Question & Answer

Briefly describe the types of information concerning financial position, income, and cash flows that might be provided (a) within the main body of the financial statements, (b) in the notes to the financial statements, or (c) as supplementary information.

Explain why boards of directors will often employ independent             remuneration consultants to assist in developing and assessing      compensation plans.             (LO5)

Presented below is the comparative balance sheet for Gilmour Company.   Instructions  (Round to two decimal places.) (a) Prepare a comparative balance sheet of Gilmour Company showing the percent each item is of the total assets or total liabilities and stockholders’ equity. (b) Prepare a comparative balance sheet of Gilmour Company showing the dollar change and the percent change for each item. (c) Of what value is the additional information provided in part (a)? (d) Of what value is the additional information provided in part (b)?

Explain how the CAMELS ratings are used. (LO4)

Explain why mortgage defaults during the credit crisis in 2008 and 2009 adversely affected financial institutions that did not originate the mortgages. What role did these institutions play in financing the mortgages? (LO4)

Describe the major constraint inherent in the presentation of accounting information.

Winans Company uses the lower-of-cost-or-market method, on an individual-item basis, in pricing its inventory items. The inventory at December 31, 2013, included product X. Relevant per-unit data for product X appear below. 2 Estimated selling price $45 Cost 40 Replacement cost 35 Estimated selling expense 14 Normal profi t 9 There were 1,000 units of product X on hand at December 31, 2013. Product X was incorrectly valued at $35 per unit for reporting purposes. All 1,000 units were sold in 2014. Instructions Compute the effect of this error on net income for 2013 and the effect on net income for 2014, and indicate the direction of the misstatement for each year.

Discuss whether the changes described in each of the cases below require recognition in the CPA’s audit report as to consistency. (Assume that the amounts are material.) (a) The company changed its inventory method to FIFO from weighted-average, which had been used in prior years. (b) The company disposed of one of the two subsidiaries that had been included in its consolidated statements for prior years. (c) The estimated remaining useful life of plant property was reduced because of obsolescence.

What is dressing, in reference to grinding wheels?

Below is the income statement for a British company, Avon Rubber plc. Avon prepares its financial statements in accordance with IFRS.   Instructions (a) Review the Avon Rubber income statement and identify at least three differences between the IFRS income statement and an income statement of a U.S. company as presented in the chapter. (b) Identify any irregular items reported by Avon Rubber. Is the reporting of these irregular items in Avon’s income statement similar to reporting of these items in U.S. companies’ income statements? Explain.

Explain how the bankruptcy of Lehman Brothers (a large securities firm) reduced the liquidity of the commercial paper market. (LO1)

For each of the following citations, identify the type of authority (statutory, administrative, or judicial) and explain the citation.

Juanita, a Texas resident (5th Circuit), is researching a tax question and finds a 5th Circuit case ruling that is favorable and a 9th Circuit case that is unfavorable.  Which circuit case has more “authoritative weight” and why?  How would your answer change if Juanita were a Kentucky resident (6th Circuit)?

The Buildings account of Postera Inc. includes the following items that were used in determining the basis for depreciating the cost of a building. (a) Organization and promotion expenses. (b) Architect’s fees. (c) Interest and taxes during construction. (d) Interest revenue on investments held to fund construction of a building. Do you agree with these charges? If not, how would you deal with each of the items above in the corporation’s books and in its annual financial statements?

Explain why the credit crisis affected the ability of financial institutions to access short-term financing in the money markets. (LO1)

Vargo Company has bonds payable outstanding in the amount of $500,000, and the Premium on Bonds Payable account has a balance of $7,500. Each $1,000 bond is convertible into 20 shares of preferred stock of par value of $50 per share. All bonds are converted into preferred stock. Instructions Assuming that the book value method was used, what entry would be made?

