ACCOUNTING

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1. Ackert Company’s last dividend was $1.55. The dividend growth rate is expected to be constant at 1.5% for 2 years, after which dividends are expected to grow at a rate of 8.0% forever. The firm’s required return (rs) is 12.0%. What is the best estimate of the current stock price?
$37.05
$38.16
$39.30
$40.48

2. The Chadmark Corporation’s budgeted monthly sales are $3,000. In the first month, 40% of its customers pay and take the 2% discount.
The remaining 60% pay in the month following the sale and don’t receive a discount.
Chadmark’s bad debts are very small and are excluded from this analysis. Purchases for next month’s sales are constant each month at $1,500.
Other payments for wages, rent, and taxes are constant at $700 per month. Construct a single month’s cash budget with the information given.
What is the average cash gain or (loss) during a typical month for the Chadmark Corporation? Please show your calculation.

3. Consider the following for the following 4 firms:

Firm Cash Debt Equity rD rE rC
Eenie 0 150 150 5% 10% 40%
Meenie 0 250 750 6% 12% 35%
Minie 25 175 325 6% 11% 35%
Moe 50 350 150 7.5% 15% 30%

Which is the weighted average cost of capital for Meenie closet to?

a. 10.5% b. 7.4% c. 10.0% d. 8.8%

4. Your consulting firm was hired to improve the performance of Shin-Soenen Inc which is highly profitable but has been experiencing cash shortage due to its high growth rate. As one part of your analysis, you want to determine the firm’s cash conversion cycle, using the following information and a 365 day a year, what is the firm’s present cash conversion cycle?

Average Inventory 75,000
Annual Sales 600,000
Annual cost of goods sold 360,000
Average accounts receivable 160,000
Average accounts payable 25,000

a. 120.6 days b. 126.9 days c. 133.6 days d. 140.6 days
e. 148.0 days.

5. Your company has been offered credit terms of 4/30, net 90 days. What will be the nominal annual percentage cost of its nonfree trade credit if it pays 120 days after the purchase? (Assume a 365-day year.)

a. 16.05%
b. 16.90%
c. 17.74%
d. 18.63%
e. 19.56%

6. Division Asset Next period exp. free cash flow Exp. growth
Oil Exploration 1.4 450 4%
Oil Refinery 1.1 525 2.5%
Gas & Conv. 0.8 600 3.0%
The risk free rate of interest is 3% and market risk premium is 5%. What is the cost of capital for oil exploration div. closet to:

a. 6.0% b. 7.0% c. 8.5% d. 10%

7. You expect CCM Corp to generate the foll. free cash flows ove rthe next 5 years:

Yr 1 2 3 4 5
FCF(million) 25 28 32 37 40

If CCM has $150million of debt and 12million shares of stock outstanding
which is the share price of CCM closest to/

a. $49.50 b. $11.25 c. $20.50 d. $22.75

8. Which is the variance of returns on the index from 2,000 to 2009 closet to?

Year End Index Realized Return (R-R) (R-R)2
2000 23.6% 14.78% 0.0218448
2001 24.7% 15.88% 0.0252174
2002 30.5% 21.68% 0.0470022
2003 9.0% 0.18% 3.4 E-06
2004 -2.0% -10.82% 0.0117072
2005 -17.3% -26.12% 0.0682254
2006 -24.3% -33.12% 0.1096934
2007 32.2% 23.38% 0.0546624
2008 4.4% -4.42% 0.0019536
2009 7.4% -1.42% 0.0002016

A. 0.0450 B. 0.3400 C. 0.1935 D. 0.0375

Accounting

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ACCOUNTING

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INTRODUCTION

 

In December 1995, the flamboyant entrepreneur, Michael “Mickey” Monus, formerly president and chief operating officer (COO) of the deep-discount retail chain Phar-Mor, Inc., was sentenced to 19 years and seven months in prison. Monus was convicted for the accounting fraud that inflated Phar-Mor’s shareholder equity by $500 million, resulted in over $1 billion in losses, and caused the bankruptcy of the twenty-eighth largest private company in the United States. The massive accounting fraud went largely undetected for nearly six years. Several members of top management confessed to, and were convicted of, financial-statement fraud. Former members of Phar-Mor management were collectively fined over $1 million, and two former Phar-Mor management employees received prison sentences. Phar-Mor’s management, as well as Phar-Mor creditors and investors, subsequently brought suit against Phar-Mor’s independent auditors, Coopers & Lybrand LLP (Coopers), alleging Coopers was reckless in performing its audits. At the time the suits were filed, Coopers faced claims in excess of $1 billion. Even though there were never allegations that the auditors knowingly participated in the Phar-Mor fraud, on February 14, 1996, a jury found Coopers liable under both state and federal laws. Ultimately, Coopers settled the claims for an undisclosed amount.

PHAR-MOR STORES 1

 

Between 1985 and 1992, Phar-Mor grew from 15 stores to 310 stores in 32 states, posting sales of more than $3 billion. By seemingly all standards, Phar-Mor was a rising star touted by some retail experts as the next Wal-Mart. In fact, Sam Walton once announced that the only company he feared at all in the expansion of Wal-Mart was Phar-Mor.

 

1 Unless otherwise noted, the facts and statements included in this case are based on actual trial transcripts.

 

The case was prepared by Mark S. Beasley, Ph.D. and Frank A. Buckless, Ph.D. of North Carolina State University and Steven M. Glover, Ph.D. and Douglas F. Prawitt, Ph.D. of Brigham Young University, as a basis for class discussion. It is not intended to illustrate either effective or ineffective handling of an administrative situation.

 

Mickey Monus, Phar-Mor’s president, COO and founder, was a local hero in his hometown of Youngstown, Ohio. As demonstration of his loyalty, Monus put Phar-Mor’s headquarters in a deserted department store in downtown Youngstown. Monus—known as shy and introverted to friends, cold and aloof to others—became quite flashy as Phar-Mor grew. Before the fall of his Phar-Mor empire, Monus was known for buying his friends expensive gifts and he was building an extravagant personal residence, complete with an indoor basketball court. He was also an initial equity investor in the Colorado Rockies major league baseball franchise. This affiliation with the Colorado Rockies and other high profile sporting events sponsored by Phar-Mor fed Monus’ love for the high life and fast action. He frequently flew to Las Vegas, where a suite was always available for him at Caesar’s Palace. Mickey would often impress his traveling companions by giving them thousands of dollars for gambling.

 

Phar-Mor was a deep-discount retail chain selling a variety of household products and prescription drugs at substantially lower prices than other discount stores. The key to the low prices was “power buying,” the phrase Monus used to describe his strategy of loading up on products when suppliers were offering rock-bottom prices. The strategy of deep-discount retailing is to beat competitors’ prices, thereby attracting cost-conscious consumers. Phar-Mor’s prices were so low that competitors wondered how Phar-Mor could turn a profit. Monus’ strategy was to undersell Wal-Mart in each market where the two retailers directly competed.

