Location: Ft. Worth, Texas
Accounting Services: Accounting and Bookkeeping, Tax Planning & Preparation, and Consulting
Client: Monster Factory USA Inc
Client Overview: Monster Factory USA Inc is an online retailer of recreational collectibles, specifically Volkswagen memorabilia. The Company distributes its products through its own website and through Amazon.com, under FBA arrangement, which is substantially a consignment arrangement. The Company uses Quickbooks Online as its financial reporting tool.
Challenge
During the first quarter of 2017, Monster Factory USA Inc employed Findlay CPA to bring their 2016 general ledger up-to-date. Three major challenges were disclosed after examination of their general ledger:
- Improper Revenue Recognition – Although the Amazon FBA arrangement was substantially a consignment arrangement, revenue was incorrectly recognized as and when shipments were made to Amazon, resulting in the over-statement of the revenues accumulated in 2015 and 2016. As a result of this:
- Accounts receivables were overstated; the end of year inventory and cost of goods sold for the years ended December 31, 2015 and 2016 were incorrect.
- Net income for the years ended December 31, 2015 and 2016 were overstated.
- Improper Recording of Accounts Receivable Collections – There were numerous instances where accounts receivable payments were recorded as product sale incomes resulting in duplication of revenue transactions during the year end December 31, 2016.
- Improper Cut-Off – A 2014 expense item of approximately $200,000 was recorded as a 2016 expense. As a result, the Company’s net operating loss for the year ending December 31, 2014, which could have been used to reduce income taxes in 2015, was understated by approximately $200,000. This is important as the company reported taxable income in excess of $275,000 in its 2015 federal income tax returns and paid a significant amount of taxes.
- We also identified various other non-Amazon payments and deposits that were duplicated or omitted from the general ledger, and numerous instances where customer balances that were known to be uncollectible were included in account receivables instead of bad debts.
Solution
Findlay CPA employed a two-prong strategy aimed at
(i) minimizing the Company’s income tax burden and
(ii) properly stating the general ledger balances for the years ended December 31, 2014 through 2016.
To this end, we examined the accuracy and cut-off of all revenue transactions, including Amazon related transactions for the period January 1, 2015 through till December 31, 2016 and made the necessary corrections, so that the revenue for 2015 and 2016 was appropriately recognized and accurately measured. We also corrected the year end inventory and cost of goods sold. We wrote off uncollectible customer balances and removed all fictitious and duplicated invoices and customer payments from the accounts receivable sub-ledger.
In order to ensure the propriety of revenue recognition going forward, we trained the Company personnel how to document and track shipments to Amazon using Quickbooks Online non-posting transactions. Additionally, we amended the Company’s 2014 income tax returns so that the 2014 net operating loss became available for use in future tax years. We also amended the company’s 2015 federal income tax return.
Results
- Net operating losses from 2014 were harvested to reduce 2015 tax liability to less than $3,000, which represents less than five percent (5%) of the liability originally reported.
- The Company’s financial information is now accurate, complete and recorded in the proper periods.
- Management can confidently use the Company’s financial statement to monitor the Company’s financial situation.