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Smith Company

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Due to Smith Company’s client, who did not follow through with a purchase of $45,500 worth of products, the company’s bookkeeper has made a mistake in computing the cost of goods sold (COGS) by including the $45,500 in production cost for 2012 and the value was not recorded in the closing inventory. The first is a clear violation of the matching concept, which states that expenses should be recognized in the same accounting period when the related revenues are (Schmidt, 2013). Thus $45,500 had to be removed from COGS, as well as added to inventory.

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According to additional information, the company made a secondary stock offering raising $225,000. This value was added to common stock and cash accounts. The company has also paid $22,000 in dividends, thus a reduction of retained, for the same amount, earnings had to be made.

Some financial analysts believe that dividends do not have an effect on investors, as investors looking for a stable flow of income would rather invest in bonds rather than dividend paying shares (Investopedia, 2009). Some financial analysts consider dividend payment having an adverse effect on the investors value, as taxation on dividends is higher compared to capital gains. Alternatively the company can use funds to reinvest in its growth (stock value growth) and repurchase shares, and let the investors benefit from the capital gains. Other financial analysts believe that dividend payout is important to investors and may positively affect company’s share price. However, if the company pays dividends decides to long-term, any reduction or omission of dividend payout will have a severely adverse effect on company’s stock price, thus the dividend payout should be sustainable (Investopedia, 2009).

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An investment, $400,000 worth of land, occurred before the year and had to be recorded in the balance sheet. A down payment of $20,000 was made and the rest of the funds were raised through a bank loan. Considering the high value of the loan $380,000, it can be assumed that is a long-term loan, it was added to Long-term debt. The down payment was recorded, by cash account reduction of $20,000.

The retained earnings were calculated by subtracting the corrected COGS, all other expenses and the dividend payment from the revenue.

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