Unfortunately, Phar-Mor’s prices were so low that Phar-Mor began losing money. Unwilling to allow these shortfalls to damage Phar-Mor’s appearance of success, Monus and his team began to engage in creative accounting so that Phar-Mor never reported these losses in its financial statements. Federal fraud examiners discerned later that 1987 was the last year Phar-Mor actually made a profit.

 

Investors, relying upon these erroneous financial statements, saw Phar-Mor as an opportunity to cash in on the retailing craze. Among the big investors were Westinghouse Credit Corp., Sears Roebuck & Co., mall developer Edward J. de Bartolo, and the prestigious Lazard Freres & Co. Corporate Partners Investment Fund. Prosecutors say banks and investors put $1.14 billion into Phar-Mor based on the phony records.

 

The fraud was ultimately uncovered when a travel agent received a Phar-Mor check signed by Monus paying for expenses that were unrelated to Phar-Mor. The agent showed the check to her landlord, who happened to be a Phar-Mor investor, and he contacted Phar-Mor’s chief executive officer (CEO), David Shapira. On August 4, 1992, David Shapira announced to the business community that Phar-Mor had discovered a massive fraud perpetrated primarily by Michael Monus, former president and COO, and Patrick Finn, former chief financial officer (CFO). In order to hide Phar-Mor’s cash flow problems, attract investors, and make the company look profitable, Monus and Finn altered Phar-Mor’s accounting records to understate costs of goods sold and overstate inventory and income. In addition to the financial statement fraud, internal investigations by the company estimated an embezzlement in excess of $10 million.2

 

Phar-Mor’s executives had cooked the books, and the magnitude of the collusive management fraud was almost inconceivable. The fraud was carefully carried out over several years by persons at many organizational layers, including the president and COO, CFO, vice president of marketing, director of accounting, controller, and a host of others.

 

The following list outlines seven key factors contributing to the fraud and the ability to cover it up for so long.

 

2 Stern, Gabriella, “Phar-Mor Vendors Halt Deliveries; More Layoffs Made,” The Wall Street Journal, August 10, 1992.

 

[1] The lack of adequate management information systems (MIS). According to the federal fraud examiner’s report, Phar-Mor’s MIS was inadequate on many levels. At one point, a Phar-Mor vice president raised concerns about the company’s MIS and organized a committee to address the problem. However, senior officials involved in the scheme to defraud Phar-Mor dismissed the vice president’s concerns and ordered the committee disbanded.

[2] Poor internal controls. For example, Phar-Mor’s accounting department was able to bypass normal accounts payable controls by maintaining a supply of blank checks on two different bank accounts and by using them to make disbursements. Only those involved in the fraud were authorized to approve the use of these checks.

[3] The hands-off management style of David Shapira, CEO. For example, in at least two instances Shapira was made aware of potential problems with Monus’ behavior and Phar-Mor’s financial information. In both cases Shapira chose to distance himself from the knowledge.

[4] Inadequate internal audit function. Ironically, Michael Monus was appointed a member of the audit committee. When the internal auditor reported that he wanted to investigate certain payroll irregularities associated with some of the Phar-Mor related parties, Monus and CFO Finn forestalled these activities and then eliminated the internal audit function altogether.

[5] Collusion among upper management. At least six members of Phar-Mor’s upper management, as well as other employees in the accounting department, were involved in the fraud.

[6] Phar-Mor’s knowledge of audit procedures and objectives. Phar-Mor’s fraud team was made up of several former auditors, including at least one former auditor who had worked for Coopers on the Phar-Mor audit. The fraud team indicated that one reason they were successful in hiding the fraud from the auditors was because they knew what the auditors were looking for.

[7] Related parties. Coopers & Lybrand, in a countersuit, stated that Shapira and Monus set up a web of companies to do business with Phar-Mor. Coopers contended that the companies formed by Shapira and Monus received millions in payments from Phar-Mor. The federal fraud examiner’s report confirms Coopers’ allegations. The complexity of the related parties involved with Phar-Mor made detection of improprieties and fraudulent activity difficult. During its investigation, the federal fraud examiner identified 91 related parties.

 

ALLEGATIONS AGAINST COOPERS

 

Attorneys representing creditors and investors pointed out that every year from 1987 to 1992, Coopers & Lybrand acted as Phar-Mor’s auditor and declared the retailer’s books in order. At the same time, Coopers repeatedly expressed concerns in its annual audit reports and letters to management that Phar-Mor was engaged in hard-to-reconcile accounting practices and called for improvements. Coopers identified Phar-Mor as a “high risk” audit client and Coopers documented that Phar-Mor appeared to be systematically exaggerating its accounts receivables and inventory, its primary assets. Phar-Mor’s bankruptcy examiner would later note that the retailer said its inventory jumped from $11 million in 1989 to $36 million in 1990 to a whopping $153 million in 1991.

 

Creditors suggested that the audit partner’s judgment was clouded by his desire to sell additional services to Phar-Mor and other related parties. Such “cross-selling” was common, and it was not against professional standards; however, the creditors claimed Coopers put extraordinary pressure on its auditors to get more business.3 The audit partner was said to be hungry for new business because he had been passed over for additional profit sharing for failing to sell enough of the firm’s services. The following year, the audit partner began acquiring clients connected to Mickey Monus and eventually sold over $900,000 worth of services to 23 persons who were either Monus’ relatives or friends.

 

3 Subsequent to Coopers & Lybrand’s audits of Phar-Mor, cross selling of certain services (e.g., information systems implementation, aggressive tax strategies) was prohibited for public company auditors by the Sarbanes-Oxley Act of 2002 and related rulings of the PCAOB, SEC and AICPA.

INVESTORS AND CREDITORS—WHAT COURSE OF ACTION TO TAKE?

After the fraud was uncovered, investors and creditors sued Phar-Mor and individual executives. These lawsuits were settled for undisclosed terms. Although many of the investors were large corporations like Sears and Westinghouse, representatives from these companies were quick to point out that their stockholders, many of whom were pension funds and individual investors, were the ultimate losers. These investors claimed they were willing to accept the business risk associated with Phar-Mor; however, they did not feel they should have had to bear the information risk associated with fraudulent financial statements. One course of action was to sue Phar-Mor’s external auditors, Coopers & Lybrand. However, although the investors and creditors were provided with copies of the audited financial statements, they did not have a written agreement with the auditor outlining the auditor’s duty of care. As is common with many audits, the only written contract was between Coopers and Phar-Mor.

 

Thirty-eight investors and creditors filed suit against Coopers, under Section 10(b) of the Federal Securities Exchange Act of 1934 and under Pennsylvania common law. All but eight plaintiffs settled their claims with Coopers without going to trial. However, the remaining plaintiffs chose to take their cases to a jury trial.

