A good friend of yours inherited the family business (a local grocery store) and just received a set of financial statements (Balance Sheet and Income statement). These were prepared by the same accountant who has done the accounting for years. Your friend has forwarded the statements to you along with a note expressing her concerns about certain items on the statements.

Shes asking you to go to the accountant and find out whats wrong with the books.

Directions:

1. Read through the letter from Jill.

Using the statements provided explain to Jill why the reports are properly prepared under US GAAP. Include the accounting assumption, principle, or constraint as applicable in your answer.

September 12, 20XX

Dear Jack,

It was good talking to you yesterday. Can you believe the summer is over? Here are the copies of reports on my familys grocery store I just received from the accountant. I sure need your help because I can never understand what those bean counters are trying to say.

Ive put together a list of some issues my brothers have with what the accountant is doing. We think there may be some BIG problems with the books. Could you please talk to him and find out what is happening?

1. What happened to the cash? How can we have net income and yet have the cash decrease? Is someone pocketing our cash?

2. What about all the investments my father owned? I know he bought a variety of stocks with money he made from the business. Why dont any investments show up on these reports?

3. I also know our store is located on very valuable property. The land was appraised at over $500,000 just six months ago. Why does the accountant only show it at $50,000? Did he just drop a 0?

4. One of the large expenses on the income statement is for depreciation, but we never authorized a check for that amount. And all our equipment is paid for, so this really looks bad.

5. What about the mortgage owed to the bank? We make monthly payments of $750 and there are 10 years left to pay. The amount on the report is lower than the total remaining payments, so this needs correcting.

2018 2017 Sales $948,000$755,000 Cost of Sales 525,000 422,000 Gross Profit 423,000 333,000 Operating Expenses: Advertising 43,500 31,000 Depreciation 20,000 20,000 Legal & Accounting 10,000 9,000 Miscellaneous 1,500 2,000 Repairs & Maintenance 9,000 14,000 Salaries & Wages 148,500 158,000 Taxes Payroll 22,000 23,875 Taxes-Property 6,5009,500 Total Expenses 261,000 267,375 Income before Taxes 162000 65,625 Provision for Taxes 58,500(23,625) NET INCOME $103,500 $42,000 December 31, 2018 and 2017 2018 2017 Cash Accounts Receivable Inventory Prepaid Expenses $125,000 $189,000 90,000 100,000 413,000 362,000 5,000 Total Current Assets 630,000 656,000 Property, Plant & Eaiunment Less: Accumulated Depreciation 160,000 150,000 (130,000) (110,000) 30,000 40,000 Land 0,000 50,000 TOTAL ASSETS $710,000 $746,000 Accounts Payable ncome Taxes Payable Current Portion of Long-Term Debt $106,000 $260,375 58,500 23,625 63,062 211,114 347,062 Total Current Liabilities Long-Term Debt (Mortgage) 74,88678950 Total Liabilities 286,000 426,000 Common Stock 50,000 50,000 Additional Paid-in Capital 10,000 10,000 Case modified from Activity 15 1997 Prentice Hall, Inc. Retained Earnings 364,000 260,000 $710,000 $746,000 TOTAL LIABILITIES & SHAREHOLDERS' EQUITY