Accounting

Northwest Bank Analytical Procedures  Interest Income

Answers to the Questions in Par A

Q. As part of the year-end audit and using the analytical-procedure approach similar to last years audit (average loan volume multiplied by weighted average interest rate), determine if Northwest Banks interest income from loans reported at December 31, 2008 appears fairly stated. Do the results of the analytical procedures indicate that you accept 2008 interest income as reported

A. Initially, no, until verifications on how averaging was done can be evaluated as being representative of the volume of loans carried during the year. Analytical procedures are measures to determine the plausible relationships of the assertions in the financial reports. Average amount based on beginning and ending balances used to factor interest income by the interest rate is not conclusive if the volume and interest rate on loans during the fiscal year are volatile and unstable.

Analytical procedures are often used to uncover unusual relationships that can lead to discovery of misstatements for various reasons. In this case, acceptance can be made if average is made on the actual loan volume and rate based on weighted average for the year. Regardless of whether the same procedure (weighted average) was used the previous year does not allow automatic acceptance of the amount this year. Professional skepticism should guide the auditor in coming out with a better decision to accept or reject.
(Houck, 2003 pp. 105-108)

Q. Based on the results of the analytical procedures, how likely is it that 2008 interest income is materially misstated

A. It is safe to assume that the results of the analytical procedures may or may not be materially misstated, about 50. Auditors must conduct verifications first to determine whether the results of the analytical procedures are fair presentations of the amount. Objectivity is necessary in this regard. The auditor must check the degree of volatility of the loan volume as this may cause misstatements within the period. Simple average of ending balances may have likely been used to misstate, often overstate, the income as reported.

Q3. Please indicate on the scale below your assessment of the strength (quality and sufficiency) of evidence provided by the interest income analytical procedure.

The principle of conservatism and objectivity guide auditors in arriving at conclusions before they are finally reported. Frauds, errors and illegal acts may come in various forms and the auditor must explore indications that these are not evident in the books. The materiality of the interest income reported by Northwest bank all the more makes it imperative to be more substantive and objective. Analytical procedures provide signals of misstatements wherever they occur and auditors must be on guard for these as they are reported, especially for banks which may have a strong interest to overstate income. Based on the scale of assessment of strength, the evidence provided by analytical procedures is strong (rated 6 to 7) depending on control assessment.

There has been a lot of efforts made by the European Union so that there can be improvement in the financial market. To achieve this, they have seen it necessary to have transparency so that the investors can have the knowledge which is necessary while changing hands of financial assets. One professor from the school of Economics of Solvay Brussels believes that transparency is never there in the business field. He believes that the information that is released when transparency is demanded is just a small part of the whole information. This is the reason why the European Union is in need of making some new laws that will require organizations to give out all the information. (Fidler, 2010)

This is the only way that there will be healthy competition. The European Union is starting to have some effect such as the case that is happening in the LSE where the profit margin have fallen from 78 to 64 and this is a clear indication of growth in new competition. The European law however clearly understands that the price transparency is not all the time in the interest of the public. It is on this note that some economists argue that market makers should not at all be forced to indicate the price in the market earlier. (Fidler, 2010)
This article clearly demostrates the principles of full disclosure requirement put in practice. Among the main requirement of this principle is that the organisation provide information that is sufficient to the user so that he or she can make a sound decision. this article can be said to follow these requirements as we can find more information about the organization in the body of the article. Even though disclosure is not suitable for proper accounting, it can be said to work well in most cases as it ensures that there is transparency. This is the case that happens in this article. Through full disclosure, there  it a growth in competition in the stock exchange company.

In conclusion, even though there seem to be some exceptions which happen to be very difficult to distinguish, there is a need for transparency in the market. This is the only way that there will be healthy competition. In addition, it is the right of all the key players in the market to have access to all the information that they may need concerning the business. Through transparency, it is possible for the growth of competition in the market. A good example is this case of the LSE reduction in profit margin as a result of growth in competition. After all, this is the only way to avoid exploitation which may result from lack of transparency. However, it is important to say that there are some other key factors in the market other than transparency and therefore transparency is just but one of the key facts that is necessary for a smooth market.

