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Chapter 24: 17Q (page 1445)
What are the accounting problems related to the presentation of interim data?
The presentation of interim data supports at least the essence of an interim financial report and standards of acknowledgment and estimate in monetary explanations displayed for the interim period.
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Distinguish between ratio analysis and percentage analysis relative to the interpretation of financial statements. What is the value of these two types of analyses?
What is the difference between a CPA鈥檚 unqualified opinion or 鈥渃lean鈥� opinion and a qualified one?
Picasso Company is a wholesale distributor of packaging equipment and supplies. The company鈥檚 sales have averaged about \(900,000 annually for the 3-year period 2015鈥�2017. The firm鈥檚 total assets at the end of 2017 amounted to \)850,000.
The president of Picasso Company has asked the controller to prepare a report that summarizes the financial aspects of the company鈥檚 operations for the past 3 years. This report will be presented to the board of directors at their next meeting.
In addition to comparative financial statements, the controller has decided to present a number of relevant financial ratios which can assist in the identification and interpretation of trends. At the request of the controller, the accounting staff has calculated the following ratios for the 3-year period 2015鈥�2017.
2015 | 2016 | 2017 | |
Current ratio | 1.80 | 1.89 | 1.96 |
Acid-test (quick) ratio | 1.04 | 0.99 | 0.87 |
Accounts receivable turnover | 8.75 | 7.71 | 6.42 |
Inventory turnover | 4.91 | 4.32 | 3.42 |
Debt to assets ratio | 51.0% | 46.0% | 41.0% |
Long-term debt to assets ratio | 31.0% | 27.0% | 24.0% |
Sales to fixed assets (fixed asset turnover) | 1.58 | 1.69 | 1.79 |
Sales as a percent of 2015 sales | 1.00 | 1.03 | 1.07 |
Gross margin percentage | 36.0% | 35.1% | 34.6% |
Net income to sales | 6.9% | 7.0% | 7.2% |
Return on assets | 7.7% | 7.7% | 7.8% |
Return on common stockholders鈥� equity | 13.6% | 13.1% | 12.7% |
In preparation of the report, the controller has decided first to examine the financial ratios independent of any other data to determine if the ratios themselves reveal any significant trends over the 3-year period.
Instructions
a) The current ratio is increasing while the acid-test (quick) ratio is decreasing. Using the ratios provided, identify and explain the contributing factor(s) for this apparently divergent trend.
What is an operating segment, and when can information about two operating segments be aggregated?
Jane Ellerby and Sam Callison are discussing the recent fraud that occurred at LowRental Leasing, Inc. The fraud involved the improper reporting of revenue to ensure that the company would have income in excess of $1 million. What is fraudulent financial reporting, and how does it differ from an embezzlement of company funds?
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