Presented below is information related to Cramer, Inc. Instructions Comment on the appropriateness of the accounting procedures followed by Cramer, Inc. (a) Depreciation expense on the building for the year was $60,000. Because the building was increasing in value during the year, the controller decided to charge the depreciation expense to retained earnings instead of to net income. The following entry is recorded. Retained Earnings 60,000 Accumulated Depreciation—Buildings 60,000 (b) Materials were purchased on January 1, 2014, for $120,000 and this amount was entered in the Materials account. On December 31, 2014, the materials would have cost $141,000, so the following entry is made. Inventory 21,000 Gain on Inventories 21,000 (c) During the year, the company purchased equipment through the issuance of common stock. The stock had a par value of $135,000 and a fair value of $450,000. The fair value of the equipment was not easily determinable. The company recorded this transaction as follows. Equipment 135,000 Common Stock 135,000 (d) During the year, the company sold certain equipment for $285,000, recognizing a gain of $69,000. Because the controller believed that new equipment would be needed in the near future, she decided to defer the gain and amortize it over the life of any new equipment purchased. (e) An order for $61,500 has been received from a customer for products on hand. This order was shipped on January 9, 2015. The company made the following entry in 2014. Accounts Receivable 61,500 Sales Revenue 61,500

Explain the guidelines for credit rating agencies that resulted from the Financial Reform Act of 2010. (LO2)

Remuneration disclosure The ASX Corporate Governance Principles and Recommendations set out rules to deal with enhanced management performance and effectiveness and requires disclosure of the process for performance evaluation of the board, its committees and individual directors and key executives. However, the outcomes of individual evaluations are not required to be disclosed.   Required Why do you think such a recommendation is included in the guidelines? (LO5)

What two assumptions are central to the IASB conceptual framework?

Explain how the downgrading of bonds for a particular corporation affects the prices of those bonds, the return to investors who currently hold these bonds, and the potential return to other investors who may invest in the bonds in the near future. (LO2)

Cost function using account analysis and high-low method The Elder Clinic, a not-for-profit entity, provides limited medical services to low-income elderly patients. The manager’s summary report for the past four months of operations is reproduced here.     The clinic receives an operating subsidy from the city, but unfortunately, the operating loss that has been incurred through June $(79 392) is larger than anticipated. Part of the problem is the salary increase that went into effect in June, which had been overlooked when the budget was submitted to the city last year. To compound the problem, the cold winter months traditionally bring with them an increase in cold-related health problems. Thus, the clinic is likely to experience an increase in patient visits during July.   The clinic’s managers are considering an increase in patient fees to reduce losses. However, they are reluctant to raise fees because the patients have low incomes. They will raise fees only if it is necessary.   Required (a)          Use your judgement to classify costs as fixed, variable, or mixed. Explain how you classified each item. (b)          Create a cost function for the Elder Clinic. Use the high-low method to estimate the function for any mixed costs. (c)           Use the cost function to estimate July expenses based on a projection of 940 patient visits. (d)          List reasons why management of the Elder Clinic cannot know with certainty what the expenses will be during July. List as many reasons as you can. (e)           Describe the pros and cons of using your cost estimate from part (C) to decide whether to raise patient fees. (f)           The managers need your July cost estimate to decide whether to raise patient fees. Use the information you learned from parts (a) and (b)  to write a memo to the director of the Elder Clinic presenting your estimate of July costs. Provide the director with appropriate information for understanding your methodology and evaluating the reliability of your cost estimate.

The pension fund manager of Utterback (a U.S. firm) purchased German 20-year Treasury bonds instead of U.S. 20-year Treasury bonds. The coupon rate was 2 percentage points lower on the German bonds. Assume that the manager sold the bonds after five years. The yield over the five-year period was substantially more than the yield the manager would have received on the U.S. bonds over the same five-year period. Explain how the German bonds could have generated a higher yield than the U.S. bonds for the manager, even if the exchange rate was stable over this five-year period. (Assume that the price of either bond was initially equal to its respective par value). Be specific. (LO2, LO5)

Wayne Cooper has some questions regarding the theoretical framework in which GAAP is set. He knows that the FASB and other predecessor organizations have attempted to develop a conceptual framework for accounting theory formulation. Yet, Wayne’s supervisors have indicated that these theoretical frameworks have little value in the practical sense (i.e., in the real world). Wayne did notice that accounting rules seem to be established after the fact rather than before. He thought this indicated a lack of theory structure but never really questioned the process at school because he was too busy doing the homework. Wayne feels that some of his anxiety about accounting theory and accounting semantics could be alleviated by identifying the basic concepts and definitions accepted by the profession and considering them in light of his current work. By doing this, he hopes to develop an appropriate connection between theory and practice. Instructions (a) Help Wayne recognize the purpose of and benefit of a conceptual framework. (b) Identify any Statements of Financial Accounting Concepts issued by the FASB that may be helpful to Wayne in developing his theoretical background.

Indicate how well the percentage-of-sales method and the aging method accomplish the objectives of the allowance method of accounting for bad debts.