Q2. Which standard-setting bodies have reasonability for establishing accounting and report standards for the following
State and local Governments
Ans Governmental  Governmental Accounting Standards Board (GASB)
Business Organizations
Ans Financial Accounting Standards Board (FASB)
Not-for-profit organizations
Ans Governmental  Governmental Accounting Standards Board (GASB)
Nongovernmental - Financial Accounting Standards Board (FASB)
The federal government, its agencies and its departments
Ans Federal Accounting Standards Advisory Board (FASAB)

Q4. Explain how the GASBS 34 reporting model meets financial report users needs for operational accountability information about governmental activities.
To meet the financial report users need for operational accountability information about governmental activities, GASBS 34 reporting model requires governmental funds to prepare a Managements Discussion and Analysis (MDA) and two government wide financial statements, namely
Statement of net assets or a balance sheet (also referred to as statement of financial position)
Statement of activities (an operating statement)
GASBS 34 require both government wide financial statements and fund financial statements.

Q6. Which expenditure of a capital projects fund should be capitalized to Construction Work in Progress Is Construction Work in Progress included in the chart of accounts of a capital projects fund If not, where would it be found
Construction expenditures under a capital project fund shall be capitalized to Capital Work in Progress (CWIP).
CWIP is not included in the chart of accounts of a CPF rather it would be found under Governmental activities in governmental funds.

Q7. Explain the essential differences between regular serial bonds and term bonds and how debt service fund accounting differs for the two types of bonds.

Differences are as below
Regular serial bondsTerm bondsMaturity of the principal is in annual installmentsMaturity of the principal is at the end of the term of the bond in one lump-sum amount.Approximates the total resources(budgeted revenues or inter-fund transfers) raised each year with the debt service requirements, thus keeping the investments to a minimumDo not approximate the total resources with debt service requirements, rather they are budgeted to meet the sinking fund requirements and interest payments for the year.They are self amortizing, hence they do not require a sinking fund to be created.They require creating of a sinking fund.Management of investment and accounting for serial bonds is simple.Management of investment and accounting for term bonds is complex.

Debt service fund accounting is different from the above 2 types of bond as
Accounting is based on accrual method.

Both matured principal and interest on the amount of debt is usually recognized in the period due.
It focuses on the current financial resources.

Auditing Perspective

In accordance with the technological revolution that has taken place throughout the globe, even the simplest of business and commercial transactions are performed within the parameters of an automated computer system. Information technology has aligned itself with commercial activity in such a way that it has become an integral part of the international business community. Hence, with benefits such as convenience, enhanced data management and augmented information sharing etc, we have also been exposed to major risks such as Network Security, Access controls, lack of audit trail and data integrity etc. (Arens, Elder, Beasely, 2010).
Now that we have established the major risks that are present, we can move on to briefly describing them from an auditing perspective. Network security is primarily concerned with the protection of a particular organizations overall network, data and hardware from external intrusion. On the other hand, data integrity ensures that files and records that are being managed within an organizations storage are not subject to issues such as bad sectors, unreadable files etc. Both of these risks can, in principle, lead to the problem of a lack of audit trail in the sense that if network security or data integrity did not exist then particular transaction details would not be reliable enough. Moreover, automated systems inherently, in accordance with ease and efficiency, reduce the number of steps that are usually required for a particular transaction and can also take upon certain authorizations, which primarily come under the authority of particular personnel, automatically. Access controls are another important threat that needs to be countered because it is one of the first lines of defense against external intrusion.

However, automated computer systems have inherently helped us to manage our data and tasks far more efficiently than any other invention. An automated system can expedite a large number of transactions, thus saving time, while also centralizing tasks in such a way so that less man power is required. This basically allows organizations to focus and develop specialist skills. The fact remains that while automated systems present more security threats, we must also realize that technology is consistently improving and evolving. Hence, better security measures are in the process of and shall continue to be developed in the foreseeable future. Thus consequently, it can be concluded with certainty that although automated systems expose an organization to a large number of risks and threats, however, the benefits outweigh the risks from a considerable margin.  