COURTROOM STRATEGIES

The Defense

 

Attorneys for Coopers continually impressed upon the jury that this was a massive fraud perpetrated by Phar-Mor’s management. They clearly illustrated the fraud was a collusive effort by multiple individuals within the upper management at Phar-Mor who continually worked to hide evidence from the auditors. The auditors were portrayed as victims of a fraud team at Phar-Mor that would do, and did, whatever it took to cover up the fraud. After the verdict the defense attorney said:

 

The jury [rightly] saw that a corporate fraud had been committed, but it mistakenly blamed the outside auditor for not uncovering something no one but the perpetrators could have known about… It’s a first…that effectively turns outside auditors into insurers against crooked management. (Robert J. Sisk, chairman of New York’s Hughes Hubbard & Reed)

 

The Plaintiffs

 

The plaintiffs opened their case by acknowledging the incidence of fraud does not, by itself, prove there was an audit failure. Moreover, they did not allege that Coopers knowingly participated in the Phar-Mor fraud; nor did they allege Coopers was liable because it did not find the fraud. Rather, plaintiffs alleged Coopers made misrepresentations in its audit opinions. The following quotes from plaintiff attorneys’ statements to the jury illustrate the plaintiffs’ strategy:

… [W]e’re not going to try to prove in this case what happened at Coopers & Lybrand. That’s not our burden. We don’t know what happened. We do know that we invested in Phar-Mor on the basis of the financials of Phar-Mor, with the clean opinions of Coopers & Lybrand. We’ve now lost our investment, and it’s a very simple case. We just want our money back…[l]f Coopers can demonstrate to you that they performed a GAAS audit in the relevant time periods, then you should find for them. But if you find based upon the testimony of our experts and our witnesses that Coopers never, ever conducted a GAAS audit…then I submit you should ultimately find for the [plaintiffs]. (Ed Klett, attorney for Westinghouse) So the question, ladies and gentlemen, is not whether Coopers could have discovered the fraud. The question is whether Coopers falsely and misleadingly stated that it conducted a GAAS audit and falsely and misleadingly told [plaintiffs] that Phar-Mor’s worthless financial statements were fairly presented. And the answer to that question is yes. (Sarah Wolff, attorney for Sears)

 

Throughout the five-month trial, the plaintiffs continually emphasized the following facts in an effort to have the jury believe the auditors were motivated to overlook any problems that might have been apparent to a diligent auditor:

 

■ The fraud went on for a period of six years, and, therefore, should have become apparent to a diligent auditor.

■ Coopers was aware that Phar-Mor’s internal accountants never provided the auditors with requested documents or data without first carefully reviewing them.

■ Greg Finnerty, the Coopers partner in-charge of the Phar-Mor audit, had previously been criticized for exceeding audit budgets and, therefore, was under pressure to carefully control audit costs.

■ Mickey Monus, Phar-Mor’s president, was viewed by Finnerty as a constant source of new business.

 

The areas where the plaintiffs alleged the auditors were reckless and did not perform an audit in accordance with GAAS centered around the accounting for inventory and its corresponding effects on both the balance sheet and the income statement. The plaintiffs’ allegations centered on the five major issues detailed below.

EARLY WARNING SIGNS—THE TAMCO SETTLEMENT

The Fact Pattern

 

In 1988, internal gross profit reports at Phar-Mor indicated serious deterioration in margins. Phar-Mor was facing an unexpected $5 million pretax loss. It was determined, with the assistance of a specialist from Coopers, that the drop in margins was due mainly to inventory shortages from one of Phar-Mor’s primary suppliers, Tamco. Tamco, a subsidiary of Giant Eagle, Phar-Mor’s principal shareholder, had been shipping partial orders, but billing Phar-Mor for full orders. Unfortunately, Tamco’s records were so poor that it could not calculate the amount of the shortage. Likewise, Phar-Mor had no way to determine the exact amount of the shortage because during this time period Phar-Mor was not logging in shipments from Tamco.

A Phar-Mor accountant performed the only formal analysis of the shortage, which he estimated at $4 million. However, negotiations between Phar-Mor and Tamco (along with its parent company Giant Eagle) resulted in a $7 million settlement. Phar-Mor recorded the $7 million as a reduction to purchases, resulting in a pretax profit of approximately $2 million in 1988. Because Tamco and Phar-Mor were both subsidiaries of Giant Eagle, the settlement was disclosed in a related-party footnote to the financial statements.

 

Trial evidence indicates the final settlement amount was determined, in part, by looking at Phar-Mor’s profitability in prior years. After the settlement, Phar-Mor’s gross margin was nearly identical to the prior year. After the fraud was uncovered, it was determined there were signals that Phar-Mor’s profitability had slipped in 1988.

Plaintiff Allegations

 

The plaintiffs claimed the settlement was a disguised capital contribution and thus simply a vehicle to artificially inflate Phar-Mor’s earnings. The plaintiffs alleged Coopers acted recklessly by not obtaining sufficient persuasive evidence to support this highly material transaction. The following excerpts are from testimony given (in a deposition) by Pat Finn, former CFO of Phar-Mor, and Charles Drott, an expert witness for the plaintiffs:

 

There was really no way to support the amount of the settlement. We did a number of tests, but based on our in-house review, we didn’t think that we could support $7 million. Mickey [Monus] did an excellent job of negotiating with David [Shapira] and he got us $7 million. (Pat Finn, former CFO of Phar-Mor) What Mr. Finn is basically describing is that, although there may well have been some shortages, that what Phar-Mor was really doing was entering into a transaction, which would enable them to manipulate its profit to overcome losses, to hide losses. So, essentially what he’s describing is fraudulent financial reporting…[T]he Coopers & Lybrand workpapers contain no independent verification, nor was there any attempt by Coopers & Lybrand to determine the actual amount of the shortages. It simply just was not done. (Charles Drott, expert witness for the plaintiffs)

 

Plaintiffs also alleged the footnote documenting the receipt and the accounting treatment of the settlement was misleading. Although the footnote disclosed the nature and amount of the related-party transaction, the plaintiffs argued the footnote should have more clearly indicated the uncertainty in the settlement estimate. And plaintiffs felt the footnote should have explicitly stated that without the settlement, Phar-Mor would have shown a loss.

Defense Response

 

A copy of the analysis conducted by the Phar-Mor accountant indicating a $4 million shortage was included in Coopers’ workpapers. However, Coopers considered the analysis very crude and included it only as support for the existence of a shortage, not the dollar amount. Although the workpapers contained relatively little documentation specifically supporting a $7 million settlement, Coopers, who audited all three companies party to the negotiation, did perform a number of procedures to satisfy themselves of the propriety of the settlement. After the internal investigation pointed to Tamco, Phar-Mor began to maintain a log of Tamco shipments. Coopers tracked the results of the log and in every subsequent Tamco shipment shortages were found. Coopers also contacted another company that had received Tamco shipments during this time period and learned that retailer was also experiencing shortages from Tamco.

