Identifying Problems in Financial Reporting Alma Zorditch started an Internet company and has computed the first year’s profit as shown below. She is distressed. She thought the business had been going fairly well but does not know how she can live on the meager profit the company has earned. She is considering going out of business. Alma doesn’t have any formal training in accounting but once took a 4 hour seminar on the subject. That seminar impressed on her the importance of keeping detailed and accurate records. All the numbers reported below are accurate, but there may be other problems that you can identify.
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Zorditch.com |
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Revenue: |
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Cash collected from customers |
$173,400 |
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Accounts receivable at year end |
18,200 |
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Total revenue |
$191,600 |
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Expenses: |
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Money I contributed to start the firm |
15,000 |
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Purchase of office furnishings & equipment |
28,500 |
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Purchase of office supplies |
1,560 |
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Rent on the office space |
13,000 |
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Loan from the bank |
50,000 |
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Wages paid to employees |
36,200 |
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Advertising and promotion |
24,280 |
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Miscellaneous |
11,300 |
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Total expenses |
179,840 |
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Profit |
$11,760 |
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After talking with Alma, you discover the following additional information.
1. When purchased, the office furnishings and equipment have an expected useful life of 5 years. That estimate still appears reasonable.
2. All office supplies have been used up.
3. The rent amount includes $1,000 rent paid in advance for the first month of Year 2.
4. Half of the advertising and promotion amont is for a campaign that will begin 3 months from now.
Required
A. Study the information given and prepare a new income statement making all changes you believe are appropriate.
B. Wherever your report differs from Alma’s, justify the change you have made.
C. Based on your revised income statement, what advice would you have for Alma? List two or three specific suggestions.