Using Financial Reports: Evaluating Financial Information as a Bank Loan Officer
Stoscheck Moving Corporation has been in operation since January 1, 2012. It is now December 31, 2012, the end of the annual accounting period. The company has not done well financially during the first year, although revenue has been fairly good. The three stockholders manage the company, but they have not given much attention to recordkeeping. In view of a serious cash shortage, they have applied to your bank for a $30,000 loan. You requested a complete set of financial statements. The following 2012 annual financial statements were prepared by a clerk and then were given to the bank.

After briefly reviewing the statements and €œlooking into the situation,€ you requested that the statements be redone (with some expert help) to €œincorporate depreciation, accruals, inventory counts, income taxes, and so on.€ As a result of a review of the records and supporting documents, the following additional information was developed:
a. The Supplies of $4,000 shown on the balance sheet has not been adjusted for supplies used during 2012. A count of the supplies on hand on December 31, 2012, showed $1,800.
b. The insurance premium paid in 2012 was for years 2012 and 2013. The total insurance premium was debited in full to Prepaid Insurance when paid in 2012 and no adjustment has been made.
c. The equipment cost $40,000 when purchased January 1, 2012. It had an estimated annual depreciation of $8,000. No depreciation has been recorded for 2012.
d. Unpaid (and unrecorded) salaries at December 31, 2012, amounted to $3,200.
e. At December 31, 2012, transportation revenue collected in advance amounted to $7,000. This amount was credited in full to Transportation Revenue when the cash was collected earlier during 2012.
f. The income tax rate is 35 percent.
Required:
1. Record the six adjusting entries required on December 31, 2012, based on the preceding additional information.
2. Recast the preceding statements after taking into account the adjusting entries. You do not need to use classifications on the statements. Suggested form for the solution:

3. Omission of the adjusting entries caused:
a. Net income to be overstated or understated (select one) by $ _______.
b. Total assets on the balance sheet to be overstated or understated (select one) by $ _______.
c. Total liabilities on the balance sheet to be overstated or understated (select one) by $ _______.
4. For both of the unadjusted and adjusted balances, calculate these ratios for the company: (a) earnings per share and (b) net profit margin. There were 10,000 shares outstanding all year. Explain the causes of the differences and the impact of the changes on financial analysis.
5. Write a letter to the company explaining the results of the adjustments, your analysis, and your
decision regarding theloan.

STOSCHECK MOVING CORP. STOSCHECK MOVING CORP. Balance Sheet Income Statement At December 31, 2012 For the Period Ended December 31, 2012 Assets Transportation revenue Expenses: Salaries expense Supplies expense Other expenses S85,000 $ 2,000 Cash Receivables 3,000 17,000 12.000 Supplies Equipment Prepaid insurance Remaining assets 4,000 40,000 18,000 6,000 Total expenses 47.000 27,000 $38,000 Net income Total assets $82.000 Liabilities Accounts payable $ 9,000 Stockholders' Equity Contributed capital (10,000 shares outstanding) Retained carnings 35,000 38,000 Total liabilities and stockholders" equity $82,000