PepsiCo Inc. is one of the worlds largest manufacturers of soft drinks and snack foods. While many of the PepsiCo brands are over 100 years old, the corporation itself is relatively young. The company was formed in 1965 with the merger of the Pepsi-Cola Co. and Frito-Lay Inc. at the time, this merger created one of the largest consumer products in the markets. Traditionally Pepsi-Cola had been in the business of sale of soft drink concentrates to licensed independent and company-owned bottlers that manufactured, sold and distributed Pepsi-Cola soft drinks. Frito-Lay was into manufacturing and sales of a variety of extremely popular snack foods. PepsiCo began its international snack food operations in 1966, and has presently its operations in 40 countries with its products being available in 120 countries across the world. At the time of the merger, PepsiCo also owned Pizza hut, Kentucky Fried Chicken, and Tack bell, but made the strategic decision to focus on packaged goods. With this aim, Tropicana was acquired in 1998 and PepsiCo merged with Quaker Oats Company, including Gatorade, in 2001. This merger made Pepsi Co the fourth largest consumer-goods company in the world. (Bachmeier, 2009, 6-8 Gillespie, Jeannet, Hennessey, 2009, pp. 575)

The company underwent a massive restructuring process in the year 2006 and is now organized into two major divisions North America and PepsiCo International. the company is organized into three business units PepsiCo Americas Foods (PAF) consisting of Frito-Lay North America (FRNA), Quaker Foods North America (QFNA) and the Latin American Food and Snacks (LAF) PepsiCo Americas Beverages (PAB) including PepsiCo Beverages North America (PBNA) and the Latin American beverage business and PepsiCo International (PI) consisting of all the businesses in US, Europe, Asia, Africa and Middle East. The UK and Europe businesses are reported as UKEU, while the remaining territory i.e. middle east, Africa  Asia report as MEAA. In yet another minor restricting in the year 2009, Turkey and certain Central Asian territories were brought under the UKEU, as against their historical reporting to MEAA. (Plunkett, 2007 PepsiCo, 2009, pp.43)

PepsiCo is headquartered in Purchase, New York which is about 45 minutes from the New York City. The corporation has more than 143,000 employees worldwide. India-born Indra Nooyi became PepsiCos CEO on 1st October 2006, making the corporation the largest US Company by market cap to put a woman in charge and the company continues to excel under her leadership. PepsiCo attributes its success to superior products, high performance standards, and distinctive competitive strategies and on the high quality and integrity of the people working in the company. (Slatter, 2007, pp. 278)

PepsiCo is a publicly traded company (Symbol PEP) with its shares being traded principally on the New York Stock Exchange (NYSE) in the United States. In addition, PepsiCo is also listed on several other major stock exchanges in Amsterdam, Chicago, Switzerland, and Tokyo. PepsiCo has consistently paid cash dividends since the corporation was founded in 1965. Currently i.e. in 2008, PepsiCo pays  1.65 per share in dividends to its stock holders, which was a increase over the .1425 per share paid in the year 2007 and 1.16 paid in the year 2006. PepsiCos stock currently trades on NYSE at 59.74 on 28th January 2010. (PepsiCo, 2009 Cartagena, Demetropoulos Martin, 2006, pp. 6)

2 Financial Analysis of PepsiCo
Some Financial Highlights PepsiCos total net revenue in the year 2008 increased to 43,251 million in the year 2008 from 39,474 million in 2007. In addition to this, the core division operating profit increased to 8,475 million in 2008 from 8,025 million in 2007 and core total operating profit increased to 7,824 million in 2008 from 7,253 million in 2007. The net income too increased to 5,887 million from 5,587 million in 2007. Finally the earnings per share (EPS) also increased during this period, to 3.68 in 2008 from 3.37 in 2007. In the year 2008, the cash flow from operations was 7 billion, while the core return on invested capital was 29. (PepsiCo, 2009, pp. 2, 5) The figure below shows the cumulative total shareholders return for the last 5 years for PepsiCos as compared to SP 500 and SP average of Industry groups.
Fig  1 Cumulative Total Shareholders Return (PepsiCo, 2009, pp. 2)

