Reference no: EM132914030

Eugenie's Corp is a small private company that sells computers and provides consulting service. The owner of the company, Eugenie Blocharme wants to expand and has asked you to become a business partner. Eugenie has prepared financial statements for the year ended December 31, 2014.

These financial statements reported the following information:

Current Assets: $90,000
Current Liabilities: 65,000
Net sales and consulting revenues 600,000
Cost of Goods sold: 475,000
Total operating expenses: 106,000

You are now trying to decide if you will invest in this business and upon reviewing the financial statements you discover the following additional details:

1. On December 31, Eugenie signed a $24,000, one-year consulting contract with a new customer starting December 01. Eugenie reported the $24,000 in net sales and consulting revenues because the customer paid the full amount on December 01.

2. During 2014, Eugenie started a new warranty program. Under this program, customers can buy a five year extended warranty for $500; and 20 customers bought and paid for this warranty. Eugenie reported the warranty sales in net sales and consulting revenues. No warranty service was provided in fiscal 2014.

3. Included in net sales is $55,000 for computers that the customer had paid for but not picked up from the company by December 31, 2014. The customer was picking up the computers on January 02. The cost of the computers is $35,000 and Eugenie included this cost in inventory because the computers were still physically sitting in the warehouse.

4. During the last week of December, the company ran a promotional campaign in the local newspaper. The cost of the campaign was $4,800. Eugenie recorded it as a prepaid expense because she anticipates that January 2015 sales will be higher as a result of the promotions.

Required:

Problem A. Calculate the correct amounts for (a) current assets, (b) current liabilities, (c) net sales and consulting revenues, (d) cost of goods sold, and (e) total operating expenses. Explain why you made each of the corrections. [Journal entries are NOT required but may be helpful to you in determining corrected balances.]

Problem B. Calculate the current ratio based on i) Eugenie's original financial statements, and ii) the corrected amounts you calculated from part A. Did the current ratio improve or worsen as a result of your corrections?