Prolemfendi Company Hired An Accounting Intern Pat Morgan

Problemefendi Company Hired An Accounting Intern Pat Morgan To Prepa

Problemefendi Company hired an accounting intern, Pat Morgan, to prepare its income statement, statement of retained earnings, and balance sheet. Pat was reluctant to undertake this task due to a lack of adequate training, but agreed to if someone would examine the work in detail and provide useful suggestions for improvement. Pat's work follows: PAT MORGAN'S Income Statement December 31, 20X5 Net Income Services to customers $125,000 Expenses Dividends $13,500 Rent 11,500 Revenues $100,500 PAT MORGAN'S Statement of Retained Earnings For the Year Ending December 31, 20X1 Beginning retained earnings $45,000 Plus: Net income 100,500 $145,500 Less: Capital stock 200,000 Ending retained earnings $(54,500) PAT MORGAN'S Equation Sheet December 31, 20X1 Assets Cash $92,700 Accounts receivable 37,400 Equipment 239,000 Total assets $369,100 Liabilities Accounts payable $7,500 Wages expense 64,000 Total expenses $71,500 Stockholders' equity Notes payable $80,100 Retained earnings $(54,500) Total stockholders' equity $25,600 Total liabilities and equity $97,100 (a) Find specific errors in Pat's work. Prepare written review notes sufficient to allow Pat to understand the errors and make necessary corrections. To get started, you may assume Pat did manage to get the listing of total assets correct. (b) Provide your notes to a fellow classmate (just call your classmate Pat for purposes of this exercise), and have him or her prepare corrected reports, based solely on your notes -- right or wrong! Remember that achieving professional success not only depends on technical proficiency but also your ability to communicate and mentor others. (c) Prepare corrected financial statements and compare them to the set provided by your classmate in requirement (b).

Paper For Above instruction

The financial statements prepared by Pat Morgan reveal several fundamental errors that need correction to accurately reflect the company's financial position and performance. These errors span across misstatements in revenue recognition, expense classification, equity calculations, and the balance sheet equation, which compromise the reliability of the financial data. Analyzing each statement separately provides clarity in identifying these issues and offers guidance for rectification.

Errors in the Income Statement

Firstly, the income statement presents a fundamental inconsistency. The total revenues are reported as $100,500, but the gross revenue generated from services to customers is listed as $125,000. The discrepancy arises from the reporting of “services to customers” as net income rather than revenue. Net income should be calculated after deducting all expenses from total revenues, but here, there is a mismatch indicating confusion between revenue, expenses, and net income. Moreover, dividends, which are distributions to shareholders, should not appear on the income statement; instead, they are part of retained earnings and should be shown on the statement of retained earnings or as a dividend declaration note.

The expenses section is incorrectly labeled, as dividends are wrongly included among expenses; dividends are not an expense but a distribution of earnings. The rent expense is listed as $11,500, which seems plausible, yet the total expenses are summed as $71,500, which includes wages expense of $64,000. However, wages expense should be treated as an operational expense on the income statement, but dividends, again, are misplaced. Additionally, the net income listed as $100,500 does not reconcile with the revenues and expenses provided because if revenues are $125,000 and expenses are $71,500, the net income should be $53,500 rather than $100,500.

Errors in the Statement of Retained Earnings

The statement of retained earnings begins with beginning retained earnings of $45,000 and adds net income of $100,500, resulting in $145,500. The statement then subtracts “capital stock” of $200,000, which is incorrect because capital stock is part of stockholders’ equity on the balance sheet, not a deduction from retained earnings. Instead, the statement should subtract dividends paid during the year to arrive at ending retained earnings. The appearance of negative ending retained earnings ($54,500) is consistent with the corrected calculations based on initial retained earnings, net income, and dividends.

Errors in the Balance Sheet (Equation Sheet)

The balance sheet claims total assets of $369,100, which is consistent with the sum of listed assets. However, the liabilities and stockholders' equity totals do not match the accounting equation: Assets = Liabilities + Stockholders' Equity. Here, total liabilities and equity sum to only $97,100, which is inconsistent with assets. The total stockholders' equity listed as $25,600 contradicts the calculated retained earnings of -$54,500, and the sum of liabilities ($7,500 + $80,100) equals $87,600. Moreover, the net number for retained earnings on the balance sheet should match the statement of retained earnings, but the presented figure is misrepresented and does not reconcile.

Corrections and Recommendations

To address these errors, it is essential first to distinguish clearly between revenues, expenses, dividends, retained earnings, and stockholders' equity. Revenue should be properly recognized, matching the services rendered of $125,000, and then subtract expenses of $71,500 (including wages and rent) to find the accurate net income. Dividends paid should be separately disclosed and deducted from retained earnings along with the net income to determine the closing balance. The capital stock should be correctly recorded under stockholders' equity, not deducted in the statement of retained earnings.

The balance sheet should reflect assets, liabilities, and stockholders’ equity in accordance with the accounting equation: Assets = Liabilities + Stockholders’ Equity. Retained earnings should be accurately calculated and included within stockholders' equity, along with the capital stock. Adjustments should be made to ensure total liabilities and equity equal total assets, correcting the discrepancy in the totals.

Conclusion

In conclusion, Pat Morgan’s initial financial statements contain significant errors in the classification and calculation of key elements. By revising the revenue recognition, removing dividends from expenses, properly accounting for dividends paid, and reconciling the balance sheet equation, accurate and reliable financial statements can be prepared. These corrections will not only improve compliance with accounting standards but also provide clearer, more useful insights into the company’s financial health.

References

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