2.1 Financial Ratio Analysis of PepsiCo
Return-on-investments ratio (Return-on-assets ratio)
Basic earning power (Operating return on assets) ratio   EMBED Equation.3
This value gives the rate of return provided by the book value of the companys assets. The higher this value, the higher will be the profitability of the company. (Drake, n.d., pp. 1) PepsiCos ratios have slightly declined in the last three year period, though these values definite show the ability of Pepsi to generate revenues from its assets base.
200820072006699935994  19.44693434628  20.02608429930  20.32
Return on assets   EMBED Equation.3

This value gives the income generated by the book value of the companys assets. The higher this value, the higher will be the profitability of the company. . (Drake, n.d., pp. 2) PepsiCos ratios have been fluctuating over the last three year period, though these values definite show the ability of Pepsi to generate revenues from its assets base.
200820072006154335994  4.28142634628  4.11140629930  4.69
Liquidity Ratio
Current Ratio   EMBED Equation.3

This ratio analyzes the ability of a company to meet its requirements for cash  necessary for both expected and unexpected cash demands. This is also known as current ratio, and refers to the companys ability to pay short-term obligations. A ratio less than 1, shows that the company is not in good financial health, but not necessarily that it will go bankrupt a high value can however detract from profits. The liquidity ratio of PepsiCo has been steadily declining over the past three year period, though it is still comfortably higher than 1, showing that that the company has been balancing the values such that not too much of liquid assets are kept as spare because of such assets being low returning investments.
200820072006108068787  1.23101517753  1.3191306496  1.40

Total debt-equity ratio
Debt in itself is not harmful it is practically a required for any company looking to expand its operations. However, it does require timely payout of interest to debt holders. Hence, companies with high level of debt must have positive earnings and a steady cash flow. A high value of ratio shows that the company has been aggressive in financing its growth with debt, which might in turn result in volatile earnings ratios. The values of debt ratios below show this nature in Pepsi which is probably the reason for its erratic earning figures. The values for long-term debt ratio are much more stable for the company, though these values too are steadily on a rise.

DebtEquity    EMBED Equation.3
200820072006785812203  0.643420317325  0.24255015447  0.165
Long-term debttotal equity   EMBED Equation.3
2008200720062388812203  1.951739417325  1.001456215447  0.94

3 SWOT Analysis
3.1 Strengths
PepsiCo brands have traditionally enjoyed an extremely high profile global presence, which has steadily maintained itself even in the presence of powerful brands from its arch rival Coke. PepsiCo constantly follows constant product innovation based on extensive market researches to understand the consumer mind and follows aggressive adversitingmarketing strategies involving famous celebrities  a move that has guaranteed the company a loyal fan-base. The company also has a broad portfolio of products catering to all types of consumers  health conscious to junk food addicts. With the demand continuously shifting to healthier products the company has acquired several brands and companies sparkling juice company IZZE, a licensing agreement with Ben  Jerrys for the sale of milkshakes, a deal with Starbucks to distribute its Ethos water brand, and the launch of a coffee-flavoured cola, Pepsi Max Cino in the UK. The company has also shifted its product innovation strategies to formulate its products to include more nutritional ingredients.
Financially also PepsiCos cumulative total shareholder return, as seen above has been much higher than the industry average continuously for the past five years. In 2008, the values for both core division operating profit and total operating profit increased by 6 and 8 respectively over the 2007 figures, as did the core earnings per share by 9, while the net revenue showed a double digit rise by 10

3.2 Weaknesses
The major weakness for PepsiCo is the rapid and steady decline of the carbonated drinks market in the last couple of years. Further, PepsiCo beverage brand enjoys highest popularity in the already saturated North American market and targets mostly the younger generation for its products. Even the CEO of the company agreed that the overall weakness trigged by the weak US economy did affect the beverage volume overall and declined by 1 and hence the core operating profit due to this decreased by 7. A major risk of the company that have been operating in international markets is the exposure to movements in currency exchange rates which impacts the international operational operating profits. According to PepsiCo estimates an unfavourable 10 change in the exchange rates would have decreased the net unrealised gains by 70 million and contracts that do not qualify for hedge accounting resulted in a net loss of 28 million 2008. (PepsiCo, 2009, pp. 51 Cartagena, Demetropoulos Martin, 2006, pp. 28)

3.3 Opportunities
The major opportunity for PepsiCo, one which the company has already leveraged, is the increased consumer concerns with regards to drinking water. The concern is especially more in developing countries like India and China  among the largest growing markets. The growth in the demand and requirements for healthier beverages too provides additional opportunities for the company for future innovation. There has also been an increase in the growth of Asian tea beverages and functional drinks industry.

