Closeup Manufacturing

Closeup Manufacturing
Income statement for the years ended 31 June
	2019	2018	2017
Sales revenue	RM1,063,360	RM987,264	RM959,104
Cost of goods sold	740,192	688,768	668,800
Gross profit	323,168	298,496	290,304
Selling and general expenses	213,888	207,616	201,856
Depreciation expense	2,168	7,040	6,272
Warranty expense	9,600	8,320	7,040
Bad debt expense	16,875	10,880	11,520
Legal fees	21,664	1,792	1,536
Interes expense	14,080	16,256	17,280
Income before taxes	44,893	46,592	44,800
Income tax expense	9,216	13,952	13,312
Net income	35,677	32,640	31,488
Dividends paid	16,000	16,000	12,800

Closeup Manufacturing
Schedule of gross profit for the years ended 31 June
	2019	2018	2017
Model WK211
Sales	RM696,000	RM631,296	RM613,248
Cost of goods sold:
Materials	262,560	234,880	227,968
Labour	154,944	137,472	133,504
Overhead	88,192	84,992	84,736
Standard cost variances	-2,944	640	-512
Depreciation	8,960	8,960	8,704
	511,712	466,944	454,400
Gross profit	168,960	164,352	158,848

Closeup Manufacturing
Schedule of gross profit for the years ended 31 June
	2019	2018	2017
Model WK211X
Sales	RM367,360	RM355,968	RM345,856
Cost of goods sold:
Materials	113,664	111,104	107,520
Labour	68,736	68,096	64,640
Overhead	38,528	35,328	34,560
Standard cost variances	-2,304	-384	256
Depreciation	7,808	7,680	7,424
	228,480	221,824	214,400
Gross profit	138,880	134,144	131,456

Supplementary information related to the company and its operation:

1. All sales are on credit, with net 30 days term.
2. A one-year warranty covering manufacturing defects is offered by the company.
3. A periodic inventory system is used and year-end inventory is determined by a physical count on 31 June. The physical count for 2019 has been conducted on the planned date and was observed by the auditors. Various test counts have been executed by the auditors although additional audits test involving inventory has not been done.
4. The average interest rate on all debt is 8%. Annual interest and principal payments are due each January. 1.
5. The overhead standards shown exclude depreciation. The inventory carrying cost for finished goods was determined by adding a depreciation factor to the material-labour-overhead standard.

Required:

Examine the companys financial statements. Determine the potential accounting issues or operational problems faced by the Closeup Manufacturing in the year ended 31 June 2019. For each issue or problem, report:

• The accounts with irregular balances and the reasoning of such evaluation.
• The possible causes that could have caused the irregularity.
• Specific elements of the business that should be given extra consideration during the 2019 audit.

2017 RM 9,856 84,224 (7,680) 36,608 Closeup Manufacturing Balance Sheet as at 31 June 2019 2018 Cash RM 46,208 RM 21,120 Accounts receivable 133,440 86,272 Bad debt allowance (13,035) (7,680) Inventories: Raw materials 41,216 38,912 Finished goods: WK211 97,664 94,464 WK211x 51,840 49,920 Prepaid expenses 1,024 256 Total current assets 358,357 283,264 Land 57,600 57,600 Building and equipment 238,720 237,824 Accumulated depreciation (115,960) (101,120) Total assets 538,717 477,568 90,880 47,872 512 262,272 57,600 234,368 (78,080) 476,160 Accounts payable Taxes payable Accrued interest Warranty liability Current portion of long-term debt Total current liabilities Long-term debt Total liabilities Paid-in capital Retained earnings Total stockholder' equity Total liabilities and equity 141,696 2,048 0 5,120 12,800 161,664 166,400 328,064 70,400 140,253 210,653 538,717 86,400 1,792 1,280 5,120 12,800 107,392 179,200 286,592 70,400 120,576 190.976 477,568 88,832 1,664 1,408 5,120 12,800 109,824 192,000 301,824 70,400 103,936 174,336 476,160 2017 RM 9,856 84,224 (7,680) 36,608 Closeup Manufacturing Balance Sheet as at 31 June 2019 2018 Cash RM 46,208 RM 21,120 Accounts receivable 133,440 86,272 Bad debt allowance (13,035) (7,680) Inventories: Raw materials 41,216 38,912 Finished goods: WK211 97,664 94,464 WK211x 51,840 49,920 Prepaid expenses 1,024 256 Total current assets 358,357 283,264 Land 57,600 57,600 Building and equipment 238,720 237,824 Accumulated depreciation (115,960) (101,120) Total assets 538,717 477,568 90,880 47,872 512 262,272 57,600 234,368 (78,080) 476,160 Accounts payable Taxes payable Accrued interest Warranty liability Current portion of long-term debt Total current liabilities Long-term debt Total liabilities Paid-in capital Retained earnings Total stockholder' equity Total liabilities and equity 141,696 2,048 0 5,120 12,800 161,664 166,400 328,064 70,400 140,253 210,653 538,717 86,400 1,792 1,280 5,120 12,800 107,392 179,200 286,592 70,400 120,576 190.976 477,568 88,832 1,664 1,408 5,120 12,800 109,824 192,000 301,824 70,400 103,936 174,336 476,160