Sustainable Company is a grocery wholesaler and is planning to expand its operations. The company has applied for a bank to finance the expansion. Jackson, the company's manager, has prepared the preliminary financial statements. The preliminary financial statements for the year ended December 31, 2021, reported the following:

Current assets $120,000

Current liabilities 80,000

Sales 560,000

Cost of goods sold 252,000

Total operating expenses 106,000

The bank has requested that Sustainable have an independent professional accountant review the financial statements. You have been asked to review the statements and during your review you have discovered the following:

A supplier shipped $15,000 of merchandise inventory to Sustainable on December 31, 2021, FOB shipping point. Jackson indicated that he did not record the inventory for the year ended December 31, 2021, because it was not received until January 2, 2022.

Included in sales and accounts receivable was $8,400 for merchandise ordered by a customer that was packed and in the warehouse. The customer indicated that they might pick it up on January 10, 2022. The customer will pay for the merchandise within 30 days of pickup. The cost of the merchandise was $4,300 and was included in merchandise inventory because the merchandise was still in Sustainable's warehouse.

Sustainable offers its customers a full refund for merchandise returned within 15 days of purchase. Sales recorded from December 17 to December 31 were $26,000. Typically, about 5% of sales are returned.

The returned goods are scrapped and not returned to merchandise inventory. Jackson said that customers had not returned any merchandise from the December 17 to December 31 sales by the company's year end.

Any returns from these sales will be recorded in January when the merchandise is returned, and the company knows the exact amount of the returns.

During the last week of December, the company had run a promotional campaign in the local newspaper. The cost of the campaign was $3,500.

Jackson recorded it as a prepaid expense because he anticipates that January 2022 sales will be higher because of the campaign.

Solution Requirements:

a. Briefly explain how financial statements help the bank with its decision on whether to lend money to Sustainable.

b. Briefly, but concisely, explain why the bank has requested an independent review of the financial statements.

c. Calculate the correct amounts for: 1. current assets, 2. current liabilities, 3. sales, 4. cost of goods sold, and 5. total operating expenses.

Explain each of your corrections. Sustainable Company applies the correct approach to recognize revenue and expenses.