## [answered] MBA 5850 Fall 2016 Block 2 Case Study #2 The president of L

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MBA 5850 Fall 2016 Block 2

Case Study #2

The president of LBS, Inc., Mr. Flugler, recently hired a new accountant to prepare his financial

statements. The new accountant has prepared a balance sheet, an income statement, and a statement

of stockholders? equity for the calendar year ended December 31, 2015.

Mr. Flugler is extremely dismayed at the appearance of the financial statements presented to him and

needs to have them corrected before presenting them to his shareholders.

The financial statements below are the statements as presented to Mr. Flugler. You have been hired as a consultant to correct the LBS, Inc. financial statements. In addition to the

presentation of the information, Mr. Flugler has also noticed some discrepancies in the amounts on the

(1) Inventory is recorded at the average cost. Inventory at December 31, 2014 included 1,000

units at a total cost of \$29,000. Purchases during the year included: 40 units at a total cost of

\$1,280 and 30 units at a total cost of \$840. Ending inventory includes 950 units.

(2) Equipment includes two assets.

a. Asset #1 was purchased on February 1, 2015 for a cost of \$29,000. This asset has a

salvage value of \$5,000 and has an expected useful life of 5 years. The asset is

depreciated using the straight-line method.

b. Asset #2 was purchased on December 1, 2015 for a cost of \$4,500. This asset has no

salvage value and has an expected useful life of 3 years. The asset is depreciated

using the straight-line method.

(3) Accounts receivable detail is as follows: The allowance for doubtful accounts is based on the aging of accounts receivable method. The

estimated percentage of uncollectible amounts is as follows:

Current amounts (not yet due) = 2%

1 - 30 days past due = 3%

31 ? 60 days past due = 9%

Over 60 days past due = 20%

Invoices are billed at net 30 days.

(4) There were two loans with activity during 2015.

a. Note amount, \$10,000. Annual interest rate of 4%. Interest was accrued monthly.

Loan date: July 1, 2010. The loan and all accrued loan interest was paid off on

7/1/2015.

b. Note amount, \$7,200. Annual interest rate of 5%. Interest is accrued monthly. Loan

date: April 1, 2015. The loan and all accrued interest is due on April 1, 2020.

(5) Deferred revenue is for services to be provided in 2016 and should be \$2,500 at December 31,

2015.

(6) A physical count of supplies at the end of the year reflected \$1,500 of supplies on hand at

December 31, 2015.

(7) LBS rents one space for both office and storage. Total rent for the year should reflect 12

payments of \$1,250 per month.

Requirements:

(1) Prepare a trial balance spreadsheet for the year ended December 31, 2015 as demonstrated in

Exhibit 4.5 of the text. You should use the accounts included on the financial statements

prepared by the new accountant. All required accounts are included on the original financial

statements.

(2) Record the adjustments required based on the seven items of information presented above. Be

sure to include all calculations used to determine adjustment amounts. These calculations may

(3) Using your adjusted trial balance, prepare a properly formatted income statement, balance

sheet, and statement of stockholders? equity for the calendar year 2015.

(4) Prepare a memo to Mr. Flugler with some talking points that he can use for his upcoming

shareholders? meeting. This memo should include the following information with your

comments on what the information says about LBS, Inc.: current ratio, working capital, net

profit margin, receivable turnover ratio, average collection period, inventory turnover ratio,

average days to sell inventory. Additional information to assist you with your memo is:

a. Average net profit margin for LBS, Inc.?s competitors is 35%.

b. Accounts receivable at 12/31/2014, \$25,600

c. Product inventory at 12/31/2014, \$24,000 (base your inventory turnover ratio and

average days to sell inventory on the product inventory only).

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