Accounting in Action: CM2

Conner and Martin have appreciated your involvement in all aspects of the company?s operations throughout the year. They now want you to take the accounting records over these past three years and give them advice on any errors and/or corrections you may find. You tell them this may take a while, and you ask if they can give you a few days to conduct your review. They agree.

Access File 4a on the website (Excel File) containing CM2 ?s financial statements for 2011, 2012, and the forecasted trial balance and financials for 2013. After carefully examining three years of information, you come up with thefollowing:

(1) Ending inventory in 2011 was overstated by $32,000 as a result of errors in the inventory count-sheet footings.

(2) Prepaid rent of $9,500 for 2013 was expensed at the end of 20012.

(3) Depreciation was understated in 2011, 2012, and 2013. This was due to a piece of equipment costing $110,000 which was purchased in 2011 and was expected to have a five-year life and no residual value. Instead of using straight-line depreciation for the expense in 2011, the whole $110,000 was expensed.

(4) Employee wages of $26,000, earned at the end of 2011, were not accrued but were expensed in 2012 when they were paid.

Instructions Prepare a worksheet to correct income and balance sheet errors. Ignore income taxes. Like the given figure in the picture.

\fCM Corporation Balance Sheet December 31, 2011 Assets Current assets Cash and cash equivalents Accounts receivable Allowance for doubtful accounts Inventory Prepaid expenses Other current assets Total current assets Property, plant and equipment Accumulated depreciation Net fixed assets Other Assets Investments Goodwill Other intangible assets % $120,670 576,454 (84,975) 847,460 18,841 4,612 1,483,062 0.65 508,140 0.22 296,590 0.13 $2,287,792 1.00 845,198 0.37 278,525 0.12 1,100,105 (591,965) 100,150 87,740 108,700 Total assets Liabilities and Stockholders' Equity Current liabilities Accounts payable Dividends payable Unearned revenue Accrued liabilities Total current liabilities $315,395 48,000 73,500 408,303 Long-term liabilities Stockholders' equity Contributed capital Common stock, $2 par value (4,000,000 shares authorized),460,000 shares issued of which 440,000 shares are outstanding 920,000 Paid-in capital common stock 105,000 Total contributed capital 1,025,000 Accumulated other comprehensive income Retained earnings Less common stock in treasury, at cost Total stockholders' equity 0 539,069 (400,000) Total liabilities and stockholders' equity 1,164,069 0.51 $2,287,792 1.00 CM Corporation Income Statement For the Years Ended 2011 Revenue Net product sales revenue Service revenue Total revenue Cost of goods sold Products Services Total cost of goods sold Gross profit Operating expenses Advertising Bad debt expense Depreciation and amortization Dues and subscriptions Equipment expenses Insurance Legal and accounting fees Miscellaneous Office expense Payroll taxes Property taxes Repair and maintenance Research and development Telephone Travel and entertainment Utilities Wages - Employees Wages - Officers Total operating expenses $8,984,852 975,860 9,960,712 1.00 5,801,655 4,159,057 0.42 3,030,626 0.30 1,128,431 0.11 5,356,018 445,637 123,869 28,640 125,500 19,730 64,781 90,144 87,650 12,010 214,138 131,170 93,400 37,543 278,000 21,085 60,402 37,876 954,688 650,000 Income (loss) from operations Other income and (expense) Interest expense Gain (loss) on disposal of assets Investment income % (27,800) (26,950) 9,230 Total other income (expense) Income (loss) before income taxes Income tax (expense) benefit Net income (loss) (45,520) 1,082,911 (379,019) 0.11 $703,892 0.07 CM Corporation Statement of Cash Flows ( Indirect Method ) For the Years Ended 2011 Cash flows from operating activities Net income (loss) Adjustments to reconcile net income to Net cash provided from operating activities Depreciation and amortization Net (gain) loss