Coopers’ experts examined Tamco’s operations and confirmed the shortages were due to a new computer inventory system at Tamco. Greg Finnerty, Coopers’ partner in charge of the audit, explained the auditors’ position as follows:

 

…[I]t’s a related-party transaction, and we don’t have the responsibility to validate the amount. The responsibilities in accordance with GAAS standards are twofold. One, in any related-party transaction, is to understand the business purpose of the transaction; and two, to agree to the disclosure of the transaction…[W]e understood the business transaction, and the disclosure was adequate. It talked about the $7 million transaction; and we saw a check, not just an intercompany account. We did a lot of those transactions, so we fulfilled our two responsibilities that are the standards for related-party transactions. I was not in that settlement session, nor should I have been. That was between the two related parties. When the discussions were over with, I talked to both parties separately, myself, and talked to them about the settlement, the reasonableness of that settlement. I, in fact, asked David Shapira—and I specifically recall asking David Shapira—of the $7 million, is that all merchandise or is there any sense that you are—you or the board of directors of Giant Eagle—passing additional capital into Phar-Mor through this transaction? And I was given absolute assurance that he was satisfied that the $7 million was a reasonable number; and, in fact, he indicated that this was a number much lower than what Phar-Mor thought it should have been. So it seemed to me that there was a reasonable negotiation that went on between these parties. (Greg Finnerty, engagement partner for the Phar-Mor audit)

 

Regarding the footnote disclosure, Coopers pointed out the footnote was typical of related-party footnotes, and that it was rather obvious that without the $7 million settlement, Phar-Mor would have reported a loss. Evidence also showed that, prior to the release of the financial statements, Phar-Mor met with investors and creditors to cover the terms and significance of the settlement. Finally, to this day, none of the parties involved—not Tamco, Phar-Mor, or Giant Eagle—have suggested the settlement was part of the fraud. Further testimony in the trial suggested the Tamco settlement was not an issue of concern with investors and creditors until their attorneys made it an issue years later in the litigation.

THE PRICE TEST

The Fact Pattern

 

Inventory at Phar-Mor increased rapidly from $11 million in 1989 to $36 million in 1990 to $153 million in 1991. Phar-Mor’s inventory system did not include a perpetual inventory record. Therefore, Phar-Mor used the retail method for valuing inventory. Phar-Mor contracted with an outside firm to physically count and provide the retail price of each item in inventory twice per year. Phar-Mor would then apply a cost complement to determine the cost of inventory. Phar-Mor’s initial strategy was to mark all merchandise up 20%, resulting in a gross margin of 16.7% and a cost complement of 83.3%. However, to be competitive, Phar-Mor lowered the margins on certain “price sensitive” items to get customers in the door. As a result, Phar-Mor’s overall budgeted gross margin fell to 15.5%, resulting in a cost complement of 84.5%.

Coopers identified inventory valuation as a high-risk area in its workpapers. As a detailed test of Phar-Mor’s inventory costing, Coopers annually attended the physical inventory count at four stores and selected from 25 to 30 items per store to perform price testing. Sample items were selected by the attending auditor in a haphazard fashion. Purchase invoices were examined for the items selected and an overall gross margin for the sample was determined. In the years 1988 through 1991, Coopers’ sample gross margins averaged from 16.1% to 17.7%. Coopers explained the difference between the expected 15.5% gross margin and the sample gross margin resulted because the sample taken did not include many price sensitive items, and, therefore, the sample gross margin was higher than Phar-Mor’s overall margin. Coopers concluded the difference noted was reasonable and consistent with expectations.

 

After the fraud was uncovered, it was determined that Phar-Mor’s actual margins were really much lower than the budgeted 15.5%, because the price sensitive items made up a relatively large percentage of sales. When Phar-Mor’s management saw the fiscal 1989 gross profit reports were coming in below historical levels, it started changing the gross margin reports because it feared Giant Eagle would want back some of the $7 million paid in Tamco settlement money. Management continued to alter the gross profit reports from that time until the fraud was uncovered.

Plaintiff Allegations

 

The plaintiffs argued that had the Coopers auditors employed a more extensive and representative price test, they would have known what Phar-Mor’s gross margins actually were, no matter what the fraud team was doing to the gross profit reports. Plaintiffs alleged the way the auditors conducted their price test and the way they interpreted the results, were both woefully inadequate and unreliable due to the sample size and acknowledged lack of representativeness.

 

…[T]he attitudes of the people involved in this were simply that even though there was clear recognition in the workpapers that this test was so flawed that it was virtually worthless, did not produce anything to them that they could use in their audit, yet they still concluded year after year that everything was reasonable, and that’s—that defies my imagination. I don’t understand how that conclusion can come from their own recognition of that, the test was so severely flawed. Also, they gave consideration to doing a better price test, but in fact never made any attempt to do so because in each of the four years they did the same exact kind of test, year after year after year, even though they knew the test produced unreliable results. (Charles Drott, expert witness for the plaintiffs)

 

The plaintiffs also pointed to Coopers’ workpapers where the auditors had indicated that even a one-half percent misstatement in gross margin would result in a material misstatement. Plaintiffs argued the auditors recklessly ignored the sample results indicating a material misstatement.

 

The plaintiffs also argued the gross profit schedules could not be used to independently test the cost complement because the calculated profit margin and ending inventory were a function of the standard cost complement that was applied to the retail inventory balance derived from the physical inventory.

 

Accounting

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I just started Accounting 220 and I am looking for tutor to help me through the semester. Below you will find the Homework for week 1. Thanks

 

 

 

Chapter 1

 

 

 

1. Professor Pacioli was recently asked the following five questions by his aspiring accounting students. Prepare a summary of the professor’s reply to each question.

 

(a) Professor, I cannot quite put my finger on it, but your name has a familiar ring to it . . .why is that?

 

(b) Professor, I have no interest in being a bookkeeper. Why should I study accounting?

 

(c) Professor, I am not sure I understand why there is a distinction between financial and managerial accounting. If you are accounting for one business, how can there possibly be two separate approaches?

 

(d) Professor, haven’t computers and modern information systems made accountants obsolete?

 

(e) Professor, I am interested in becoming a CPA. What do I need to do, apply to the FASB?

 

2. Determine whether each of the following items is an: Asset Liability Revenue Expense Owners’ equity Other

 

(a) Cash

 

(b) Dividend to shareholders

 

(c) Land

 

(d) Accounts payable

 

(e) Capital stock

 

(f ) Notes payable

 

(g) Accounts receivable

 

(h) Salaries

 

(i) Rent

 

(j) Cost of utilities used

 

(k) Customer order not yet filled

 

(l) The value of completed services provided to customers

 

(m) Obligation to pay for utilities consumed

 

 

 

3. Indicate the impact (increase/decrease/no change) for each of the following transactions on total assets, liabilities, and owners’ equity.

 

(a) Paid the current month’s rent.

 

(b) Provided services to customers for cash.

 

(c) Provided services to customers on account.

 

(d) Recorded receipt of an electric bill to be paid next month.

 

(e) Paid an electric bill received in a prior month.

 

(f ) Purchased land for cash.

 

(g) Purchased equipment in exchange for a note payable (loan).

 

(h) Collected a previously recorded account receivable.

 

(i) Purchased a building by paying 20% in cash and agreeing to

 

pay the remainder over future years.

 

(j) Declared and paid a dividend to shareholders.

 

4. Goudar Bloodcare is a blood donation center where eligible donors give a pint of blood about once every other month. Assess each of the following to decide if Goudar should record the item as an asset, a liability, a revenue, or expense.

 

(a) The monthly fee paid to maintain Goudar’s website.

 

(b) Needles, bags, plastic bandages, etc. that were used to collect blood.

 

(c) Needles, bags, plastic bandages, etc. that will be used in the future to collect blood.

