Why do you think the loan officer suspected that the accounts had not been adjusted prior to the… 1 answer below »

Several years ago, your father opened Derby Television Repair Inc. 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 additional service trucks, and purchasing the building he now rents. To secure funds for the expansion, your father submitted a loan application to the bank and included the most recent financial statements (as follows) prepared from accounts maintained by a part-time bookkeeper.

  Derby Television Repair Inc.

Income Statement

For the Year Ended December 31, 2004

Service revenue

 

$66,900

Less: Rent paid

$18,000

 

Wages paid

16,500

 

Supplies paid

7,000

 

Utilities paid

3,100

 

Insurance paid

3,000

 

Miscellaneous payments

2,150

49,750

Net income

 

$17,150

  Derby Television Repair Inc.

Balance Sheet

December 31, 2004

Assets

 

Cash

$ 3,750

Amounts due from customers

2,100

Truck

25,000

Total assets

$30,850

 

Equities

 

Stockholders’ equity

$30,850

After reviewing the financial statements, the loan officer at the bank asked your father if he used the accrual basis of accounting for revenues and expenses. Your father responded that he did, and that is why he included an account for “Amounts Due from Customers.” The loan officer then asked whether or not the accounts were adjusted prior to the preparation of the statements. Your father 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 possible accounts that might need to be adjusted before an accurate set of financial statements could be prepared.

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