Question

Part 1: Describe the purpose of a Trial Balance and the steps of how to prepare a Trial Balance.

Part 2: Meredith Ward is the assistant chief accountant at Frazier Company, a manufacturer of computer chips and cellular phones. The company presently has total sales of $20 million. It is the end of the first quarter. Meredith is hurriedly trying to prepare a trial balance so that quarterly financial statements can be prepared and released to management and the regulatory agencies. The total credits on the trial balance exceed the debits by $1,000. In order to meet the 4 p.m. deadline, Meredith decides to force the debits and credits into balance by adding the amount of the difference to the Equipment account. She chooses Equipment because it is one of the larger account balances; percentage-wise, it will be the least misstated. Meredith “plugs” the difference! She believes that the difference will not affect anyone's decisions. She wishes that she had another few days to find the error but realizes that the financial statements are already late.

Answer the following questions:

Who are the stakeholders in this situation?

What are the ethical issues involved in this case?

What are Meridith's alternatives?

Answer 1

A. The purpose of trial balance is to find out that is there any error in the nominal ledger accounts because the trial balance is prepared to prove that the debit balances and credit balances of the accounts are equal if the balance does not match it shows that there in some error in the nominal ledger accounts.

Steps to prepare trial balance:

1. For each ledger account calculate the debit balance and credit balance. If the credit total is larger then subtract the debit total from the credit total to get the ledger account total which goes to the credit side of the trial balance. Similarly for the debit balance, if the debit total is larger then subtract the credit balance from it and transfers the balance to the debit column of the trial balance.

2. When all the debit and credit total are posted to the trial balance of all the ledgers then add all the credit total and debit total.

3. Do same for both the sides of the trial balance and get a grand total of both the columns.

B. 1. The stakeholders in this situation would be the stockholders,Creditors, Auditors and the board of directors. The persons who had a interest in the organisation.

2. The information presented to the stakeholders is not showing the true and fair values.The book value of the equipment is manipulated. The value of the equipment increases this can lead to a unfair practice with the creditors who rely on the financial statements to check out the credit worthiness of a company.

3. Alternatives available to Meridith first of all she should check out all the debit and credit balances of all the accounts. All the journal entries and ledger posting must be thoroughly checked. Even though she doesnot find the error she can open a suspense account to match the trial balance for a short period , this will not lead to any manipulations in the accounting balances.