 

(d) Amounts received from hospitals to pay for the blood products.

 

(e) A loan that is owed to a bank.

 

(f ) The building and equipment that serves as the home office for Goudar.

 

(g) Amounts owed to a printing company that prepared T-shirts that were given away at a recent

 

blood drive campaign.

 

(h) The salaries of employees of Goudar.

 

5. Magee Corporation provided the following summary balance sheet information:

 

Dec. 31, 20X1 Dec. 31, 20X2

 

Total assets $1,500,000 $2,300,000

 

Total liabilities 700,000 1,400,000

 

Compute net income for the year ending December 31, 20X2, under each of the following independent scenarios:

 

(a) Magee paid no dividends, and no additional capital was raised via share issuances.

 

(b) Magee paid $100,000 in dividends, and no additional capital was raised via share issuances.

 

(c) Magee paid no dividends, but raised $250,000 via issuances of additional shares of stock.

 

(d) Magee paid $100,000 in dividends, and raised $250,000 via issuances of additional shares of stock.

 

6.CUE Corporation was formed at the beginning of 20X2, and presents the following incomplete financial statements for three years. CUE has requested your help in completing the missing values for each year.

 

Begin by solving the unknowns in the 20X2 year, and work forward to subsequent years. Remember that

 

20X2 is the first year of business, so Cue begins with a zero balance in 20X2 beginning retained earnings.

 

 

 

 

7. Think very broadly about accounting, its societal role, and its underlying premises, then provide a general answer to each of the following.

 

(a) What is the role of accounting in society?

 

(b) Is accounting complete? Does it provide all of the information that investors and creditors need

 

for rationale decision making?

 

(c) Consider an intrinsic principle of accounting, such as the historical cost principle. Are the underlying principles and assumptions of accounting immutable truths, or is there some degree of arbitrariness that is apt to evolve over time?

 

 

 

8. As you study accounting, you will become increasingly familiar with a variety of generally accepted accounting principles. Already, you are beginning to appreciate some of the fundamental principles, rules, and procedures. Evaluate the following ten comments, and state whether you agree or disagree:

 

(a) The fundamental accounting equation precludes a situation where liabilities exceed assets.

 

(b) A complete set of financial statements would include a cash flow statement.

 

(c) The balance sheet can prepared in a vertical or horizontal format.

 

(d) The form of dating each financial statement is identical.

 

(e) Many assets are reported at their historical cost.

 

(f ) Revenue should not be recognized before it is collected.

 

(g) The term income is synonymous with the term revenue.

 

(h) Dividends are reported as an expense on the income statement.

 

(i) Retained earnings will equal cash on hand.

 

(j) Issuing stock does not increase a company’s revenue or income.

 

9. Review the following facts for four separate companies. Identify the two companies that lost money during the year, explaining how you reached your conclusion for each.

 

 

 

COMPANY A Ending retained earnings was less than beginning retained earnings and dividends were twice as much as income during the year.

 

COMPANY B Ending retained earnings was more than beginning retained earnings, but the company issued stock in an amount greater than the increase in retained earnings; no dividends were declared or paid.

 

COMPANY C No stock was issued and no dividends were declared or paid; total liabilities went up more than total assets.

 

COMPANY D Expenses exceeded revenues, but the company issued additional shares of stock in an amount that exceeded the difference between revenues and expenses.

 

 

 

Involved

 

 

 

I-01.03;

 

Prepare Bisceglia’s income statement, statement of retained earnings, and balance sheet for the year ending December 31, 20X5. The following information is all that is available. Be sure to prepare proper headings and dates on each financial statement.

 

 

 

Capital stock $41,000

 

Rent expense $10,000

 

Wage expense 37,000

 

Accounts payable 4,000

 

Revenue 90,000

 

Equipment 80,000

 

Cash 9,000

 

Dividends 5,000

 

Utilities expense 6,000

 

Accounts receivable 19,000

 

Beginning retained earnings 11,000

 

Notes payable 20,000

 

 

 

 I-01.05

 

Bingo Corporation is a newly formed company. Below are the first 10 transactions that Bingo encountered. Prepare an income statement, statement of retained earnings, and balance sheet immediately following each of these consecutive transactions.

 

(1) Issued capital stock for $50,000 cash.

 

(2) Purchased building for $120,000, making a $20,000 down payment and signing a promissory

 

note payable for the balance.

 

(3) Paid wages expense of $5,000.

 

(4) Provided services to customers for $15,000 cash.

 

(5) Paid utilities expense of $2,000.

 

(6) Reduced note payable with an $8,000 cash payment (ignore interest costs).

 

(7) Provided services to customers on account, $10,000.

 

(8) Incurred wages expense of $3,000, to be paid in the future.

 

(9) Collected $4,000 on an outstanding account receivable.

 

(10) Declared and paid dividend of $6,000.

 

 

 

Chapter 2

 

 

 

 

 

1. Perhaps you have watched the game show known as “Jeopardy.” Contestants must prepare a question that is answered by a given prompt. It is your turn to play “Jeopardy” and your category is “tools of accounting.” For instance, if your prompt was “book of original entry,” you would reply: “What is the general journal?” And remember, the prompts get harder as you go. Don’t forget to answer in the form of a question!

 

(a) Debits must equal these

 

(b) Used to increase expense accounts

 

(c) The process of transferring data from journal to ledger

 

(d) Not a financial statement, showing balance

 

(e) The offspring of a control account

 

(f ) A “scratch pad” for accountants

 

 

 

1. Review the following list of accounts, and indicate the debit/credit rules for the account, as well as the account’s normal balance. The first one is done as an example.

 

 

 

                                               Increased with a:               Decreased with a:        Normal Balance:

 

(A) Cash Debit Credit Debit           Debit                                       Debit                     Credit                             

 

(b) Capital Stock

 

(c) Accounts Payable

 

(d) Revenues

 

(e) Rent Expense

 

(f ) Equipment

 

(g) Dividends

 

(h) Utilities Expense

 

(i) Accounts Receivable

 

(j) Loan Payable

 

 

 

1. Mo Lambert formed a corporation to provide concrete construction work. His jobs typically involve building parking lots, drives, and foundations. Mo provided the following information about transactions occurring during the first month of operation. Evaluate the transactions and prepare journal entries for this activity.

 

Jan. 2, 20X5 Mo Lambert invested $10,000 cash in the capital stock of the newly formed corporation.

 

Jan. 4, 20X5 Purchased equipment on account for $7,500.

 

Jan. 12, 20X5 Proceeds received from customers for services provided

 

Jan. 15, 20X5 Received a bill for construction supplies used in the amount of $2,000.

 

Jan. 18, 20X5 Provided $3,200 of services on account.

 

Jan. 20, 20X5 Paid employees $2,300 for wages earned.

 

Jan. 22, 20X5 Collected 60% of the amount due for the work provided on January 18.

 

Jan. 23, 20X5 Paid 40% of the amount due on the equipment purchased on January 4.

 

Jan. 25, 20X5 Purchased (and immediately used) construction supplies for cash in the amount of $600.

