It is July 15, 2014. You, a junior accountant at a small accounting firm, go over your notes from your afternoon meeting with Marco Douga. Marco came to your office looking for help with his business, Marco€™s Professional Print Shop Ltd. (MPP). Marco is the owner- manager of MPP, a copy and print shop located in Newville. He recently approached a bank for a loan. At his last meeting with the bank, the bank manager indicated that the loan is almost approved and told Marco that he needed to examine MPP€™s 2013 financial statements. In your file, you have the following information: Exhibit I: Summary notes of the discussion with Marco Douga. Exhibit II: Statement of earnings for the years ended December 31, 2013 and 2012, prepared by the client. Your supervisor is eager to see a draft statement of earnings for the year ended December 31, 2013, based on the information you have thus far.
Exhibit I
Marco re- mortgaged his home for $ 55,000. This money was invested in the share capital of MPP. He also borrowed money from relatives to get the business started. With the money, Marco was able to purchase the computers, printers, copiers, and scanners needed to provide the full range of quality services that he thought his customers would need. Most of the equipment he purchased was used, which greatly reduced start- up costs.
also purchased the furniture and fixtures needed to set up a functional and attractive place for the business. As of December 31, 2013, MPP still owed Marco€™s relatives $ 100,000. Marco personally paid $ 3,800 interest for each of the last two years on the additional mortgage on his home. MPP now needs a loan for two reasons. First, some of Marco€™s relatives want their loans repaid. Since the business is now on its way, Marco thinks MPP can repay some of the money it owes. Second, Marco would like to upgrade some of MPP€™s equipment and obtain some additional pieces of equipment.
Carla records the revenue by adding up the deposits made to the company€™s bank account during the year. Amounts owed by customers are recorded at the time of delivery, on a specially designated sheet of paper kept by the cash register. As cash is received, the related balance on the list is reduced. The accounts receivable balance on December 31 is the total amount on the list on that date. On December 31, 2013, there was $ 16,200 on the list and on December 31, 2012, the amount was $ 11,505. When Carla prepared the statement of earnings, she included a bad debt expense of $ 1,955 in 2012 and $ 2,754 in 2013, the amounts being estimated at 17 percent of the accounts receivable balance.
Marco obtained a corporate credit card on which he makes MPP€™s purchases. Items purchased on the credit card are expensed in the year as long as a statement is received from the credit card company before Carla prepares the year- end statement of earnings. If the statement comes in after that time, the expenses will get picked up the following year. Marco sometimes makes personal purchases on the corporate credit card if he thinks he is too close to his credit limit on his personal credit card. Marco estimates that he charged about $ 4,000 of personal expenses to the corporate credit card in each of the last two years. In addition, Marco has taken about $ 25,000 in cash each year from the business for personal reasons. Carla included these amounts in the payments to employees item on the statement of earnings.
The amount of inventory on hand at the end of each year is counted so that Marco can get a clear idea of what he has on hand. Marco was told that management needed the inventory value on December 31, 2013, and 2012. He determined the value of the inventory by using the list of what was in the stockroom on December 31 and by applying prices from the most recent supplier price lists. On December 31, 2013, MPP had inventory of $ 12,222, and on December 31, 2012, the balance was $ 8,200.
Required:
1. Identify any areas of concern that you may have about the operation of the business, particularly the proper accounting for revenue and expenses, and the control of operations.
2. Prepare a revised statement of earnings based on the information that you gathered during your meeting with Marco.
3. Identify the weaknesses in MPP€™s internal control of operations. What changes would you recommend? Explain.
Exhibit II

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Statement of earnings supplied by the client MARCO'S PROFESSIONAL PRINT SHOP LT STATEMENT OF EARNINGS For the year ended December 31 2013 Sales Cost of merchandise sold Selling, general, and administrative Payments to employees Computers, printers, copiers, and scanners Fumiture and fixtures Advertising and promotion Utilities Interest on loans from relatives Bank charges Rent Bad debt expense Other expenses 2012 260,034 96,212 35,249 83,740 85,000 15,000 29,503 17,900 5,000 1.500 22,000 1,955 12,444 405,503 $360,547 124,984 42,204 90,099 10,000 34,727 18,300 5,000 2,000 22,000 2,754 16,618 368,686 Net loss (8.139 145 469)