ACC 301 Take Home Exam #2 by chh57159

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									                  ACC 301 Take Home Exam #2 (9 problems/questions)
Please use EXCEL and/or WORD to complete this exam. Be sure to show your
calculations so that you can receive partial credit. Print up two copies of your
solutions to this exam and bring both copies to class next week.
NOTE: You may consult with your classmates about any of the questions/problems
on this exam. However, thi s is an exam and copying someone else’s work is not honest.


Problem

      1. The changes in the account balances and the following additional information are taken from the accounts of the
         Rainbow Co.

                                                                                               Increase
                                                                                              (Decrease)
          Cash .................................................                          $142,500
          Accounts Receivable ..................................                           (30,000)
          Inventory ............................................                           202,500
          Buildings and Equipment (net) ........................                           630,000
          Accounts Payable .....................................                          (172,500)
          Bonds Payable ........................................                           375,000
          Capital Stock ........................................                           300,000
          Additional Paid-In Capital ...........................                            45,000

          Dividends for 2004 were $82,500. There were no transactions in 2004 affecting retained earnings other than the
          dividends and net income. Calculate the 2004 net income.
      2. The following pretax amounts pertain to the Brooke Corp. for the year ended December 31, 2004.

          Sales .................................................                        $     400,000
          Operating expenses ....................................                               84,000
          Extraordinary gain ....................................                               30,000
          Interest expense ......................................                                4,000
          Cost of goods sold ....................................                              280,000
          Gain on sale of equipment .............................                               10,000
          Prior period adjustment ...............................                              (16,000)
          Gain on disposal of business segment ..................                               40,000
          Cumulative effect of change in accounting principle ...                              (24,000)
          Retained earnings, January 1, 2004 ....................                            1,600,000
          Dividends declared ....................................                               12,000

          The effective corporate tax rate is 30 percent. The company had 10,000 shares of common stock outstanding for
          the entire year.

          (1)   Prepare a multiple-step income statement in good form for the year ended
                December 31, 2004.
          (2)   Prepare a retained earnings statement in good form for the year ended December
                31, 2004.
3. The Sage Corporation prepared, for 2005 and 2004, the following balance sheet data:

                                                                           December 31
                                                                    2005                   2004
   Cash ....................................                   $     87,375           $     63,750
   Available-for-sale securities (not cash                           17,250                105,000
     equivalents) ..........................
   Accounts receivable .....................                       90,000                 86,250
   Merchandise inventory ...................                      187,500                163,500
   Prepaid insurance .......................                        1,125                  1,500
   Land, buildings, and equipment ..........                    1,378,875              1,087,500
   Accumulated depreciation ................                     (558,750)              (498,750)
     Total .................................                   $1,203,375             $1,008,750

   Accounts payable ........................                   $  153,375             $  236,250
   Salaries payable ........................                       18,750                 26,250
   Notes payable--bank (current) ...........                       37,500                150,000
   Bonds payable ...........................                      375,000                      0
   Common stock ............................                      600,000                600,000
   Retained earnings (deficit) .............                       18,750                 (3,750)
     Total .................................                   $1,203,375             $1,008,750

   Additional information:
   (a) Sold available-for-sale securities (not cash equivalents) costing $87,750 for
         $90,000.
   (b) Equipment costing $18,750 with a book value of $3,750 was sold for $4,500.
   (c) Issued 8% bonds payable at par, $375,000.
   (d) Purchased new equipment for cash, $310,125.
   (e) Paid cash dividends of $22,500 during the year.
   (f) Net income for 2005 was $45,000.
   (g) Proceeds from the notes payable were used for operating purposes.

   Prepare a cash flow statement for Sage Corporation for 2005, using the indirect method.
   Calculate the Cash Flow to Net Income and the Cash Flow Adequacy ratios.
4. The following is a comparative balance sheet for Top Ten Clothiers Inc. for the years 2005 and 2004:

                                      Top Ten Clothiers Inc.
                                    Comparative Balance Sheet
                                    December 31, 2005 and 2004