3.4 Threats
The majority of the accounting risks for PepsiCo arise from adverse changes in commodity prices. This is because these affect the cost of raw materials. The company has hedging strategies for managing the volatility in the raw material and energy costs. The corresponding contracts resulting in net unrealised losses of 117 million as on 27th December 2008 for PepsiCo, which would have further increased by 19 million if there was a 10 decrease int he underlying commodity price. The derivative contracts that were not qualified for hedge accounting, on the other hand, resulted in net losses of 343 million in 2008, which would have further increased by 34 million, if there was a 10 decrease in the underlying commodity price. (PepsiCo, 2009, pp. 50) Other threats for the company come from increasing obesity and health concerns. The operations outside US generated 48 of the companys net revenue, which is definitely a risk since the companys multibillion empire rests 50 on the recession-hit US market.

4 Conclusions  Recommendations from the Analysis
First and foremost, PepsiCo needs to reduce its dependence on the US market. This is not merely because of the present economic downturn. The rise of the US market is also expected to be cautious and slow. Also the possibility that the economy, and hence the consumers, would reach the previous state of financial security is remote in the next few years, even if the market does jump. Hence, diversification from US market to other international markets is extremely important at this stage.

The asset turnover ratio of the company is volatile and needs to be at a higher level. The company needs to increase its asset turnover by increasing its production efficiency, or price levels, or reduce current or non-current assets. In addition, the company needs to reduce its debt-reliance and needs to increase its capital efficiency also. In addition expense control is also required. In this context, the company has started a program known as Productivity for Growth, which is expected to generate more than 1.2 billion in pre-tax savings over the next three years. (PepsiCo, 2009, pp. 42) This shows that the company is already aware of its problem with asset and capital management. Finally, the company has faced both currency exposure losses and losses due to high material costs in recent quarters. The company needs to manage the hedging of such risks. The upside however is that the companys global sales have increased furthering its growth potential and also brought in strong revenue, which have offset these risks to a large extent.

The concept of Corporate Governance is as old as the foundations of publicly traded companies. However, the emergence of its importance gained hype during period of severe economic losses faced during Asian crisis and fraudulent activities by major companies around the world and especially in U.S. The huge losses of investors as well as employees and embezzlement streaming through top management in firms like Enron, WorldCom and Tyco, led financial authorities into formation of more stringent rules and requirements for publicly traded companies.

Corporate Governance and its emergence
The Code of Corporate Governance refers to an authoritative system of corporate government where the owners and operators of business are responsible and accountable to shareholders for all the activities and transactions taking place in any organization. Corporate Governance ensures that certain risk elements are eliminated to protect investors and other stakeholders in a company from unethical approaches as well as ensure transparency for stakeholders. The motivation behind promotion of corporate governance was to increase accountability of companys top management and directors who have the greatest access to companys assets and therefore, greater power of manipulation. Since application of stringent Corporate Governance, research shows considerable improvement in effectiveness of risk management in firms and enhanced trust among stakeholders and company management.

Corporate Governance Regulations by FRC
According to Code of Corporate Governance, formulated by Financial Reporting Council, management has to fulfill several disclosure requirements in its annual reports to provide transparent and relevant information to shareholders regarding risk management tools of the company as well as its Board structure. Since every company has a different structure, the compliance rules may vary firm to firm. However, FRC requires each firm to state its reasons for exclusion of any law regarding corporate governance disclosure. Due to various financial disasters around the globe, the code of corporate governance requires disclosure of information regarding the Board, directors, executives and auditors of firm in its annual reports. Along with this, the selection of directors and executives, their remuneration and meetings should be disclosed as well to prove the justifiable distribution of firms earnings. The information regarding risk management tools that a firm uses and how efficient the firm has been over the year has to be shown in financial statements for investors and stakeholders.

