Financial Accounting Costa Company Income Statement Revenue Case Study

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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.

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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.

2) This company is profitable. Its net income was $89,100. The adjustments are not going to render….....

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