ACC 306 Week 5

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ACC 306 Week 5

Assignments

Analysis Case 2010 - DRS Corporation - Various changes ? LO1 through LO4

DRS Corporation changed the way it depreciates its computers from the sum-of-the-years-digits method to the straight-line method beginning January 1, 2011. DRS also changed its estimated residual value used in computing depreciation for its office building. At the end of 2011, DRS changed the specific subsidiaries constituting the group of companies for which its consolidated financial statements are prepared.

Required:

1.For each accounting change DRS undertook, indicate the type of change and how DRS should report the change. Be specific.

  1. Why should companies disclose changes in accounting principles?

E 2018 Classifying accounting changes ? LO1 through LO5

Indicate with the appropriate letter the nature of each situation described below:

PR Change in principle reported retrospectively

PP Change in principle reported prospectively

E Change in estimate

EP Change in estimate resulting from a change in principle

R Change in reporting entity

N Not an accounting change

1.Change from declining balance depreciation to straight-line.

2.Change in the estimated useful life of office equipment.

3.Technological advance that renders worthless a patent with an unamortized cost of $45,000.

4.Change from determining lower of cost or market for inventories by the individual item approach to the aggregate approach.

5.Change from LIFO inventory costing to weighted-average inventory costing.

6.Settling a lawsuit for less than the amount accrued previously as a loss contingency.

7.Including in the consolidated financial statements a subsidiary acquired several years earlier that was appropriately not included in previous years.

8.Change by a retail store from reporting bad debt expense on a pay-as-you-go basis to the allowance method.

9.A shift of certain manufacturing overhead costs to inventory that previously were expensed as incurred to more accurately measure cost of goods sold. (Either method is generally acceptable.)

10.Pension plan assets for a defined benefit pension plan achieving a rate of return in excess of the amount anticipated.

P 2111 - Arduous Company - Prepare a statement of cash flows; direct method ? LO3 LO8

The comparative balance sheets for 2011 and 2010 and the income statement for 2011 are given below for Arduous Company. Additional information from Arduouss accounting records is provided also.

a.During 2011, $6 million of customer accounts were written off as uncollectible.

b.Investment revenue includes Arduous Companys $6 million share of the net income of Demur Company, an equity method investee.

c.Treasury bills were sold during 2011 at a gain of $2 million. Arduous Company classifies its investments in Treasury bills as cash equivalents.

d.A machine originally costing $70 million that was one-half depreciated was rendered unusable by a rare flood. Most major components of the machine were unharmed and were sold for $17 million.

e.Temporary differences between pretax accounting income and taxable income caused the deferred income tax liability to increase by $3 million.

f.The preferred stock of Tory Corporation was purchased for $25 million as a long-term investment.

g.Land costing $46 million was acquired by issuing $23 million cash and a 15%, four-year, $23 million note payable to the seller.

h.A building was acquired by a 15-year capital lease; present value of lease payments, $82 million.

i.$60 million of bonds were retired at maturity.

j.In February, Arduous issued a 4% stock dividend (4 million shares). The market price of the $5 par value common stock was $7.50 per share at that time.

k.In April, 1 million shares of common stock were repurchased as treasury stock at a cost of $9 million.

Required:

Prepare the statement of cash flows of Arduous Company for the year ended December 31, 2011. Present cash flows from operating activities by the direct method. (A reconciliation schedule is not required.)

P 2114 - Surmise Company - Statement of cash flows; indirect method; limited information ? LO4 LO8

The comparative balance sheets for 2011 and 2010 are given below for Surmise Company. Net income for 2011 was $50 million.

Required:

Prepare the statement of cash flows of Surmise Company for the year ended December 31, 2011. Use the indirect method to present cash flows from operating activities because you do not have sufficient information to use the direct method. You will need to make reasonable assumptions concerning the reasons for changes in some account balances. A spreadsheet or T-account analysis will be helpful.

ACC 306 Week 5 Final Paper

Discussion Questions

Ethics Case 205 Softening the blow ? LO1 LO2 LO3

Late one Thursday afternoon, Joy Martin, a veteran audit manager with a regional CPA firm, was reviewing documents for a long-time client of the firm, AMT Transport. The year-end audit was scheduled to begin Monday.

For three months, the economy had been in a down cycle and the transportation industry was particularly hard hit. As a result, Joy expected AMTs financial results would not be pleasant news to shareholders. However, what Joy saw in the preliminary statements made her sigh aloud. Results were much worse than she feared.

Larry (the company president) already is in the doghouse with shareholders, Joy thought to herself. When they see these numbers, theyll hang him out to dry.

I wonder if hes considered some strategic accounting changes, she thought, after reflecting on the situation. The bad news could be softened quite a bit by changing inventory methods from LIFO to FIFO or reconsidering some of the estimates used in other areas.

Required:

1.How would the actions contemplated contribute toward softening the bad news?

2.Do you perceive an ethical dilemma? What would be the likely impact of following up on Joys thoughts? Who would benefit? Who would be injured?

Ethics Case 217 - Ben Naegle - Wheres the cash? ? LO1 LO3

After graduating near the top of his class, Ben Naegle was hired by the local office of a Big 4 CPA firm in his hometown. Two years later, impressed with his technical skills and experience, Park Electronics, a large regional consumer electronics chain, hired Ben as assistant controller. This was last week. Now Bens initial excitement has turned to distress.

The cause of Bens distress is the set of financial statements hes stared at for the last four hours. For some time prior to his recruitment, he had been aware of the long trend of moderate profitability of his new employer. The reports on his desk confirm the slight, but steady, improvements in net income in recent years. The trend he was just now becoming aware of, though, was the decline in cash flows from operations.

Ben had sketched out the following comparison ($ in millions):

Profits? Yes. Increasing profits? Yes. The cause of his distress? The ominous trend in cash flow which is con sistently lower than net income.

Upon closer review, Ben noticed three events in the last two years that, unfortunately, seemed related:

a.Parks credit policy had been loosened; credit terms were relaxed and payment periods were lengthened.

b.Accounts receivable balances had increased dramatically.

c.Several of the companys compensation arrangements, including that of the controller and the company president, were based on reported net income.

Required:

1.What is so ominous about the combination of events Ben sees?

  1. What course of action, if any, should Ben take?

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