on assets (Increase) decrease in accounts receivable Increase (decrease) in allowance for doubtful accounts (Increase) decrease in inventory (Increase) decrease in prepaid expenses (Increase) decrease in other current assets Increase (decrease) in accounts payable Increase (decrease) in unearned revenue Increase (decrease) in interest payable Increase (decrease) in wages and payroll taxes payable Increase (decrease) in income taxes payable $703,892 125,500 26,950 (188,643) (7,564) (125,360) (14,650) 4,612 263,400 46,820 3,456 (5,478) (278,950) Total adjustments Net cash provided by operating activities (149,907) 553,985 Cash flows from investing activities (Purchase) of fixed assets (Purchase) of intangibles (Purchase) of investments Net cash used by investing activities (274,300) 0 (12,650) (286,950) Cash flows from financing activities Dividends paid Net cash used by financing activities (32,000) (32,000) Net increase (decrease) in cash and cash equivalents 235,035 Cash and cash equivalents at beginning of period (114,365) Cash and cash equivalents at end of period $120,670 General Ledger Account Names Balance Sheet Accounts Cash and cash equivalents Accounts Receivable Balance 12/31/12 Debit Credit 72,337 782,080 Allowance for doubtful accounts Inventory Prepaid expenses Other Current Assets Property, Plant and Equipment 2013 Projections Debit # Credit 170,000 133,195 102,470 1,340,902 404,683 16,063 1,560,192 365,000 739,085 Investments 140,186 Goodwill 397,740 Other intangible assets 253,900 205,500 Proposed ajes Debit JE# Credit Forcasted Trial Bal 12/31/13 Debit Credit 242,337 915,275 16,530 17,174 Accum Depr Proposed Trial Balance 2013 Debit Credit 242,337 119,000 1,745,585 1,745,585 17,174 17,174 16,063 16,063 1,195,192 1,195,192 132,500 5,000 915,275 119,000 666,085 666,085 140,186 140,186 397,740 397,740 248,900 248,900 Accounts Payable 1,169,343 30,657 1,200,000 1,200,000 Dividends payable 110,000 5,000 115,000 115,000 Accrued liabilities 340,759 187,991 528,750 528,750 Unearned revenue 102,860 34,200 137,060 137,060 Long term liabilities 588,500 508,500 508,500 Common Stock 920,000 920,000 920,000 Paid-in capital common stock 105,000 105,000 105,000 Treasury Stock 80,000 400,000 Retained Earnings 400,000 802,557 Dividends 115,000 Net Income 5,433,452 Income Statement Accounts Product sales revenue Service revenue Products cost of goods sold Service cost of goods sold Bad debt expense Depreciation and amortization 331,500 5,433,452 9,100,000 9,100,000 975,000 975,000 5,433,452 975,000 500,000 500,000 5,400,000 5,400,000 5,400,000 450,000 450,000 450,000 20,000 20,000 20,000 137,500 137,500 137,500 10,000 10,000 10,000 178,500 178,500 178,500 Insurance 80,000 80,000 80,000 Interest expense 48,000 48,000 Investment income 10,500 Other operating expenses 900,000 Research and development Wages- employees Wages - Officers Net (Income) Loss 0 48,000 10,500 10,500 900,000 900,000 200,000 200,000 200,000 1,050,000 1,050,000 1,050,000 800,000 800,000 0 800,000 (331,500) 0 9,764,000 10,872,378 10,872,378 0 5,433,452 9,100,000 500,000 Gain/loss on disposal Income tax expense 115,000 331,500 4,980,574 Product sales returns & discounts 802,557 115,000 0 4,980,574 400,000 802,557 9,764,000 (331,500) 0 0 9,764,000 9,764,000 CM Corporation Balance Sheet Remember the 2013 column is management's projection December 31, 2013 December 31, 2012 Assets Current assets Cash and cash equivalents Accounts receivable Allowance for doubtful accounts Inventory Prepaid expenses Other current assets Total current assets Property, plant and equipment Accumulated depreciation Net fixed assets Other Assets Investments Goodwill Other intangible assets $242,337 915,275 (119,000) 1,745,585 17,174 16,063 $72,337 782,080 (102,470) 1,340,902 17,174 16,063 2,817,434 0.68 1,195,192 (666,085) 1,560,192 (739,085) 529,107 0.13 140,186 397,740 248,900 Total assets 2,126,086 0.57 821,107 0.22 140,186 397,740 253,900 786,826 0.19 791,826 0.21 $4,133,367 