Accounting

Accounting for Costa Company

Accounting for Decision Making Accounting for Decision Making Income ment for Costa Company for the year ended on 31-Dec-12 $ Revenues 624,400 (619,400+5,000) Cost of Goods Sold 412,610 (402,610+80,500-70,500) Gross Profit 211,790 Depreciation expense 18,250 Insurance 1,500 Salaries 61,940 Utilities 7,400 Marketing 5,600 Misc. expenses 4,500 Property taxes 6,500 Rent 22,000 Net Income 84,100 1. There are two errors indicated related to inventory and sales of Costa Company. These errors will have profound impact on the company’s financial position as reported in the balance sheet of the company and also in the comprehensive income statement. Errors, omission, and mistakes can mislead users of the financial information about the reality of the business and its financial situation (Weygandt, Kimmel, Kieso, 2010). Incorrect reporting of closing inventory would not only overvalue company’s assets and hence the size of the company’s book. This would also lead to wrong reporting of cost of goods sold which will have direct impact on the net income generated by the company and also the amount available to be distributed to shareholders. Missing out a revenue transaction will have a negative effect on the net income of the company because costs related to it are already included in costs of goods sold by the company. This underreporting of net income would in turn affect the equity side of the balance sheet. 2. The income statement of Costa Company after adjustments to two errors reported in the case has generated a net income of $84,100 at the year end. This indicates that the company’s business operations are actually generating enough revenue that is able to cover costs of goods sold and operating expenses and taxes related to the business. The gross profit of the company is $211,790 which indicates that the gross profit margin is 33.92%. The net profit margin of the company is 13.47% (Warren, Reeve, Duchac, 2012). Thus, from the analysis of the company’s profitability it could be highlighted that the company’s business is profitable. 3. The company’s financial position indicates that the company’s total assets are $465,000. The current assets are $140,000 and non-current assets are $325,000. The company’s non-current assets are equipment held by the company recorded at their cost less accumulated depreciation. The company is holding large amount of inventory in its current assets which can cause liquidity issues for the company if its short term obligations fall due and the company is not able to generating sufficient cash to meet its requirements. The cash holding by the company at the year end is $41,500 which may be considered on the lower side as compared to its both short and long term borrowing. On the liabilities side, the company has high long term debt amounting $105,000. The company also has issued common stock of $10,000 and retained earnings of $245,500. This reflects that the company has a strong solvency position as its equity position is far greater than both its short and long term liabilities. Reference List Warren, C. S., Reeve, J. M., Duchac, J. E. (2012). Financial accounting. Mason, OH: South-Western Cengage Learning. Weygandt, J. J., Kimmel, P. D., Kieso, D. E. (2010). Financial Accounting, Study Guide. Hoboken, NJ: John Wiley Sons. Retrieved from McGraw Hill: http://highered.mcgraw-hill.com/sites/dl/free/0073526681/355565/wiL03970_appE.pdf

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