Introduction

Please describe the effect of the errors on the income statement and balance sheet.

The cash goes up, inventory goes down, sales goes up and cogs goes up (see arrows on the spreadsheet).

Is this company profitable? How do you determine whether or not this is the case.

You review operating income on the income statement

Yes, the firm is profitable.

Is the company in a solid financial position, i.e. comment on balance sheet.

Yes, they have assets that are profitable operatings (retained earnings) versus contributions from owners (stock and paid in capital) and debt (liabilities). They are in good position, with small levels of debt

Attached is the trial balance for the firm for 2012 and the related Income Statement and Balance Sheet prior to adjusting for the two errors. The impact of the two errors is noted in the revised Income Statement and Balance Sheet, also in Excel (attached). The two errors are discussed below.

Error one: inventory count wrong

The trial balance shows that inventory is $80,500. When inventory was counted they found $84,200. So, inventory goes up by $4,200 and COGS (inventory expense) goes down.

These changes are highlighted with the "call out" arrows on the Excel sheet attached.

The balance sheet is going up by the $4,200 write down in inventory. The income statement is going up by the decrease in expenses (COGS).

Error two: missing sale and payment

A sale is missing. The sale was not recorded and the cash from the customer for that sale is also not recorded (or the sale would be there!). So, we record the cash and the revenue that is missing. To record the check, cash must be increased and sales must be increased. The call out arrows on excel show the changes as a result of recording this check and the related sale.

The balance sheet is going up by the $15,000 and the