 

Jan. 31, 20X5 The company paid Mo Lambert a $1,500 dividend.

 

 

 

1. Yorkston Corporation was formed in 1961. The company came into existence concurrent with the beginning of construction of super highways throughout the country. It seems the company’s founders had innovated a unique process of applying high-gloss luminescent paint to street signs, and these were in high demand for the new high-speed roadways.

 

The company has gone on to develop a full line of highway safety products. Yorkston is now in the process of building a company museum. Someone has dug up the first page from the company’s original general journal. This page will be on display in the museum. When you examine this page, you will note that the bookkeeper simply recorded the debits and credits, but included no descriptions.

 

Your job is to review the journal page and write a description for each transaction. These descriptions will

 

be included on an explanatory diagram included in the display case. The diagram should also include some information that would allow a museum visitor to know what the document is and what it was used for.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1. Bikash Mishra recently formed a financial services and consulting firm in Nepal. He was very busy during the first month and has not yet had an opportunity to install his computerized accounting package. But, he did understand the need to keep track of all transactions as they occurred. Following is a manual journal that he maintained for transactions occurring during January. All amounts are in the Nepalese rupee (NPR).Bikash has requested that you prepare a ledger of the company’s accounts, and post these transactions to determine the balance of each account. He needs this data in order to begin the process of transitioning to his new computerized accounting system.

 

 

 

 

 

 

 

 

1. The CEO of newly formed Targus Company printed a copy of the company’s general ledger prior to a recent plane flight. She settled into seat 7A next to where you were sitting. Once airborne, she removed the printed “GL” from her brief case and began examining the report. Unfortunately, she realized that her printer had run out of ink on the very last page. She is frustrated because she is not able to determine the company’s exact profitability to date, and is on her way to a shareholder meeting where she is to issue a report on the company’s progress. She happened to note that you were studying an accounting book, and asked if you might help her. Prepare a trial balance from the general ledger, determine the missing amount for salaries expense, and determine the company’s profit for its first month. 

 

		CASH
		Date	Description	Debit	Credit	Balance
		02-Jan-X8	Balance forward	–	–	–
		03-Jan-X8	Journal Page 1	250,000	–	250,000
		10-Jan-X8	Journal Page 1	–	75,000	175,000
		14-Jan-X8	Journal Page 1	–	15,000	160,000
		18-Jan-X8	Journal Page 2	40,000	–	200,000
		21-Jan-X8	Journal Page 2		4,000	196,000
		26-Jan-X8	Journal Page 2		3,000	193,000
		31-Jan-X8	Journal Page 2	26,000	–	219,000
		ACCOUNTS RECEIVABLE
		Date	Description	Debit	Credit	Balance
		02-Jan-X8	Balance forward	–	–	–
		06-Jan-X8	Journal Page 1	55,000	–	55,000
		18-Jan-X8	Journal Page 2	–	40,000	15,000
		LAND
		Date	Description	Debit	Credit	Balance
		02-Jan-X8	Balance forward	–	–	–
		10-Jan-X8	Journal Page 1	75,000	–	75,000
		SALARIES PAYABLE
		Date	Description	Debit	Credit	Balance
		02-Jan-X8	Balance forward	–	–	–
		31-Jan-X8	Journal Page 2	–	18,000	18,000
		CAPITAL STOCK
		Date	Description	Debit	Credit	Balance
		02-Jan-X8	Balance forward	–	–	–
		03-Jan-X8	Journal Page 1	–	250,000	250,000
		REVENUES
		Date	Description	Debit	Credit	Balance
		02-Jan-X8		–	–	–
		06-Jan-X8	Journal Page 1	–	55,000	55,000
		31-Jan-X8	Journal Page 2	–	26,000	81,000
		SUPPLIES EXPENSE
		Date	Description	Debit	Credit	Balance
		02-Jan-X8		–	–	–
		26-Jan-X8	Journal Page 2	3,000	–	3,000
		UTILITIES EXPENSE
		Date	Description	Debit	Credit	Balance
		02-Jan-X8		–	–	–
		21-Jan-X8	Journal Page 2	4,000	–	4,000
		SALARIES EXPENSE
		Date	Description	Debit	Credit	Balance
		02-Jan-X8		–	–	–
		14-Jan-X8	Journal Page 1	15,000
		31-Jan-X8	Journal Page 2

 

 

 

1.  

 

Professor Drebin’s Executive MBA students were recently discussing the benefits of a chart of accounts. Following is a transcript of the discussion. Most of the comments were correct, but two students were off base. Assume the role of Professor Drebin, and identify and adjust the incorrect statements.

 

Susie- I am a sales manager, but I occasionally need to review our company’s general journal.

 

It frustrates me because the accounts are often listed only by a number. What’s up with that?

 

Professor- What you are likely seeing are references to the chart of accounts. Chart of accounts are quite typical. Why would a company use a chart of accounts?

 

Miguel- I am an IT manager, and I can tell you that computer programming is much simpler when numeric values are used in lieu of text descriptions. This aids the construction of underlying computer programs that are able to match and sort.

 

Roberta- Miguel may be right, but I work in our cash department and I have to monitor receivables, payables, and cash. A key benefit for me is that I can determine the total of all receivables by doing a query of our 1002 accounts. If I want data by customer, I can refine the query to look for sub accounts like 1002.003, etc. And, the same thing is true for cash and payables. For example, our cash account is 1001, but we have unique sub accounts for each bank account (1001.001, 1001.002, etc.). So, I think one key benefit is to have a unique master account that can easily be broken down into many sub components.

 

Fletcher- This is all interesting to me. I guess you don’t even need textual names for accounts if you use a numeric system.

 

Randy- I had no idea about this. All I know is that I am in charge of managing our delivery trucks, and I track individual trucks for scheduled maintenance based on an asset ID tag number. Each truck has a unique long number, but it just occurred to me that it always begins with the digits 10005. I wonder if that “10005” might tie back to the company’s chart of accounts as well.

 

Jana- Randy, I doubt it. We have trucks, and I know for a fact that they are numbered 1500 in our chart of accounts. I am pretty sure that all company’s must use the same chart of accounts. Otherwise, comparing data from different companies would be chaos.

 

Louis- Jana makes an interesting point. But, I don’t think everyone uses the same chart of accounts. Although, I must add that I recently read about a project called XBRL that purports to develop some uniform data management schemes that will aid data comparison and exchange. And, it involves a lot more than just the chart of accounts.

 

Arman- I am a divisional manager, and I regularly review our unit’s ledger accounts and compare them to balances of other divisions. It is very helpful to be able to identify all assets, expenses, and so forth by uniform account numbering. This uniformity greatly aids data mining and evaluation. For example, our travel costs all start with a 503 digit, but 503.01 further identifies air travel, 503.02 relates to lodging, and so forth. This scheme enables me to look

 

at overall data, as well as its components. It sure helps me control costs and compare results

 

 

 

 

 

1. The following narratives describe transactions impacting cash, accounts receivable, accounts payable, revenues, and selected expense accounts. Use T-accounts to analyze this activity and determine the ending balances for accounts receivable and accounts payable. At the beginning of the period, accounts receivable totaled $54,300, while accounts payable totaled $31,275. The company started the period with $85,000 in cash.

