THE EFFECT OF ADJUSTMENTS ON THE FINANCIAL STATEMENTS (A CONCEPTUAL APPROACH). Don Berthrong, the manager of the local Waldenbooks, is wondering whether adjustments will affect his financial statements. Don’s business has grown steadily for several years, and Don expects it to continue to grow for the next several years at a rate of 5 to 10% per year. Nearly all Don’s sales are for cash. Other than cost of goods sold, which is not affected by adjustments, most of Don’s expenses are for items that require cash outflows (for example, rent on the building, wages, utilities, insurance).

REQUIRED:

1. Would Don’s financial statement be affected significantly by adjustments?

2. Consider all businesses. What kinds of transactions would require adjustments that would have a significant effect on the financial statements? What kinds of businesses would be likely to require these kinds of adjustments?