ACC305 Wk 2 Integrating Case 5-23 page 296
ACC305 Wk 2 Integrating Case 5-23 page 296
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Date Created: 11/12/15
Integrating Case 523 on page 296 You are a new staff accountant with a large regional CPA rm participating in your rst audit You recall from your auditing class that CPAs often use ratios to test the reasonableness of accounting numbers provided by the client Since ratios re ect the relationships among various account balances if it is assumed that prior relation ships still hold prior years39 ratios can be used to estimate what current balances should approximate However you never actually performed this kind of analysis until now The CPA in charge of the audit of Covington Pike Corporation brings you the list of ratios shown below and tells you these re ect the relationships maintained by Covington Pike in recent years Pro t margin on sales 5 Return on assets 75 Gross pro t margin 40 Inventory turnover ratio 6 times Receivables turnover ratio 25 Acidtest ratio 9 Current ratio 2 to 1 Return on shareholders equity 10 Debt to equity ratio 13 Times interest earned ratio 12 times Jotted in the margins are the following notes 0 Net income 15000 0 Only one shortterm note 5000 all other current liabilities are trade accounts 0 Property plant and equipment are the only noncurrent assets Bonds payable are the only noncurrent liabilities The effective interest rate on shortterm notes and bonds is 8 o No investment securities 0 Cash balance totals 15000 Required You are requested to approximate the current year39s balances in the form of a balance sheet and income statement to the extent the information allows Accompany those nancial statements with the calculations you use to estimate each amount reported Integrating Case 523 Balance Sheet Assets Cash 15000 Accounts receivable net 12000 Inventory 30000 Prepaid expenses and other current assets 3000 Current assets 60000 Property plant and equipment net 140000 200000 Liabilities and Shareholders Equity Accounts payable 25000 Short term notes 5000 Current liabilities 30000 Bonds payable 20000 Shareholders equity 150000 200000 Income Statement Sales 300000 Cost of goods sold 180000 Gross profit 120000 Operating expenses given 6 d i h i b g glVCI l f 1 k b a C 0 96000 0 Interest expense 2000 m Tax expense 17000 n Net income 15000 given Calculations in 000s a Profit margin on sales Net income Sales 5 Sales 15 5 300 b Return on assets Net income Total assets 75 Total assets 15 75 200 Gross profit margin Gross profit Sales 40 Gross profit 300 X 40 120 Cost of goods sold Sales Gross profit 300 120 180 Inventory turnover ratio Cost of goods sold Inventory 6 Inventory 180 6 30 Receivables turnover ratio Sales Accounts receivable 25 Accounts receivable 300 25 12 Acid test ratio Cash AR ST Investments Current liabilities 9 Current liabilities 15 12 0 9 30 Accounts payable Current liabilities Short term notes 30 5 25 Current ratio Current assets Current liabilities 2 Current assets 30 X 2 60 Prepaid eXpenses and other current assets Current assets Cash AR Inventory 60 15 12 30 3 Property plant and equipment Total assets Current assets 200 60 140 Return on shareholders equity Net income Shareholders equity 10 Shareholders equity 15 10 150 Debt to equity ratio Total liabilities Shareholders equity 13 Total liabilities 150 X 13 50 Bonds payable Total liabilities Current liabilities 50 30 20 m Interest eXpense 8 X Short term notes Bonds 1 1 Interest eXpense 8 X 5 20 2 Times interest earned ratio Net income Interest TaXes Interest 12 Times interest earned ratio 15 2 TaXes 2 12 Times interest earned ratio 15 2 TaXes 24 TaX eXpense 24 15 2 7 Operating eXpenses Sales Cost of goods sold Interest eXpense TaX eXpense Net income 300 180 2 7 15 96
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