Solomon Pty Ltd is a highly successful, closely held Brisbane company that manufactures and assembles motor vehicle speciality parts that are sold in auto parts stores. Sales and profits have expanded rapidly in the past few years and the prospects for future years are every bit as encouraging. In fact, the Solomon brothers are currently considering either selling out to a large company or going public to obtain additional capital.

The company originated in 1964 when Frank Solomon decided to manufacture tooled parts. In 1979 the company changed over to the auto parts business. Fortunately, it has never been necessary to expand the facilities, but space problems have recently become severe and expanded facilities will be necessary. Land and building costs in Brisbane are currently extremely inflated.

Management has always relied on you for help in its problems because the financial controller is sales oriented and has little background in the controllership function. Salaries of all officers have been fairly modest in order to reinvest earnings in future growth. In fact, the company is oriented towards long-run wealth of the brothers more than towards short-run profit. The brothers have all their personal wealth invested in the firm.

A major reason for the success of Solomon has been the small but excellent sales force. The sales policy is to sell to small auto shops at high prices. This policy is responsible for fairly significant credit losses, but the profit margin is high and the results have been very successful. The firm has every intention of continuing this policy in the future.

Your firm has been auditing Solomon since 1974 and you have been on the job for the past three years. The company has excellent internal controls and has always been cooperative. In recent years Solomon has attempted to keep net profit at a high level because of borrowing needs and future sellout possibilities. Overall, the company has always been pleasant to deal with and willing to help in any way possible. There have never been any major audit adjustments and an unqualified opinion has always been issued.

In the current year you have completed the tests of the sales and collection area. The tests of controls and substantive tests of transactions for sales and sales returns and allowances were excellent, and an extensive confirmation yielded no material misstatements. You have carefully reviewed the cutoff for sales and for sales returns and allowances and found these to be excellent. All recorded bad debts appear reasonable, and a review of the aged trial balance indicates that conditions seem about the same as in past years.

REQUIRED

a. Evaluate the information in the case to provide assistance to management for improved operation of its business. Prepare the supporting analysis using an electronic spreadsheet program (instructor option).

b. Do you agree that sales, accounts receivable and allowance for doubtful debts are probably correctly stated? Show calculations to support your conclusion.

31/12/X (Current year) 31/12/X3 31/12/X2 31/12/X1 Balance sheet Cash Accounts receivable Allowance for doubtful debts Inventory Current assets Non-current assets Total assets Current liabilities Non-current liabilities Shareholders' equity Total liabilities and shareholders' equity Income statement information Sales Sales retums and allowances Sales discounts allowed Bad debts Gross proft Net profit after taxes Aged accounts receivable 0-30 days 31-60 days 61-120 days >120 days Total $49 615 2 366 938 (250 000) 2771 833 4938 386 3 760 531 $8 698 917 $2 253 422 4711 073 1734 422 $39 453 2 094 052 240 000) 2 585 820 4 479 325 3 744 590 $8223 915 $2 286 433 4525 310 1412 172 $8 698 917S8 223 915 $ 48 291 1351 470 (220 000) 200 000) 1 650 959 3 734 521 2850 720 3 132 133 $7 233 451 $5 982 853 $1951 830 $1 625 811 3 550 481 806 561 S5 982 853 51 811 1756 321 2 146 389 3 498 930 4 191 699 1 089 922 S7 233 451 $6 740 652 (207 831) $6 165 411 (186 354) (63 655) (245 625) $1360 911 $322 250 $5 313 752 (158 367) (52 183) (216 151) $1 230 640 $283 361 $4 251 837 (121 821) (42 451) (196 521) $1062 543 $257 829 (248 839) $1 415 926 $335 166 792 742 452 258 179 852 2 366 938 942 086 881 232 $ 808 569 $674 014 407 271 202 634 67 551 351 470 697 308 368 929 146 583 2 094 052 561 429 280 962 105 361 $1 756 321 $1