    

 

Transaction #1 Services were provided to customers for cash in the amount of $15,230.

 

Transaction #2 Supplies were purchased and used. This purchase occurred on account, in the

 

amount of $2,400.

 

Transaction #3 Collections of outstanding receivables occurred in the amount of $19,410.

 

Transaction #4 Utilities costs in the amount of $763 were incurred and paid in cash.

 

Transaction #5 Payments on outstanding accounts payable were made for $23,900.

 

Transaction #6 Services were provided to customers on account in the amount of $48,654.

 

1. Narmadha Narayan distributes electronic parts. Most transactions with customers are immediately paid with cash or check. But, Narayan has five major customers that have established accounts. These approved customers routinely buy on credit. The terms of the credit agreement provide that payment must occur within 30 days, and each customer has a maximum credit limit of $10,000.

 

Following is information for May regarding each of the credit customers:

 

 

 

Customer #1 Beginning balance, $1,403. Purchases on account on May 5, $7,237.

 

Payment on account on May 17, $1,403.

 

Customer #2 Beginning balance, $5,275. Purchase on account on May 15, $2,275.

 

Payment on account on May 26, $4,275.

 

Customer #3 Beginning balance, $0. Purchase on account on May 9, $9,550.

 

Customer #4 Beginning balance, $7,557. Purchase on account on May 7, $2,100.

 

Purchase on account on May 22, $9,444. Payment on account on May 11, $7,557.

 

Customer #5 Beginning balance, $2,990. Payment on account on May 18, $2,990.

 

 

 

(a) Prepare a subsidiary accounts receivable ledger account for each of Narayan’s customers.

 

(b) Prepare the general ledger Accounts Receivable “control” account. Be sure the total in this account reconciles to the sum of the individual balances in the subsidiary ledgers.

 

(c) What is the purpose of a subsidiary ledger? What other control accounts might be supported by subsidiary ledgers?

 

(d) Review Narayan’s subsidiary ledgers and identify which customer should be put on credit watch for

 

being delinquent, and which customer has exceeded their credit limit.

 

 

 

Involved

 

Tom Pryor formed a management consulting firm specializing in cost management systems. Below are the transactions that occurred during the initial month of operation.

 

June 2 Tom Pryor invested $25,000 cash in the capital stock of the newly formed corporation.

 

June 3 Hired an administrative assistant, to be paid $3,000 per month. Leased office space at the rate of $1,000 per month. Signed a contract with Pomero to deliver consulting services valued at $7,500.

 

June 8 Purchased (and immediately used) office supplies on account for $750.

 

June 9 Received $2,500 from Pomero for work performed to date.

 

June 15 Paid $1,200 for travel costs associated with consultation work.

 

June 16 Provided services on account to Arpy for $3,000.

 

June 17 Paid $1,500 to administrative assistant for salary.

 

June 23 Billed Farris for $4,000 consulting engagement performed.

 

June 25 The company paid Tom Pryor a $1,000 dividend.

 

June 26 Collected 50% of the amount due for the billing on June 23.

 

June 27 Purchased computer furniture for $4,000, paying $1,000 down.

 

June 27 Paid $750 on the open account relating to the June 8 purchase.

 

June 28 Completed the Pomero job and billed the remaining amount.

 

June 30 Paid $1,500 to administrative assistant for salary.

 

June 30 Paid rent for June, $1,000.

 

Pryor consulting uses the following accounts:

 

Cash

 

Accounts Receivable

 

Equipment

 

Accounts Payable

 

Capital Stock

 

Revenues

 

Salary Expense

 

Rent Expense

 

Travel Expense

 

Supplies Expense

 

Dividends

 

(a) Journalize the listed transactions.

 

(b) Post the transactions to the appropriate general ledger accounts.

 

(c) Prepare a trial balance as of June 30.

 

2

 

Paul Morris is a doctor of veterinary medicine specializing in horses. At the beginning of March, he incorporated his practice, and has completed his first month in business. He has come to you seeking help setting up his “books.” The following is a transcript of your conversation with Dr. Morris.

 

Dr. Morris “I specialize in embryo transplants for horses that will be used in cutting horse competitions. I started the month by investing $30,000 of my own money in the stock of the business.”

 

You “By stock, do you mean livestock animals or capital stock?”

 

Dr. Morris “I mean the capital stock of the business — I don’t actually own any animals. I work with clients’ animals only.”

 

You “Ok, is that all the money you had to start out the business? Were there any other investors?”

 

Dr. Morris “I am the only owner, but the business did borrow $50,000 to buy some land on which I plan to build a barn next year. Is that what you mean by other investors?”

 

You “Not exactly. The loan will need to be listed as a liability of the business. Have you paid off any of the loan yet?”

 

Dr. Morris “Not yet. The loan is not due for several years. But, I did pay $400 interest on the loan for the month.”

 

You “I see. So, you plan to build a barn next year on the land. I guess that is where you will be working with animals in the future. But, where are you caring for animals currently?”

 

Dr. Morris “I rent stalls from Tri-County arena. That costs me $1,500 per month. Which reminds me, I need to pay them for the first month. I forgot to send them their check!”

 

You “Besides the interest, what other bills have you paid so far?”

 

Dr. Morris “I knew you would ask that, so I kept a list. I paid for salaries of $2,000, for supplies used of $3,300, and utilities of $700. That’s it so far.”

 

You “Do you have any other bills that have not been paid yet?”

 

Dr. Morris “Nope, just the rent , but we already talked about.”

 

You “Good. Let’s talk about your revenues. Do you have a list of what customers paid you this month?”

 

Dr. Morris “No, just a total of all my bank deposits. They come to a total of $26,315 — excluding the cash deposits for my original investment and the $50,000 loan.”

 

Processing transactions into financial reports I-02.02

 

You “I see, and this $26,315 all relates to services provided to customers? Have you done any work for which you have not been paid?”

 

Dr. Morris “Yes, my wife keeps up with the outstanding balances due from customers. She told me that we are still owed $9,500.”

 

You “Well, Dr. Morris, I think that gives me enough information to get started. I will prepare you a set of financial statements for your first month of business, and we will see where you stand. Then, I think the first order of business for next month will be to get you set up with a computerized accounting system. You really will need an organized accounting system going forward, and that is best handled with a basic computer program. There are many from which to choose.”

 

Dr. Morris “Great, that is what I was hoping you would say. I cannot tell you how much I appreciate your help on this.”

 

(a) Prepare summary journal entries that reflect the first month of business.

 

(b) Use T-accounts to capture the impact of the transactions on the accounts.

 

(c) Prepare a trial balance as of the end of March.

 

(d) Prepare an income statement and statement of retained earnings for the month of March. Prepare the resulting balance sheet as of the end of the month.

