ACCT 31020 Names: _______________________

Financial Accounting and Reporting I ________________________

________________________

Business Consultation: Talking GAAP

A good friend of yours inherited the family business (a local grocery store) and just received a set of
financial statements (Balance Sheet and Income statement). These were prepared by the same
accountant who has done the accounting for years. Your friend has forwarded the statements to you
along with a note expressing her concerns about certain items on the statements.
She’s asking you to go to the accountant and find out what’s wrong with the books.
Directions:
1. Read through the letter from Jill.
2. Using the statements provided explain to Jill why the reports are properly prepared under US
GAAP. Include the accounting assumption, principle, or constraint as applicable in your answer.
3. Submit one response from the group with all members identified.
4. Issue Raised: GAAP Treatment:
1.

2.

3.

4.

5.

Case modified from Activity 15 1997 Prentice Hall, Inc.

September 12, 20XX

Dear Jack,

It was good talking to you yesterday. Can you believe the summer is over? Here are the copies of reports
on my family’s grocery store I just received from the accountant. I sure need your help because I can
never understand what those “bean counters” are trying to say.

I’ve put together a list of some issues my brothers have with what the accountant is doing. We think
there may be some BIG problems with the books. Could you please talk to him and find out what is
happening?

1. What happened to the cash? How can we have net income and yet have the cash decrease? Is
someone pocketing our cash?
2. What about all the investments my father owned? I know he bought a variety of stocks with
money he made from the business. Why don’t any investments show up on these reports?
3. I also know our store is located on very valuable property. The land was appraised at over
$500,000 just six months ago. Why does the accountant only show it at $50,000? Did he just
drop a “0”?
4. One of the large expenses on the income statement is for depreciation, but we never authorized
a check for that amount. And all our equipment is paid for, so this really looks bad.
5. What about the mortgage owed to the bank? We make monthly payments of $750 and there
are 10 years left to pay. The amount on the report is lower than the total remaining payments,
so this needs correcting.

I have some other minor questions, but if you can get the accountant to fix these big mistakes (and find
out if he even knows what he’s doing), that would be a big help! Call me if you want to go over any of
these in more detail. Again, thanks for being the go-between. (You were always so good at accounting!)

Your friend,

Jill

Case modified from Activity 15 1997 Prentice Hall, Inc.

 ABC Grocery, Inc.
Balance Sheet
December 31, 2018 and 2017

2018 2017

Cash $125,000 $189,000

Accounts Receivable 90,000 100,000
Inventory 413,000 362,000
Prepaid Expenses 2,000 5,000
Total Current Assets 630,000 656,000

Property, Plant & Eqiupment 160,000 150,000

Less: Accumulated Depreciation (130,000) (110,000)
30,000 40,000
Land 50,000 50,000

TOTAL ASSETS $710,000 $746,000

Accounts Payable $106,000 $260,375

Income Taxes Payable 58,500 23,625
Current Portion of Long-Term Debt 46,614 63,062
Total Current Liabilities 211,114 347,062

Long-Term Debt (Mortgage) 74,886 78,938

Total Liabilities 286,000 426,000

Common Stock 50,000 50,000

Additional Paid-in Capital 10,000 10,000
Retained Earnings 364,000 260,000

TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $710,000 $746,000

Case modified from Activity 15 1997 Prentice Hall, Inc.

 ABC Grocery, Inc.
Income Statement
For the Years Ended December 31, 2018 and 2017

2018 2017

Sales $948,000 $755,000

Cost of Sales 525,000 422,000
Gross Profit 423,000 333,000

Operating Expenses:
Advertising 43,500 31,000
Depreciation 20,000 20,000
Legal & Accounting 10,000 9,000
Miscellaneous 1,500 2,000
Repairs & Maintenance 9,000 14,000
Salaries & Wages 148,500 158,000
Taxes - Payroll 22,000 23,875
Taxes - Property 6,500 9,500
Total Expenses 261,000 267,375

Income before Taxes 162,000 65,625

Provision for Taxes (58,500) (23,625)

NET INCOME $103,500 $42,000

Case modified from Activity 15 1997 Prentice Hall, Inc.