ACC 305 Week 1 Quiz Assignments - E3-18, E3-20, Judgment Case 3-5, Research Case 1-3, Ethics Case 1-8, Judgment Case 2-1,Judgment Case 3-6

ACC 305 Week 1 Quiz Assignments

E3-18, E3-20, Judgment Case 3-5, Research Case 1-3, Ethics Case 1-8, Judgment Case 2-1,Judgment Case 3-6

E3-18 The current asset section of the Excalibur Tire Company’s balance sheet consists of cash, marketable securities, accounts receivable, and inventories. The December 31, 2011, balance sheet revealed the following:

 

Required:

Inventories $840,000 Total Assets $2,800,000 Current Ratio 2.25 Acid – test Ratio 1.2 Debt to equity ratio 1.8

Determine the following 2011 balance sheet items:

1. Current assets

2. Shareholders’ equity

3. Noncurrent assets

4. Long-term liabilities

E3-20 Most decisions made by management impact the ratios analysts use to evaluate performance. Indicate (by letter) whether each of the actions listed below will immediately increase (I), decrease (D), or have no effect (N) on the ratios shown. Assume each ratio is less than 1.0 before the action is taken.

                                                                                    Current            Acid-test          Debt to

            Action                                                              Ratio                Ratio                Equity Ratio

1.         Issuance of long-term bonds   

2.         Issuance of short-term notes   

3.         Payment of accounts payable

4.         Purchase of inventory on account

5.         Purchase of inventory for cash

6.         Purchase of equipment with a 4-year note

7.         Retirement of bonds

8.         Sale of common stock

9.         Write-off of obsolete inventory

10.       Purchase of short-term investment for cash

11.       Decision to refinance on a long-term basis     

            some currently maturing debt

Judgment Case 3-5 You recently joined the internal auditing department of Marcus Clothing Corporation. As one of your first assignments, you are examining a balance sheet prepared by a staff accountant. MARCUS CLOTHING CORPORATION Balance Sheet At December 31, 2011 Assets Current assets: cash $137,000 Accounts receivable, net 80,000 Note receivable 53,000 Inventories 240,000 Investments 66,000 Total current assets 576,000 Other assets: Land $200,000 Equipment, net 320,000 prepaid expenses 27,000 patent Total other assets 569,000 Total assets $1,145,000 Liabilities and Share holders’ Equity current liabilities: Accounts payable $125,000 Salaries payable 32,000 Total current liabilities 157,000 long – term liabilities : Note payable $100,000 Bonds payable 300,000 Interest payable 20,000 long term liabilities 420,000 Shareholders’ equity: Common stock 500,000 retained earnings 68,000 Total shareholders’ equity 568,000 Total liabilities and shareholders’ equity $1,145,000

In the course of your examination you uncover the following information pertaining to the balance sheet:

The company rents its facilities. The land that appears in the statement is being held for future sale.

The note receivable is due in 2013. The balance of $53,000 includes $3,000 of accrued interest. The next interest payment is due in July 2012.

The note payable is due in installments of $20,000 per year. Interest on both the notes and bonds is payable annually.

The company's investments consist of marketable equity securities of other corporations. Management does not intend to liquidate any investments in the coming year.

Required:
Identify and explain the deficiencies in the statement prepared by the company’s accountant. Include in your answer items that require additional disclosure, either on the face of the statement or in a note.

Discussion Questions

Research Case 1-3 The purpose of this case is to introduce you to the information available on the website of the Financial Accounting Standards Board (FASB)

Required:
Access the FASB home page on the Internet. The web address is www.fasb.org. Answer the following questions.
1. Describe the mission of the FASB.

2. Who are the current Board members? Briefly describe their backgrounds.

3. How are topics added to the FASB’s technical agenda?

Ethics Case 1-8 It is the responsibility of management to apply accounting standards when communicating with investors and creditors through financial statements. Another group, auditors, serves as an independent intermediary to help ensure that management has in fact appropriately applied GAAP in preparing the company’s financial statements. Auditors examine (audit) financial statements to express a professional, independent opinion. The opinion reflects the auditors’ assessment of the statements’ fairness, which is determined by the extent to which they are prepared in compliance with GAAP.

Some feel that it is impossible for an auditor to give an independent opinion on a company’s financial statements because the auditors’ fees for performing the audit are paid by the company. In addition to the audit fee, quite often the auditor performs other services for the company such as preparing the company’s income tax returns.

Required:
How might an auditor’s ethics be challenged while performing an audit?

Judgment Case 2-1 You have recently been hired by Davis & Company, a small public accounting firm. One of the firm’s partners, Alice Davis, has asked you to deal with a disgruntled client, Mr. Sean Pitt, owner of the city’s largest hardware store. Mr. Pitt is applying to a local bank for a substantial loan to remodel his store. The bank requires accrual based financial statements but Mr. Pitt has always kept the company’s records on a cash basis. He does not see the purpose of accrual based statements. His most recent outburst went something like this: “After all, I collect cash from customers, pay my bills in cash, and I am going to pay the bank loan with cash. And, I already show my building and equipment as assets and depreciate them. I just don’t understand the problem.”

Required:
1. Explain the difference between a cash basis and an accrual basis measure of performance.

2. Why, in most cases, does accrual basis net income provide a better measure of performance than net operating cash flow?

3. Explain the purpose of adjusting entries as they relate to the difference between cash and accrual accounting.

Judgment Case 3-6 You recently joined the auditing staff of Best, Best, and Krug, CPAs. You have been assigned to the audit of Clearview, Inc., and have been asked by the audit senior to examine the balance sheet prepared by Clearview’s accountant.

Required:
Identify the items in the statement that most likely would require further disclosure either on the face of the statement or in a note. Further identify those items that would require disclosure in the significant accounting policies note.

SOLUTION PREVIEW

E 3-18 Calculating ratios; solve for unknowns

1. Acid-test ratio = Quick assets ÷ Current liabilities = 1.20    
Quick assets = Current assets - Inventories     
Quick assets = Current assets - $840,000        

Current assets ÷ Current liabilities =                             2.25    
Current assets - $840,000 ÷ Current liabilities =                      1.20

 

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