Your firm has been engaged to examine the financial statements of Buffalo Corporation for the year 2020. The bookkeeper who maintains the financial records has prepared all the unaudited financial statements for the corporation since its organization on January 2, 2015. The client provides you with the information. Buffalo Corporation Balance Sheet December 31, 2020 Assets Liabilities Current assets $1,899,000 Current liabilities $956,000 Other assets 5,138,660 Long-term liabilities 1,471,000 Stockholders’ equity 4,610,660 $7,037,660 $7,037,660 An analysis of current assets discloses the following. Cash (restricted in the amount of $298,000 for plant expansion) $582,000 Investments in land 187,000 Accounts receivable less allowance of $30,000 487,000 Inventories (LIFO flow assumption) 643,000 $1,899,000 Other assets include: Prepaid expenses $62,000 Plant and equipment less accumulated depreciation of $1,412,000 4,110,000 Cash surrender value of life insurance policy 83,000 Unamortized bond discount 36,660 Notes receivable (short-term) 161,000 Goodwill 247,000 Land 439,000 $5,138,660 Current liabilities include: Accounts payable $503,000 Notes payable (due 2023) 158,000 Estimated income taxes payable 145,000 Premium on common stock 150,000 $956,000 Long-term liabilities include: Unearned revenue $493,000 Dividends payable (cash) 198,000 8% bonds payable (due May 1, 2025) 780,000 $1,471,000 Stockholders’ equity includes: Retained earnings $2,790,660 Common stock, par value $10; authorized 200,000 shares, 182,000 shares issued 1,820,000 $4,610,660 The supplementary information below is also provided. 1. On May 1, 2020, the corporation issued at 95.30, $780,000 of bonds to finance plant expansion. The long-term bond agreement provided for the annual payment of interest every May 1. The existing plant was pledged as security for the loan. Use the straight-line method for discount amortization. 2. The bookkeeper made the following mistakes. a. In 2018, the ending inventory was overstated by $185,000. The ending inventories for 2019 and 2020 were correctly computed. b. In 2020, accrued wages in the amount of $222,000 were omitted from the balance sheet, and these expenses were not charged on the income statement. c. In 2020, a gain of $175,000 (net of tax) on the sale of certain plant assets was credited directly to retained earnings. 3. A major competitor has introduced a line of products that will compete directly with Buffalo’s primary line, now being produced in a specially designed new plant. Because of manufacturing innovations, the competitor’s line will be of comparable quality but priced 50% below Buffalo’s line. The competitor announced its new line on January 14, 2021. Buffalo indicates that the company will meet the lower prices that are high enough to cover variable manufacturing and selling expenses, but permit recovery of only a portion of fixed costs. 4. You learned on January 28, 2021, prior to completion of the audit, of heavy damage because of a recent fire to one of Buffalo’s two plants; the loss will not be reimbursed by insurance. The newspapers described the event in detail. Analyze the above information to prepare a corrected balance sheet for Buffalo in accordance with proper accounting and reporting principles. Prepare a description of any notes that might need to be prepared. The books are closed and adjustments to income are to be made through retained earnings. (List Current Assets in order of liquidity.)
Reporting Cash Flows
Reporting of cash flows means a statement of cash flow which is a financial statement. A cash flow statement is prepared by gathering all the data regarding inflows and outflows of a company. The cash flow statement includes cash inflows and outflows from various activities such as operating, financing, and investment. Reporting this statement is important because it is the main financial statement of the company.
Balance Sheet
A balance sheet is an integral part of the set of financial statements of an organization that reports the assets, liabilities, equity (shareholding) capital, other short and long-term debts, along with other related items. A balance sheet is one of the most critical measures of the financial performance and position of the company, and as the name suggests, the statement must balance the assets against the liabilities and equity. The assets are what the company owns, and the liabilities represent what the company owes. Equity represents the amount invested in the business, either by the promoters of the company or by external shareholders. The total assets must match total liabilities plus equity.
Financial Statements
Financial statements are written records of an organization which provide a true and real picture of business activities. It shows the financial position and the operating performance of the company. It is prepared at the end of every financial cycle. It includes three main components that are balance sheet, income statement and cash flow statement.