ACCOUNTING

ORDER A PLAGIARISM FREE PAPER NOW

ACCT&201 Week 2 Homework:

 

1. Select the financial statement that matches with the description (Related transactions)

	Related transactions Financial Statements a. Change in owners’ claims to resources b. Profitability of the company c. Change in cash as a result of operating, investing, and financing activities d. Resources equal creditors’ and owners’ claims to those resources

 

2. At the beginning of the year (January 1), Buffalo Drilling has $11,000 of common stock outstanding and retained earnings of $8,200. During the year, Buffalo reports net income of $8,500 and pays dividends of $3,200. In addition, Buffalo issues additional common stock for $8,000.

Required:

Prepare the statement of stockholders’ equity at the end of the year (December 31).

 

	BUFFALO DRILLING Statement of Stockholders’ Equity Common Stock Retained Earnings Total Stockholders’ Equity Beginning balance Ending balance

 

3. Wolfpack Construction has the following account balances at the end of the year.

Accounts	Balances
Equipment	$	26,000
Accounts payable		3,000
Salaries expense		33,000
Common stock		11,000
Land		18,000
Notes payable		20,000
Service revenue		39,000
Cash		6,000
Retained earnings		?

 

Required:

Use only the appropriate accounts to prepare a balance sheet.

	WOLFPACK CONSTRUCTION Balance Sheet Assets Liabilities Total liabilities 0 Stockholders’ Equity Total stockholders’ equity 0 Total assets $0 Total liabilities and stockholders’ equity $0

4. Longhorn Corporation provides low-cost food delivery services to senior citizens. At the end of the year, the company reports the following amounts:

Cash	$	1,200		Service revenue	$	67,700
Equipment		29,000		Cost of goods sold (food expense)		53,400
Accounts payable		4,400		Buildings		40,000
Delivery expense		2,600		Supplies		3,400
Salaries expense		5,500		Salaries payable		800

 

In addition, the company had common stock of $40,000 at the beginning of the year and issued an additional $4,000 during the year. The company also had retained earnings of $18,200 at the beginning of the year.

Show your work

1. 
   Prepare the income statement for Longhorn Corporation.

 

 

 

 

	LONGHORN CORPORATION Income Statement Expenses: Total expenses 0

 

2. Prepare the statement of stockholders’ equity for Longhorn Corporation.

	LONGHORN CORPORATION Statement of Stockholders’ Equity Common Stock Retained Earnings Total Stockholders’ Equity Beginning balance Ending balance

 

5. Below are incomplete financial statements for Bulldog, Inc.

   Required:

Calculate the missing amounts.

	BULLDOG, INC. Income Statement Revenues $39,000 Expenses: Salaries Advertising 6,000 Utilities 4,000 Net income

 

	BULLDOG, INC. Statement of Stockholders’ Equity Common Stock Retained Earnings Total Stockholders’ Equity Beginning balance $10,000 $7,000 $17,000 Issuances 1,100 1,100 Add: Net income Less: Dividends (3,000) (3,000) Ending balance $11,100 $10,000 $21,100

 

 

 

	BULLDOG, INC. Balance Sheet Assets Liabilities Cash $4,000 Accounts payable Write in here Accounts receivable 3,000 Stockholders’ Equity Supplies 9,000 Common stock Write in here Equipment 10,000 Retained earnings Write in here Total assets $26,000 Total liabilities and stockholders’ equity Write answer in here

 

6. Cornhusker Company provides the following information at the end of 2018.

Cash remaining	$	4,800
Rent expense for the year		7,000
Land that has been purchased		21,000
Retained earnings		12,400
Utility expense for the year		4,900
Accounts receivable from customers		7,200
Service revenue earned during the year		37,000
Salary expense for the year		13,300
Accounts payable to suppliers		2,200
Dividends paid to shareholders during the year		3,200
Common stock that has been issued prior to 2018		16,000
Salaries owed at the end of the year		2,400
Insurance expense for the year		3,500

 

No common stock is issued during 2018, and the balance of retained earnings at the beginning of 2018 equals $7,300.

 

Required:

1. Prepare the income statement for Cornhusker Company on December 31, 2018.

 

	CORNHUSKER COMPANY Income Statement For the year ended December 31, 2018 Expenses: Total expenses

 

2. Prepare the statement of stockholders’ equity for Cornhusker Company on December 31, 2018.

	CORNHUSKER COMPANY Statement of Stockholders’ Equity For the year ended December 31, 2018 Common Stock Retained Earnings Total Stockholders’ Equity Beginning balance Ending balance

 

3. Prepare the balance sheet for Cornhusker Company on December 31, 2018.

	CORNHUSKER COMPANY Balance Sheet December 31, 2018 Assets Liabilities Total liabilities Stockholders’ Equity Total stockholders’ equity Total assets Total liabilities and stockholders’ equity

 

7. The four underlying assumptions of generally accepted accounting principles are economic entity, monetary unit, periodicity, and going concern. Consider the four independent situations below.
8. Jumbo’s is a local restaurant. Due to a bad shipment of potatoes, several of the company’s customers become ill, and the company receives considerable bad publicity. Revenues are way down, several of its bills are past due, and the company is making plans to close the restaurant at the end of the month. The company continues to report its assets in the balance sheet at historical (original) cost.
9. Gorloks Tax Services is owned and operated by Sam Martin. The company has the usual business assets: land, building, cash, equipment, and supplies. In addition, Sam decides to buy a boat for him and his family to enjoy on the weekends. Sam includes the boat as an asset on the balance sheet of Gorloks Tax Services.
10. Claim Jumpers International, a U.S.-based company, has operations in the United States and in Europe. For the current year, the company purchased two trucks in the United States for $10,000 and three trucks in Europe for €20,000 (euros). Because of the differences in currencies, the company reported “Five Trucks” with no corresponding amount in the balance sheet.
11. Cobbers Etc. sells specialty music equipment ranging from African bongo drums to grand pianos. Because of the fluctuating nature of the business, management decides to publish financial statements only when a substantial amount of activity has taken place. Its last set of financial statements covered a period of 14 months, and the set of financial statements before that covered a period of 18 months.

Required:

For each situation, select which of the underlying assumptions of GAAP is violated.

	Situation Assumption Violated 1. 2. 3. 4.

 

 

Chap 2.

 

1. Suppose a local company has the following balance sheet accounts. Calculate the missing amounts assuming the business has total assets of $37,500.

 

	Accounts Balances Land $9,000 Equipment Salaries Payable 4,300 Notes Payable Supplies 2,100 Cash 7,200 Stockholders’ Equity 13,500 Accounts Payable 1,700 Prepaid Rent 3,200

 

2. Boilermaker House Painting Company incurs the following transactions for September.

 

Required:

For each transaction, describe the dual effect on the accounting equation. For example, for the first transaction, (1) assets increase and (2) stockholders’ equity increases.
 

Transactions Dual Effect 1. Paint houses in the current month for $15,000 on account. Assets increase and stockholders’ equity increases. 2. Purchase painting equipment for $16,000 cash. 3. Purchase office supplies on account for $2,500. 4. Pay employee salaries of $3,200 for the current month. 5. Purchase advertising to appear in the current month, $1,200. 6. Pay office rent of $4,400 for the current month. 7. Receive $10,000 from customers in (1) above. 8. Receive cash of $5,000 in advance from a customer who plans to have his house painted in the following month.