Don Berthrong, the manager of the local Books-A-Million, is wondering whether adjusting entries will affect his financial statements. Don’s business has grown steadily for several years, and Don expects it to continue to grow for the next several years at a rate of 5 to 10 percent per year. Nearly all of Don’s sales are for cash. Other than cost of goods sold, which is not affected by adjusting entries, most of Don’s expenses are for items that require cash outflows (e.g., rent on the building, wages, utilities, insurance).
1. Would Don’s financial statement be affected significantly by adjusting entries?
2. What kinds of transactions would require adjustments that would have a significant effect on the financial statements? What kinds of businesses would be likely to require these kinds of adjustments?