Question: On December 16, 2010, Medianet Group’s
On December 16, 2010, Medianet Group’s CFO and Company’s Board of Directors concluded that the previously issued financial statements contained in the Company’s Quarterly Reports on Form 10-Q for each of the three quarters during the year ended September 30, 2010, should not be relied upon because of the following errors that require a restatement of such financial statements:
Intercompany eliminations. Certain intercompany eliminations were not made during each of the quarters during the year ended September 30, 2010, and for the fiscal year ended September 30, 2009. In this connection, Medianet determined that during the periods referred to above, insufficient personnel resources were available to perform review and monitoring controls within the accounting function.
Enrollment fees. The Company determined that revenue from the sale of its eBiz kits was erroneously recorded for each of the quarters during the year ended September 30, 2010, and for the fiscal year ended September 30, 2009. The Company's nonrefundable eBiz kits fee revenue was previously recognized when collected. Based on a review of Staff Accounting Bulletin (“SABâ€) 104, the Company revised its revenue recognition of nonrefundable eBiz kits to recognize them on a straight-line basis over the term of the renewal period (12 months).
Required:
A. Intercompany sales of inventory of $862,677 were not eliminated from the consolidated income statement. What impact did this have on net income and on revenues? Why are intercompany sales eliminated during consolidation?
B. The error for the enrollment fees meant that unearned revenues were understated by $2,934,794. What impact did this error have on revenue? Does this error have an impact on cash flows? What impact did this error have on the Company’s working capital, current ratio, and total
liabilities–to-equity ratio?
Transcribed Image Text:
Balance Sheet (12/30/2009) (as reported) Assets Liabiliies Current Assets: Current Liabilities: Cash and cash cquivaknts 2,499,237 Accounts payabk Accrued and other liabilities 121,461 Restricted cash 722,230 585,715 Accounts recivabk 72,998 Accrued incentive 644,292 Inventories 401,141 Layalty points payabke Commissions payable Income taxes payable 209,025 Prepaid customer acquisition costs 1,876,605 Pepaid expenses 127,209 287,838 Deposits 94,070 Customer deposits 18,348 Total Current A ssets 3,916,885 Dekrred eve nue 2,626,835 Noe payabk-elakd party Total Current Liabilitics 191,355 6,561,474 Property and equipment, net 94,139 Common stock 27,304 Other Assets 32,222 Additional paid-in capital (768,528) Total Assets 4,043,246 Other comprehensive (loss) (14,176) Retained earnings (deficit) (1,762,828) (2,518,228) Total Stockholden' Equity Total Liabilities and Stockholdkn' Equity 4.043.246 Income Statement (as reported) Forthe Year Ended 1230/2009 Revenues 16,974,449 Diect cost of evenues 11,804,157 5,170,292 Gross profit Selling, general and administrative 5,905,788 Income (loss) from operations (735,496) Interest income (expense)-net Income (loss) frrom continuing operations before income taxes (3,245) (738,741) Income taxe-henefit (expense) (287,838) Income (loss) from continuing (1,026,579) operations (Loss) from discontinued segment (1,980,285) Gain from sale of subsidiary 74,990 net Income (loss) (2,931,874)
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