SA 3-5 Adjustments and financial statements Several years ago, your brother opened Niagara Appliance Repairs. He made a small initial investment and added money from his personal bank account as needed. He withdrew money for living expenses at irregular intervals. As the business grew, he hired an assistant. He is now considering adding more employees, purchasing addi- tional service trucks, and purchasing the building he now rents. To secure funds for the expansion, your brother submitted a loan application to the bank and included the most recent financial statements (shown below) prepared from accounts maintained by a part-time bookkeeper. Niagara Appliance Repairs Income Statement For the Year Ended December 31, 2015 Service revenue $112.500 Less Rent paid $31.200 Wages paid 24.750 Miscellaneous payments 9.100 Supplies paid 7.000 Utilities paid 6.500 Insurance paid 3.600 Total expenses 82.150 Net income $ 30.350 I Niagara Appliance Repairs Balance Sheet December 31, 2015 Assets Cash $15.900 Amounts due from customers 18.750 Truck 55.350 Total assets $ 90.000 Equities Owner's capital $ 90,000 After reviewing the financial statements, the loan officer at the bank asked your brother whether he used the accrual basis of accounting for revenues and expenses. Your brother responded that he did, which is why he included an account for "Amounts Due from Customers." The loan officer then asked whether the accounts were adjusted prior to the preparation of the statements. Your brother answered that they had not been adjusted. a. Why do you think the loan officer suspected that the accounts had not been adjusted prior to the preparation of the statements? b. Indicate the accounts that might need to be adjusted before an accurate set of finan- cial statements can be prepared. c. Why did the loan officer ask your brother whether he used the accrual basis of accounting for revenues and expenses? Why would it have been important to use this method