Adjustments and financial statements
Several years ago, your brother opened Magna Appliance Repairs. 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 brother submitted a loan application to the bank and included the most recent financial statements (shown below) prepared from accounts maintained by a part-time bookkeeper.
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Magna Appliance Repairs
Income Statement
For the Year Ended October 31, 2014
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Service revenue .
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$675,000
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Less: Rent paid
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$187,200
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Wages paid .
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148,500
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Supplies paid
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42,000
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Utilities paid
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39,000
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Insurance paid . .
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21,600
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Miscellaneous payments
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54,600
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492,900
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Net income
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$182,100
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Magna Appliance Repairs
Balance Sheet
October 31, 2014
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Assets
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Cash
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$95,400
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Amounts due from customer
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112,500
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Truck
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332,100
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Total assets
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$540,000
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Equities
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Capital
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$100,000
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Retimed earning
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440,000
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Total equities
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$540,000
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After reviewing the financial statements, the loan officer at the bank asked your brother if he used the accrual basis of accounting for revenues and expenses. Your brother 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 brother answered that they had not been adjusted.
1. Why do you think the loan officer suspected that the accounts had not been adjusted prior to the preparation of the statements?
2. Indicate possible accounts that might need to be adjusted before an accurate set of financial statements could be prepared.