Several years ago, your father opened Derby Television Repair Inc. He made a small initial investment and added money from his personal bank account as needed. He withdrew money for living expenses at irregular intervals. As the business grew, he hired an assistant. He is now considering adding more employees, purchasing additional service trucks, and purchasing the building he now rents. To secure funds for the expansion, your father submitted a loan application to the bank and included the most recent financial statements (as follows) prepared from accounts maintained by a part-time bookkeeper.

 

Derby Television Repair Inc. Income Statement For the Year Ended December 31, 2004
Service revenue		$66,900
Less: Rent paid	$18,000
Wages paid	16,500
Supplies paid	7,000
Utilities paid	3,100
Insurance paid	3,000
Miscellaneous payments	2,150	49,750
Net income		$17,150

 

Derby Television Repair Inc. Balance Sheet December 31, 2004
Assets
Cash	$ 3,750
Amounts due from customers	2,100
Truck	25,000
Total assets	$30,850
Equities
Stockholders’ equity	$30,850

After reviewing the financial statements, the loan officer at the bank asked your father if he used the accrual basis of accounting for revenues and expenses. Your father responded that he did, and that is why he included an account for “Amounts Due from Customers.” The loan officer then asked whether or not the accounts were adjusted prior to the preparation of the statements. Your father answered that they had not been adjusted.

a. Why do you think the loan officer suspected that the accounts had not been adjusted prior to the preparation of the statements?

b. Indicate possible accounts that might need to be adjusted before an accurate set of financial statements could be prepared.