   Assets                                                          2005                   2004
   Cash ..................................                    $  43,000           $  240,000
   Accounts receivable ...................                      390,000              210,000
   Inventory .............................                      360,000              450,000
   Long-term investments .................                            0              120,000
     Total assets ........................                    $ 793,000           $1,020,000
   Liabilities and Equities
   Accounts payable ......................                    $ 150,000           $       240,000
   Operating expenses payable ............                       48,000                    30,000
   Bonds payable .........................                      140,000                   200,000
   Common stock ..........................                      250,000                   250,000
   Retained earnings .....................                      205,000                   300,000
      Total liabilities and equities ......                     $ 793,000           $1,020,000

   The income statement for the year ended December 31, 2005, follows:

                                          Top Ten Clothiers
                                          Income Statement
                                For the Year Ended December 31, 2005

   Sales                                                                             $1,120,000
   Cost of goods sold:
     Beginning inventory, January 1, 2005                         $  450,000
     Purchases ...........................                           660,000
     Cost of goods available .............                        $1,110,000
     Less ending inventory, December 31,                             360,000             750,000
      2005 ...............................
   Gross profit on sales .................                                           $   370,000
   Operating expenses ....................                                               360,000
   Operating income ......................                                           $    10,000
   Other revenues and expenses:
     Loss on sale of long-term investment                                                (15,000)
   Net loss ..............................                                           $    (5,000)

   After paying cash dividends, the decrease in retained earnings totaled $95,000. Management is alarmed by the
   shrinkage in the company's cash position during 2005. Prepare a statement of cash flows for 2005 using the direct
   method.
5. A major controversy in the issuance of Statement of Financial Accounting Standards No. 95¸ "Statement of Cash
   Flows," centered around the possibility of the Board's requiring the direct method of reporting operating cash
   flows. Bankers who responded to the Exposure Draft preceding the issuance of the pronouncement on cash flows
   expressed a preference for the direct method. Practicing CPAs have been shown in studies to favor the indirect
   method. The Board has allowed both the indirect and direct methods to be used, although the Board expressed a
   preference for the direct method.

   Evaluate the strengths and weaknesses of the direct and indirect methods and why you believe the Board decided
   to allow preparers of financial statements a choice between the two methods.
6. One of the five techniques of earnings management identified by the Securities and Exchange Commission
   relates to materiality. Independent auditors have traditionally used arbitrary quantitative benchmarks to define
   how large an amount must be to be considered material.

   During the course of auditing the financial statements of a company, an auditor finds some misstatements in the
   client's financial statements. When combined, the misstatements, result in a 4% overstatement of net income and
   a $.02 (4%) overstatement of earnings per share. The auditor's materiality threshold is 5%, that is, an item in the
   financial statements must be misstated by more than 5% to be considered a material deviation from generally
   accepted acounting principles. On the basis of the established materiality threshold, the auditor concludes that the
   deviation from GAAP is immaterial and the accounting is permissible.

   Define the term "materiality" and explain whether the auditor is justified in the conclusion that the accounting
   proposed by the client is permissible.
7. You are auditing a company whose management has intentionally made adjustments to various financial
   statement items that are not in accordance with generally accepted accounting principles. This behavior has
   occurred over a number of accounting periods. None of the individual adjustments by itself is material and the
   aggregate effect on the financial statements taken as a whole is immaterial. Top management of the client are
   aware of these misstatements and consider them part of their strategic management of earnings.

   Explain how you as the independent auditor should respond to this situation.
8. Recent accounting scandals have raised concerns over the quality and transparency of financial accounting and
   reporting in the United States. Critics of what is termed the "rules-based" system currently used in the U.S. cite
   the increasingly detailed and complex nature of rule-driven accounting pronouncements. These critics suggest
   that the United States should adopt a principles-based system similar to that of the International Accounting
   Standards Board.

   Explain what is meant by a principles-based system and the advantages and disadvantages of such a system.
9. Research has shown that numerous companies manage their earnings. A variety of earnings management
   techniques are available ranging from income smoothing to outright fraud.

   Define income smoothing and explain how it is implemented.




   BONUS!!!! points!!!!! Discontinued operations are generally reported in
   a separate income statement category for the gain or loss from the
   disposal of a component of a business. In addition, the results of
   operations of a component that has been or will be disposed of are also
   reported separately from continuing operations. In other word, there are
   TWO line items under the section “Discontinued Operations”. How do
   you determine the amounts that will be reported under each category.
   (note: there may be a new standard that applies—SFAS No 144.
   Guidance prior to SFAS NO 144 was Accounting Principles Board No.
   30)

								
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