial statements Several years ago, your brother opened Magna Appliance Repairs.

After reviewing the financial statements, the loan officer at the bank asked your brother if he used the accrual basis of accounting for revenues and expenses. Your brother responded that he did and that is why he included an account for “Amounts Due from Customers.” The loan officer then asked whether or not the accounts were adjusted prior to the preparation of the statements. Your brother answered that they had not been adjusted.

a. Why do you think the loan officer suspected that the accounts had not been adjusted prior to the preparation of the statements?

b. Indicate possible accounts that might need to be adjusted before an accurate set of financial statements could be prepared.

a.

To determine

Adjustments in financial statements Case Study

Case Summary:

Several years ago, the brother opened MA Repairs with small initial investments. Later for the expansion, the brother submitted a loan application to the bank and included the most recent financial statements, prepared by the part time book keeper. After reviewing the financial statements the loan officer enquired whether accrual basis of accounting was used to record revenues and expenses; then the brother responded that they maintained the books of accounts as per accrual basis of accounting. Further the loan officer enquired whether or not the accounts were adjusted prior to the preparation of the statements. To this the brother replied a no; since the accounts had not been adjusted.

To explain: The reasons for which loan officer suspected that the accounts had not been adjusted prior to the preparation of the statements.

Explanation

There are various indication in the income statement and balance sheet for which the loan officer suspected that the accounts had not been adjusted prior to the preparation of the statements. They are:

1. In income statement all expenses are mentioned as ‘paid’, instead of expenses.

2. Similarly incase of revenues mentioned are huge in amount, and in the balance sheet nothing is mentioned about the unearned revenue. So there lies a suspicion whether this mentioned revenue only belongs to the current year.

3. Nothing mentioned about depreciation and accumulated depreciation in the income statement and balance sheet respectively.

4. No accounts payable (wages payable and more) reported in the balance sheet.

5. Supplies expense for the period is not adjusted from the supplies account.

The accrual basis of accounting states that the revenues can only be reported in the period when they are earned. If it is reported before it’s earned, then it doesn’t signify the actual revenue of the current period...

b.

To determine

To indicate: The possible accounts that might need to be adjusted.

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