You're a staff accountant at a local CPA firm. My mess Inc is an important client that has brought in its general ledger in order to have a compilation of its financial statements prepared. As a first step, you have asked a new employee, Sam Klutz, to prepare an income statement and balance sheet. The results of Sams work are presented below. You have been tasked with reviewing Sams work, and prepare a memo to him. The memo should identify each of the errors you find. You do not need to prepare adjusting entries. Explain the proper GAAP treatment for each item?

Balance sheet is below:

Assets:			Liabilities:
Current Assets:			Current Liabilities:
Cash	105,000		Accounts payable	680,000
Accounts receivable	510,000		Payroll taxes payable	55,000
Inventory	850,000		Short-term debt	175,000
Prepaid expenses	40,000		Current portion of long-term debt	100,000
Short-term investments	150,000		Dividends payable	20,000
Deferred tax asset	75,000		Total Current Liabilities	1,030,000
Total Current assets	1,730,000		Noncurrent Liabilities:
Long-term assets:			Accumulated amortization	22,000
Property, plant, and equipment	1,450,000		Long-term debt	1,200,000
Accumulated depreciation	(325,000)		Other long-term liabilities	320,000
Goodwill	145,000		Total Long-Term Liabilities	1,542,000
Other intangibles	210,000		Total Liabilities	2,572,000
Treasury stock	50,000
Total Long-term assets	1,530,000		Stockholders' equity:
			Common stock	100,000
Total assets	3,260,000		Additional paid-in capital	350,000
			Preferred stock, 6%, $100 par, 1,000 shares, redemption date 1/1/25	100,000
			Retained earnings	108,000
			Non-controlling interest	10,000
			Total stockholders' equity	668,000
			Total liabilities and stockholders' equity	3,240,000

Income Statement
Net Sales	3,920,000
Cost of sales	2,720,000
Unrealized gain on inventory	(20,000)
Gross profit	1,220,000
Selling and administrative expense	620,000
Rent	55,000
Depreciation and amortization	132,000
Interest expense	275,000
Income from operations	138,000
Other income:
Gain on sale of building*	385,000
Allowance for uncollectable accounts	40,000
Income before taxes	563,000
Provision for income taxes	152,010
Net income	410,990

*My mess Inc sold its headquarters building to First National Bank for $480,000. The building had an original cost of $225,000 and accumulated depreciation of $130,000. The company is leasing the building from the bank on a 20 year lease that requires annual rental payments of $35,000.