Conner and Martin appreciate your involvement in all aspects of the companys 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 the CM Corporation Balance Sheet containing CM2s 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 the following:

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

Prepaid rent of $9,500 for 2013 was expensed at the end of 2012.

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.

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

Action

Prepare a worksheet. Ignore income taxes.

CM Corporation

Balance Sheet

December 31, 2011

Assets

%

Current assets

Cash and cash equivalents

$120,670

Accounts receivable

576,454

Allowance for doubtful accounts

(84,975)

Inventory

847,460

Prepaid expenses

18,841

Other current assets

4,612

Total current assets

1,483,062

0.65

Property, plant and equipment

1,100,105

Accumulated depreciation

(591,965)

Net fixed assets

508,140

0.22

Other Assets

Investments

100,150

Goodwill

87,740

Other intangible assets

108,700

296,590

0.13

Total assets

$2,287,792

1.00

Liabilities and Stockholders' Equity

Current liabilities

Accounts payable

$315,395

Dividends payable

48,000

Unearned revenue

73,500

Accrued liabilities

408,303

Total current liabilities

845,198

0.37

Long-term liabilities

278,525

0.12

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

0

Retained earnings

539,069

Less common stock in treasury, at cost

(400,000)

Total stockholders' equity

1,164,069

0.51

Total liabilities and stockholders' equity

$2,287,792

1.00

CM Corporation

Income Statement

For the Years Ended

2011

%

Revenue

Net product sales revenue

$8,984,852

Service revenue

975,860

Total revenue

9,960,712

1.00

Cost of goods sold

Products

5,356,018

Services

445,637

Total cost of goods sold

5,801,655

Gross profit

4,159,057

0.42

Operating expenses

Advertising

123,869

Bad debt expense

28,640

Depreciation and amortization

125,500

Dues and subscriptions

19,730

Equipment expenses

64,781

Insurance

90,144

Legal and accounting fees

87,650

Miscellaneous

12,010

Office expense

214,138

Payroll taxes

131,170

Property taxes

93,400

Repair and maintenance

37,543

Research and development

278,000

Telephone

21,085

Travel and entertainment

60,402

Utilities

37,876

Wages - Employees

954,688

Wages - Officers

650,000

Total operating expenses

3,030,626

0.30

Income (loss) from operations

1,128,431

0.11

Other income and (expense)

Interest expense

(27,800)

Gain (loss) on disposal of assets

(26,950)

Investment income

9,230

Total other income (expense)

(45,520)

Income (loss) before income taxes

1,082,911

0.11

Income tax (expense) benefit

(379,019)

Net income (loss)

$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)

$703,892

Adjustments to reconcile net income

to Net cash provided from operating activities

Depreciation and amortization

125,500

Net (gain) loss on assets

26,950

(Increase) decrease in accounts receivable

(188,643)

Increase (decrease) in allowance for doubtful accounts

(7,564)

(Increase) decrease in inventory

(125,360)

(Increase) decrease in prepaid expenses

(14,650)

(Increase) decrease in other current assets

4,612

Increase (decrease) in accounts payable

263,400

Increase (decrease) in unearned revenue

46,820

Increase (decrease) in interest payable

3,456

Increase (decrease) in wages and payroll taxes payable

(5,478)

Increase (decrease) in income taxes payable

(278,950)

Total adjustments

(149,907)

Net cash provided by operating activities

553,985

Cash flows from investing activities

(Purchase) of fixed assets

(274,300)

(Purchase) of intangibles

0

(Purchase) of investments

(12,650)

Net cash used by investing activities

(286,950)

Cash flows from financing activities

Dividends paid

(32,000)

Net cash used by financing activities

(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 12/31/12			2013 Projections			Proposed Trial Balance 2013			Proposed ajes			Forcasted Trial Bal 12/31/13
Balance Sheet Accounts	Debit		Credit	Debit	#	Credit	Debit		Credit	Debit	JE#	Credit	Debit		Credit
Cash and cash equivalents	72,337			170,000			242,337						242,337
Accounts Receivable	782,080			133,195			915,275						915,275
Allowance for doubtful accounts			102,470			16,530			119,000						119,000
Inventory	1,340,902			404,683			1,745,585						1,745,585
Prepaid expenses	17,174						17,174						17,174
Other Current Assets	16,063						16,063						16,063
Property, Plant and Equipment	1,560,192					365,000	1,195,192						1,195,192
Accum Depr			739,085	205,500		132,500			666,085						666,085
Investments	140,186						140,186						140,186
Goodwill	397,740						397,740						397,740
Other intangible assets	253,900					5,000	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	80,000					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	400,000						400,000						400,000
Retained Earnings			802,557						802,557						802,557
Dividends				115,000			115,000						115,000
Net Income			0						331,500						331,500
	4,980,574		4,980,574				5,433,452		5,433,452				5,433,452		5,433,452
Income Statement Accounts
Product sales revenue						9,100,000			9,100,000						9,100,000
Service revenue						975,000			975,000						975,000
Product sales returns & discounts				500,000			500,000						500,000
Products cost of goods sold				5,400,000			5,400,000						5,400,000
Service cost of goods sold				450,000			450,000						450,000
Bad debt expense				20,000			20,000						20,000
Depreciation and amortization				137,500			137,500						137,500
Gain/loss on disposal						10,000			10,000						10,000
Income tax expense				178,500			178,500						178,500
Insurance				80,000			80,000						80,000
Interest expense				48,000			48,000						48,000
Investment income						10,500			10,500						10,500
Other operating expenses				900,000			900,000						900,000
Research and development				200,000			200,000						200,000
Wages- employees				1,050,000			1,050,000						1,050,000
Wages - Officers				800,000			800,000						800,000
Net (Income) Loss			0						(331,500)						(331,500)
	0		0				9,764,000		9,764,000	0		0	9,764,000		9,764,000
				10,872,378		10,872,378
						0