Lloyds TSB 
The financial statement of Lloyds TSB bank complies with Code of Corporate Governance by disclosing relevant information for shareholders. The financial report includes Directors report regarding firms performance over the year along with any risk elements that caused losses for the firm. The names for all directors, their remuneration and their responsibilities are also shown. The statement clearly reports executive and non-executive schemes, their meetings and voting power over issues under Share capital section and executive schemes. The report also focuses on auditors, their report for the firm and assurance of independent position of auditors and management is also provided. The accounting policies adopted and different pension schemes and employee benefits are discussed in detail along with allocation of companys shares among its own directors, management and employees in section 46, 47 and 48 under Accounting policy, Share based payments and Related party transactions.  Under section 50 of notes, Financial risk management, the management has discussed various forms of risks that the firm faces including credit risk, operational risk, liquidity risk and market risk. Under Future developments, the management has reported firms future plans for investments and other business related activities that can affect firms performance.

Barclays
Compared to Lloyds, Barclays provide a more structured reporting product in form of annual report through separate section of Corporate Governance. The statement presents Chief executives report regarding firms performance over year along with economic and business factors that resulted in losses for the firm. Barclays report includes a separate section for analysis and presentation of risk factors associated with the bank. The section includes basic structure of organization and risks associated along with banks approach and policies for dealing with each type of risk. The report informs shareholders about each process and control mechanism that managers use to tackle risks. Under Corporate governance section, information regarding board and executive committee is provided with identification of executive and non-executive members. Under business review, remuneration, benefits, annual meetings, dividends and other share based compensations are discussed. Along with all relevant information, firms Group chairman has separately provided statement on Corporate Governance at Barclays and its adherence to Code of Corporate Governance under which each element and regulation of Corporate Governance is discussed. The report also provided number of meetings held among the members, attendance of members, auditors and executives, summary of matters reserved to Board, Board structure, and process of annual statement approval through disclosure, executive, auditor and technical committees.

Comparison
The presentation of factors regarding corporate governance is, although, acceptable for both companies, yet Lloyds lack several elements that could have been a part of financial report. Firstly, the company should have separately provided detailed analysis of factors related to code of corporate governance to present a clear and detailed analysis of activities at the bank. Secondly, the firm did not provide detailed information regarding board meetings and their details for convenience of shareholders. The detail regarding decisions taken at Board meetings is also missing. The report presents general description of risks associated with Lloyds activities while no specific and relevant information is provided for investors benefit as is provided in Barclayss report. Overall both companies do comply with Code of corporate governance with Lloyds requiring certain improvements in presentation of its report for more transparency and clarity of firms affairs.

Conclusion
The emergence of corporate governance is a sensitive issue for investors and stakeholders who have their stake involved with publicly traded firms and therefore, the Financial Reporting Council has provided an effective framework for managers to inform investors regarding a firms activities.  The comparison of two UK based firms, Lloyds and Barclays, shows that firms in general are compelled to present all relevant information regarding issues associated with stakeholders and accountability of managers to keep the stakeholders informed. Results show that Barclays provide a great insight into management structure and transparency of firms operations and therefore, complies completely with Code of Corporate Governance. On the other hand Lloyds provide basic information yet insufficient details regarding risk management tools and activities of executives and directors over the year.

Exercise 7-29

1. Billed on 5th of Month of July (800,0002) 400,000
Pay within 10 days (400,000 x 80) 320,000
Discount Granted (320,000 x 2) (6,400)
Net Money Received 313,600
Billed on 20th of Month of July (900,0002) 450,000
Pay within 10 days (450,000 x 80) 360,000
Discount Granted (360,000 x 2) (7,200)
Net Money Received 352,800
Billed on 5th of Month of June (750,0002) 375,000
After 30 days billing (375,000 x 18) 67,500
Billed on 20th of Month of June (800,0002) 400,000
After 30 days billing (400,000 x 18) 72,000
Total Cash to be received in July 805,900

2. June Sales 800,000
Gross Profit (800,000 x 40) 320,000
Cost of goods sold 480,000
Ending Inventory on May (480,000 x 25) 120,000
3. July Sales 900,000
Gross Profit (900,000 x 40) 360,000
Cost of goods sold 540,000
Ending Inventory on June (540,000 x 25) 135,000
Merchandise Purchases of June
Opening Inventory 120,000
Purchases 495,000
Closing Inventory (135,000)
Cost of goods sold 480,000

