#1 - Case Problem - Identify objective of financial reporting, elements of the financial statements, and revenue and expense recognition. I Endemic Company is a grocery wholesaler and is planning to expand its operations. The company has applied for a bank to finance the expansion. Sanderson, the company's manager, has prepared the preliminary financial statements. The preliminary financial statements for the year ended December 31, 2021, reported the following: Current assets Current liabilities Sales $150,000 91,600 603,000 270,000 110,250 Cost of goods sold Total operating expenses The bank has requested that Endemic have an independent professional accountant review the financial statements. You have been asked to review the statements and during your review you have discovered the following: 1. A supplier shipped $18,000 of merchandise inventory to Endemic on December 31, 2021, FOB shipping point. Sanderson indicated that he did not record the inventory for the year ended December 31, 2021, because it was not received until January 2, 2022. 2. Included in sales and accounts receivable was $8,850 for merchandise ordered by a customer that was packed and in the warehouse. The customer indicated that they might pick it up on January 10, 2022. The customer will pay for the merchandise within 30 days of pickup. The cost of the merchandise was included in merchandise inventory because the merchandise was still in Endemic's warehouse. 3. Endemic offers its customers a full refund for merchandise returned within 15 days of purchase. Sales recorded from December 17 to December 31 were $30,000. Typically, about 5% of sales are returned. The returned goods are scrapped and not returned to merchandise inventory. Sanderson said that customers had not returned any merchandise from the December 17 to December 31 sales by the company's year end. Any returns from these sales will be recorded in January when the merchandise is returned, and the company knows the exact amount of the returns. 4. During the last week of December, the company had run a promotional campaign in the local newspaper. The cost of the campaign was $4,300. Sanderson recorded it as a prepaid expense because he anticipates that January 2022 sales will be higher because of the campaign. Solution Requirements: A. Briefly explain how financial statements help the bank with its decision on whet to lend money to Endemic. B. Briefly, but concisely, explain why the bank has requested an independent revie of the financial statements. C. Calculate the correct amounts for: a. Current assets, b. Current liabilities, c. Sales, d. Cost of goods sold, and e. Total operating expenses. Explain each of your corrections. Endemic Company applies the correct approach to recognize revenue and expenses