Following is a condensed version of the 2009 income statement of Petersen Company.
Sales............................................................. $ 2,176,200
Cost of Goods Sold..................................... (1,212,900)
Gross Profit.................................................. $ 963,300
Operating Expenses...................................... (333,900)
Operating Income.......................................... $ 629,400
Other Revenue.............................................. 30,600
Income before Income Tax............................ $ 660,000
Income Tax Expense.................................... (264,000)
Net Income...................................................... $ 396,000
Petersen’s accountant overlooked a $9,600 utility bill at the end of 2009. This bill should have been recorded with a debit to Utilities Expense and a credit to Accrued Liabilities. The company’s year-end Inventory account balance was also incorrect. Because of errors made during the counting of inventory, Petersen’s year-end inventory was listed as $522,900 in its accounting records instead of the correct figure of $453,600. This overstatement of year-end inventory caused Petersen’s Cost of Goods Sold for the year to be understated by an equal amount.
Following is other information regarding Petersen Company.
Average total assets during 2009.......................................... $2,461,500*
Interest expense for 2009 (included in
Other Revenues and Expenses)............................................... 102,000
Average common stockholders’ equity.................................... 1,140,000*
Average income tax rate........................................................... 40%
*These averages were computed by adding the beginning-of-the-year and end-of-the-year amounts and dividing by two.
Required:
(a) Ignoring the two errors discovered in Petersen’s accounting records, compute the company’s profitability ratios for 2009.
(b) Compute Petersen’s profitability ratios for 2009 after adjusting the company’s financial data for the two errors.
(c) Did the two errors have a material effect on Petersen’s profitability ratios? Defend your answer.
(d) Do you believe that companies manipulate numbers intentionally to mislead investors? Explain.