Owner's Capital
Before we begin to understand what Owner’s capital is and what Equity financing is to an organization, it is important to understand some basic accounting terminologies. A double-entry bookkeeping system Normal account balances are those which are expected to have either a debit balance or a credit balance, depending on the nature of the account. An asset account will have a debit balance as normal balance because an asset is a debit account. Similarly, a liability account will have the normal balance as a credit balance because it is amount owed, representing a credit account. Equity is also said to have a credit balance as its normal balance. However, sometimes the normal balances may be reversed, often due to incorrect journal or posting entries or other accounting/ clerical errors.
Your firm has been engaged to examine the financial statements of Buffalo Corporation for the year 2020. The bookkeeper who maintains the financial records has prepared all the unaudited financial statements for the corporation since its organization on January 2, 2015. The client provides you with the information.
|
Buffalo Corporation
Balance Sheet December 31, 2020 |
||||||
|---|---|---|---|---|---|---|
|
Assets
|
Liabilities
|
|||||
|
Current assets
|
$1,899,000 |
Current liabilities
|
$956,000 | |||
|
Other assets
|
5,138,660 |
Long-term liabilities
|
1,471,000 | |||
|
|
4,610,660 | |||||
| $7,037,660 | $7,037,660 |
| An analysis of current assets discloses the following. | ||
| Cash (restricted in the amount of $298,000 for plant expansion) | $582,000 | |
| Investments in land | 187,000 | |
| Accounts receivable less allowance of $30,000 | 487,000 | |
| Inventories (LIFO flow assumption) | 643,000 | |
| $1,899,000 | ||
| Other assets include: | ||
| Prepaid expenses | $62,000 | |
| Plant and equipment less |
4,110,000 | |
| Cash surrender value of life insurance policy | 83,000 | |
| Unamortized bond discount | 36,660 | |
| Notes receivable (short-term) | 161,000 | |
| |
247,000 | |
| Land | 439,000 | |
| $5,138,660 | ||
| Current liabilities include: | ||
| Accounts payable | $503,000 | |
| Notes payable (due 2023) | 158,000 | |
| Estimated income taxes payable | 145,000 | |
| Premium on common stock | 150,000 | |
| $956,000 | ||
| Long-term liabilities include: | ||
| Unearned revenue | $493,000 | |
| Dividends payable (cash) | 198,000 | |
| 8% bonds payable (due May 1, 2025) | 780,000 | |
| $1,471,000 | ||
| Stockholders’ equity includes: | ||
| |
$2,790,660 | |
| Common stock, par value $10; authorized 200,000 shares, 182,000 shares issued | 1,820,000 | |
| $4,610,660 |
The supplementary information below is also provided.
| 1. | On May 1, 2020, the corporation issued at 95.30, $780,000 of bonds to finance plant expansion. The long-term bond agreement provided for the annual payment of interest every May 1. The existing plant was pledged as security for the loan. Use the straight-line method for discount amortization. | ||
| 2. | The bookkeeper made the following mistakes. | ||
| a. | In 2018, the ending inventory was overstated by $185,000. The ending inventories for 2019 and 2020 were correctly computed. | ||
| b. | In 2020, accrued wages in the amount of $222,000 were omitted from the balance sheet, and these expenses were not charged on the income statement. | ||
| c. | In 2020, a gain of $175,000 (net of tax) on the sale of certain plant assets was credited directly to retained earnings. | ||
| 3. | A major competitor has introduced a line of products that will compete directly with Buffalo’s primary line, now being produced in a specially designed new plant. Because of manufacturing innovations, the competitor’s line will be of comparable quality but priced 50% below Buffalo’s line. The competitor announced its new line on January 14, 2021. Buffalo indicates that the company will meet the lower prices that are high enough to cover variable manufacturing and selling expenses, but permit recovery of only a portion of fixed costs. | ||
| 4. | You learned on January 28, 2021, prior to completion of the audit, of heavy damage because of a recent fire to one of Buffalo’s two plants; the loss will not be reimbursed by insurance. The newspapers described the event in detail. |
Analyze the above information to prepare a corrected balance sheet for Buffalo in accordance with proper accounting and reporting principles. Prepare a description of any notes that might need to be prepared. The books are closed and adjustments to income are to be made through retained earnings. (List Current Assets in order of liquidity.)
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