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# Acc600 case emba

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### Acc600 case emba

1. 1. A Case Study on Financial Reporting, Tax, and Business Decision Making EMBA ACC600 Group Project February 14, 2007 Adam Berk Louis Desouza Rachelle Ginsberg Marta Nobo Vince Rubiera Irene Tzouganakis
2. 2. Beach Bums ACC60062 Group Project 2 Case Requirements for Part A: 1. Calculate the cost of tanning lotion sold and the cost of tanning lotion in ending inventory under a periodic system using (a) LIFO, (b) FIFO, and (c) weighted-average cost flow assumptions. [Refer to Horngren Chapter 6.] FIFO LIFO AVG Cost of Ending Inventory (560,000) (376,000) (448,000) Costs of Goods Sold 1,680,000\$ 1,864,000\$ 1,792,000\$ See Exhibit A 2. Calculate bad-debt expense for the year using the percentage-of-sales method, assuming provisions of (a) 1 percent, and (b) 2 percent of sales. There are no cash sales; all sales are made on account. Assuming an ending balance in net receivables of \$742,000 prior to the adjustment for current-year uncollectibles, what will be the end-of-year amount of net receivables on the balance sheet under each assumption? [Refer to Horngren Chapter 9 pages 460-462] To calculate these amounts, we multiplied each percent by the total amount of sales. This was done since all sales were made on account. 1% 2% Accounts receivable, net 672,000\$ 602,000\$ See Exhibit B 3. Assume that the production manager’s supposition about the existing equipment’s residual value is correct (that is, it will have a residual value of \$500,000 regardless of whether it is disposed of at the end of Year 10 or the end of Year 6). Calculate the depreciation expense for the current year (that is, Year 5 of the asset’s life) using the straight-line method, assuming that the existing equipment has an estimated total useful life of (a) 10 years, or (b) 6 years. [Note: Depreciation expense has not been calculated for Year 5, so the remaining useful life at the beginning of the fifth year is assumed to be (a) 6 years, or (b) 2 years.] [Refer to Horngren Chapter 10 pages 520- 521.] (a) We took the purchase price minus the residual and divided it by the 10 year life to arrive at the expense for year 5. (b) This required calculating the book value at the end of year 4, subtracting the residual and dividing over the remainder of the years to arrive at a depreciation expense of \$1,200,000 for year 5. 10 years Switch to 6 @ yr 5 Depreciation expense (year 5) 400,000\$ 1,200,000\$ See Exhibit C 4. Use your responses to questions 1 through 3 and the income statement in Exhibit 1 to calculate the highest net income that can be reported within the constraints of acceptable financial reporting. For this question, ignore the effects of income taxes. We arrived at this number by using the FIFO inventory, the 10 year depreciation and the 1% allowance method (percent-of-sales). Highest Pre-Tax Income 1,890,000\$ See Exhibit D
3. 3. Beach Bums ACC60062 Group Project 3 5. Use your response to questions 1 through 4 to complete the end-of-year balance sheet in Exhibit 2. For purposes of this requirement, assume a retained earnings balance at the beginning of the current year of \$1,033,688. See Exhibit E for full balance sheet 6. Repeat questions 4 and 5 with the goal of calculating the lowest net income that can be reported within the constraints of acceptable financial reporting. What would be reported as the total assets under this low-income scenario? [Hint: prepare an income statement and balance sheet similar to those in Exhibits 1 and 2.] We arrived at this number by using the LIFO inventory, switching to a 6 year depreciation and using the 2% allowance method (percent-of-sales). Lowest Pre-Tax Income 836,000\$ See Exhibit G for full income statement Total assets 3,819,688\$ See Exhibit F for full balance sheet 7. Use your responses for questions 4 through 6 to calculate the return on net sales (using pre-tax income) for the company as a whole for the current year under both the high-income and low- income scenarios. Also, use your responses to questions 4 through 6 to calculate the current ratio and the debt ratio as of the current year-end under the high-income and low-income scenarios. [Refer to Horngren Chapter 17, page 869 for ratios.] Highest Lowest Return on Net Sales 27% 12% Current Ratio 9.49 8.48 Debt Ratio 16% 21% See Exhibit H for calculations