Accounting for Costa Company - Essay Example

expenses 4,500 Property taxes 6,500 Rent 22,000 Operating Income 84,100 1. The case of Costa Company reflects a case having one error in the valuation of closing inventory recorded in the company’s books and one omission of sale transaction. Both types of mistakes made by the company can have significant impact on the true reflection of the company’s financial position. As in the case of incorrect valuation of inventories being overstated has a negative impact on the book value of the company and at the same time it causes costs of goods sold to be understated.

The understatement of cost of goods sold has a positive impact on the company’s profitability (Weygandt, Kimmel, & Kieso, 2010). This is often done by managers in order to fictitiously boost the company’s profits in the short term to gain certain financial benefits and later on losses are recorded in books, which would ultimately have a negative effect on shareholders’ value invested in the company. Moreover, companies are often involved in changing methods of inventory valuation i.e. FIFO, LIFO, and Average Costing between accounting periods, which if performed without proper scrutiny could lead to major change in the value of the company’s closing inventory and hence, making the financial statements incorrect reflections of the business position.

It is therefore necessary for businesses and regulators to ensure that companies maintain uniformity in the selection and application of the accounting standards. If it is deemed necessary then previous accounts must also be revised to reflect the true position of the company’s business (Fridson & Alvarez, 2011). On the other hand, omissions are regarded as certain transactions or amounts deliberately or non-deliberately left out of the company’s books and no entries are made by the company (Warren, Reeve, & Duchac, 2012).

In the case of Costa Company, although the amount of sale transaction was not significantly high, but certain transactions could surely mislead the company’s financial position reported to shareholders. This would cause understate profit of the company and hence, it would affect the equity position of the company which is reported as retained earnings in the company’s balance sheet (Porter & Norton, 2010). 2. From the income statement of Costa Company as prepared above it could be indicated that the company is generating a gross profit of $211,790 which is arrived at after deducting costs of goods sold after making adjustment to the closing inventory value from the company’s revenues, which are also adjusted for the missing transaction of $5,000.

This reflects that the company is operating at high gross profit margin of almost 34% in the year 2012. After deducting all operating expenses and property taxes the company has generated a net income of $84,100. This is lesser than before which was recorded without taking into account errors and misstatements. This indicates that if companies fail to take into business transactions or wrongly value and report an entry then this could lead to falsification of the entire financial statement and incorrect information passed onto shareholders who rely on the financial statements for their decisions (Fridson & Alvarez, 2011).

This reflects that the company has a net profit margin of 13.5%. All these indicators reflect that the company is a profitable entity and shareholders can expect good returns on their investments in the company. 3. Costa Company 31-Dec-12 Balance Sheet Current Assets Accounts receivable 18,000 Cash 41,500 Inventory