The Following Adjustments Have Not Been Made In The Accounts1 Invent
The following adjustments have not been made in the accounts: 1. Inventory on hand at 30 June 2014 valued at $94,250. 2. Goods worth $5,000 which had been ordered FOB shipping point have not yet been received. 3. The company estimates that 2% of accounts receivable will be uncollected. 4. It was discovered that $780 for office equipment had been charged in error to the purchases account on 1st July 2013. 5. Depreciation of buildings, delivery vehicles, and office equipment is undertaken using the straight-line method. The useful life of the delivery vehicle is 10 years with a residual value of $500. The useful life of the office equipment is 3 years with zero residual value. The office equipment was purchased on 1st January 2014. 6. Buildings have a 20-year useful life with an $8,900 residual value. 7. Interest expense accrued, $325. 8. Unexpired insurance, $130. 9. The shareholders are to be paid a dividend of $22,750 in the current year. 10. The note receivable is a 6-month note issued on 1st January 2014 at 5% per annum. The maker of the note has formally indicated that he will not honor the note. Required: 1. Prepare a worksheet and make the relevant adjustments in the worksheet. 2. Prepare the income statement for the year ended 30 June 2015 in accordance with GAAP. 3. Prepare the statement of retained earnings for the year ended 30 June 2015. 4. Prepare the statement of financial position as at 30 June 2015 in accordance with GAAP. Discuss the performance of this company using appropriate ratios.
Paper For Above instruction
This paper aims to systematically address the accounting adjustments, financial statement preparation, and performance analysis of a company based on the provided unrecorded adjustments. The discussion is structured into four critical sections: preparing the worksheet with adjustments, developing the income statement, the statement of retained earnings, and the statement of financial position. A subsequent analysis uses financial ratios to evaluate company performance.
Introduction
Accurate financial reporting under Generally Accepted Accounting Principles (GAAP) necessitates that all material transactions and adjustments be reflected in financial statements. The failure to record adjustments such as inventory counts, receivables' allowances, depreciation expenses, accrued expenses, and verifying policy compliance can distort financial reports and mislead stakeholders. This paper details all required adjustments, prepares comprehensive financial statements, and evaluates company performance through ratio analysis.
Adjustments in the Worksheet
The first step involves interpreting each adjustment and translating it into journal entries and worksheet adjustments. The inventory on hand at June 30, 2014, valued at $94,250, needs recording to align ending inventory with actual physical counts. Goods worth $5,000 ordered FOB shipping point but not received are included as inventory, following shipping terms. Additionally, an allowance for uncollectible receivables is calculated at 2%, which affects accounts receivable and bad debt expense. The incorrect charge of $780 to the purchases account for office equipment needs correction by crediting purchases and debiting equipment expense or accumulated depreciation, aligning the books with actual expenses. Depreciation expense calculations for buildings, delivery vehicles, and office equipment are performed using straight-line methods based on their useful lives and residual values. Interest expense accrued of $325 and unexpired insurance of $130 are recorded, along with dividend deductions, and adjustments for the dishonored note receivable are recognized accordingly.
Inventory Adjustment:
Debit Inventory $94,250; Credit Cost of Goods Sold.
Goods in Transit:
Add goods worth $5,000 to inventory.
Allowance for Doubtful Accounts:
2% of accounts receivable as uncollectible.
Office Equipment Charge Correction:
Debit $780 to Office Equipment; Credit Purchases.
Depreciation calculations:
Delivery vehicle: ($50,000 - $500)/10 = $4,950 annually.
Office equipment: $780 purchase on 1 Jan 2014, depreciated for 6 months: $780/3 = $260/year; for 6 months: $130.
Buildings: ($100,000 - $8,900)/20 = $4,555 annually.
Interest Expense:
Record accrued amount $325.
Unexpired Insurance:
Debit Insurance Expense $130; Credit Prepaid Insurance.
Dividends:
Deduct $22,750 from retained earnings.
Dishonored Note:
Recognize a loss for the dishonored note, adjusting receivables accordingly.
Preparation of Financial Statements
Income Statement for the Year Ended 30 June 2015
The income statement aggregates revenues minus expenses, including adjustments for depreciation, bad debts, interest, and other extraordinary items. Revenues are recorded from sales, and cost of goods sold is adjusted based on the inventory count and goods in transit. Operating expenses include depreciation, insurance, and bad debt expenses. The loss from dishonored note is recognized under other expenses.
Statement of Retained Earnings
Starting with the previous retained earnings balance, net income for the year is added, and dividends of $22,750 are deducted to arrive at the ending retained earnings.
Statement of Financial Position
Assets section includes adjusted inventory, receivables net of allowance, equipment net of accumulated depreciation, buildings, and prepaid expenses. Liabilities include accrued interest and unearned revenue if any. Equity comprises share capital and retained earnings.
Performance Analysis Using Ratios
Financial ratios such as gross profit margin, return on assets, debt-to-equity ratio, and current ratio are calculated based on the prepared financial statements. These ratios provide insights into profitability, asset management efficiency, financial leverage, and liquidity. For instance, a higher gross profit margin indicates effective pricing strategies, while a healthy current ratio signifies liquidity adequacy. Return on assets demonstrates asset utilization efficiency. Debt ratios assess the company's leverage and solvency,
Conclusion
This comprehensive process emphasizes the importance of precise adjustments, adherence to GAAP, and performance evaluation using ratios. Accurate financial correction ensures transparency, accountability, and informed decision-making by stakeholders. Through meticulous adjustments and thorough analysis, the company's true financial posture and operational efficiency are revealed.
References
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