1.00 $3,739,019 1.00 Liabilities and Stockholders' Equity Current liabilities Accounts payable Dividends payable Unearned revenue Accrued liabilities Total current liabilities $1,200,000 115,000 137,060 528,750 Long-term liabilities $1,169,343 110,000 102,860 340,759 1,980,810 0.48 1,722,962 0.46 508,500 0.12 588,500 0.16 Stockholders' equity Contributed capital Common stock, $2 par value (4,000,000 shares authorized),460,000 shares issued of which 440,000 shares are outstanding 920,000 Paid-in capital common stock 105,000 Total contributed capital 1,025,000 Accumulated other comprehensive income Retained earnings Less common stock in treasury, at cost Total stockholders' equity 920,000 105,000 1,025,000 0 1,019,057 0 802,557 (400,000) Total liabilities and stockholders' equity (400,000) 1,644,057 0.40 1,427,557 0.38 $4,133,367 1.00 $3,739,019 1.00 Remember the 2013 column is management's projection CM Corporation Income Statement For the Years Ended December 31, 2013 Revenue Net product sales revenue Service revenue Total revenue Cost of goods sold Products Services Total cost of goods sold Gross profit Operating expenses Bad debt expense Depreciation and amortization Insurance Other operating expenses Research and development Wages - Employees Wages - Officers Total operating expenses $8,600,000 975,000 $9,575,000 5,400,000 450,000 5,850,000 3,725,000 Income (loss) before income taxes Income tax (expense) benefit Net income (loss) 0.90 0.10 1.00 $8,732,684 1,261,645 0.56 0.05 5,315,848 570,811 $9,994,329 0.91 0.13 1.04 0.56 0.06 5,886,659 4,107,670 0.39 20,000 137,500 80,000 900,000 200,000 1,050,000 800,000 Income (loss) from operations Other income and (expense) Interest expense Gain (loss) on disposal of assets Investment income Total other income (expense) December 31, 2012 0.41 17,508 147,120 85,744 1,063,741 470,680 998,545 710,000 NOTE: some of the operating expenses detailed in Chapter 3 Excel files have been combined herein as "other operating expenses" 3,187,500 0.33 3,493,338 0.35 537,500 0.06 614,332 0.06 (48,000) 10,000 10,500 (52,965) 0 13,230 (27,500) (39,735) 510,000 (178,500) 574,597 (201,109) $331,500 0.03 $373,488 0.04 CM Corporation Statement of Retained Earnings For the Years Ended December 31, 2013 December 31, 2012 Beginning balance $802,557 $539,069 Net income (loss) 331,500 373,488 (115,000) (110,000) $1,019,057 $802,557 Dividends Ending balance Remember the 2013 column is management's projection CM Corporation Statement of Cash Flows ( Indirect Method ) For the Years Ended December 31, 2013 Cash flows from operating activities Net income (loss) Adjustments to reconcile net income to Net cash provided from operating activities Depreciation and amortization Net (gain) loss on assets (Increase) decrease in accounts receivable Increase (decrease) in allowance for doubtful accounts (Increase) decrease in inventory (Increase) decrease in prepaid expenses (Increase) decrease in other current assets Increase (decrease) in accounts payable Increase (decrease) in unearned revenue Increase (decrease) in accrued liabilities Total adjustments Net cash provided by operating activities Cash flows from investing activities Proceeds from sale (purchase) of fixed assets (Purchase) of intangibles (Purchase) of investments Net cash used by investing activities Cash flows from financing activities Proceeds from (payment on) long-term liabilities Dividends paid Net cash used by financing activities Net increase (decrease) in cash and cash equivalents Cash and cash equivalents at beginning of period Cash and cash equivalents at end of period December 31, 2012 $331,500 $373,488 137,500 (10,000) (133,195) 16,530 (404,683) 0 0 30,657 34,200 187,991 147,120 0 (205,626) 17,495 (493,442) 1,667 (11,451) 853,948 29,360 (67,544) (141,000) 271,527 190,500 645,015 169,500 169,500 (460,087) (455,200) (40,036) (955,323) (80,000) (110,000) (190,000) 309,975 (48,000) 261,975 170,000 (48,333) 72,337 120,670 $242,337 $72,337