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.

Magna Appliance Repairs Income Statement For the Year Ended October 31, 2016 Service revenue . . . . . . . . . . . . . . . . $675,000 Less: Rent paid . . . . . . . . . . . . . . . . . $187,200 Wages paid . . . . . . . . . . . . . . . 148,500 Supplies paid . . . . . . . . . . . . . . 42,000 Utilities paid . . . . . . . . . . . . . . 39,000 Insurance paid . . . . . . . . . . . . 21,600 Miscellaneous payments . . . 54,600 492,900 Net income . . . . . . . . . . . . . . . . . . . . . $ 182,100 Magna Appliance Repairs Balance Sheet October 31, 2016 Assets Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 95,400 Amounts due from customers . . . 112,500 Truck . . . . . . . . . . . . . . . . . . . . . . . . . . 332,100 Total assets . . . . . . . . . . . . . . . . . . . . . $540,000 Equities Common Stock . . . . . . . . . . . . . . . . . 100,000 Retained Earnings . . . . . . . . . . . . . . 440,000 Total equities . . . . . . . . . . . . . . . . . . . $540,000 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.