4. September Sales 600,000
Gross Profit (600,000 x 40) 240,000
Cost of goods sold 360,000
Ending Inventory on August (360,000 x 25) 90,000
August Sales 900,000
Gross Profit (900,000 x 40) 360,000
Cost of goods sold 540,000
Ending Inventory on July (540,000 x 25) 135,000
Merchandise Purchases of August
Opening Inventory 135,000
Purchases 495,000
Closing Inventory (90,000)
Cost of goods sold 540,000
Half Paid in month of Purchase (495,0002) 247,500
Merchandise Purchases of July
Opening Inventory 135,000
Purchases 540,000
Closing Inventory (135,000)
Cost of goods sold 540,000
Half Paid one month after Purchase (540,0002) 270,000
Total Cash Payments for Merchandise Purchased 517,500

Exercise 7-32
Cash Collected during discount period
March Budgeted Sales450,000Time of Sales (50)225,000Discount Given (2)(4,500)Net Cash Received220,500Within first 10 days (10)45,000Discount Given (1)(450)Net Cash Received44,550Total Cash Received265,050Cash Collected after discount period
JanuaryFebruaryMarchBudgeted Sales400,000450,000450,0001 month after (25)100,000112,5002 months after (12)48,000Cash Received160,500Total Cash Received in March 265,050,  160,500  425,550

Exercise 7-37
Statement of Cash Receipts and Disbursements at October 20X7Cash Receipts  Sales29,340Cash Payments  Purchases17,000  Selling and General Administrative Expenses4,025  Total Cash Payments21,025Net Cash Receipts8,315Opening Cash Balance4,800Closing Cash Balance13,115Workings
Cash Receipt from Sales
AugustSeptemberOctoberSales12,00036,00030,000Month of Sale (60)18,000Discount (1)(180)Net Cash Receipt17,8201 Month after (30)3,60010,8002 Months after (6)720Cash Received11,520Total Cash Received29,340
Purchases of Merchandise
SeptemberOctoberSales (units) 1,8001,500Ending Inventory (units)750550Opening Inventory (units)(900)(750)Purchases (units)1,6501,300Purchases (at 12 per case)19,80015,600
Payment of Purchases
OctoberPurchases of September paid in October (13) 6,600Purchases of October paid in month of purchase (23)10,400Total Payments17,000

Selling and General Administrative Expenses
Total Fixed Expenses 24,000
Non-Cash Expense - Depreciation (13,200)
Fixed Expenses net of depreciation 10,800
 EMBED Equation.3
Variable Expenses 61,500 - 24,000  37,500
 EMBED Equation.3
Total Selling and General Admin. Expenses 900  3,125  4,025

Exercise 8-28
Budgeted Material Cost (750,000 x 0.25) 187,500
Actual Materials Support Costs 177,000
Static-Budget Variance 10,500 F
Standard Material Cost for actual movement (650,000 x 0.25) 162,500
Actual Materials Support Costs 177,000
Flexible-Budget Variance 14,500 (U)

Exercise 8-29
Material Price Variance  (Standard Price  Actual Price) x Actual Yards Used
Material Price Variance  (B700  B695) x 7,900  B39,500 F
 EMBED Equation.3
Material Quantity Variance
Standard yards for actual production (2 x 3,800) 7,600 yards
Actual yards used 7,900 yards
Material Quantity Variance (yards) 300 (U)
Standard price per yard B700
Material Quantity Variance (B) B210,000 (U)
Exercise 8-30
Labor Rate Variance (Standard Rate  Actual Rate) x Actual Hours Worked
-1,085  (14  Actual Rate) x 1,750
Actual Rate  (24,500  1,085),1,750  14.62
1. Actual Labor Rate per Hour 14.62
Total Direct Labor Budget Variance 1,855 F
Labor Rate Variance 1,085 (U)
Labor Efficiency Variance 2,940 F
Labor Efficiency Variance  (Standard Hours  Actual Hours) x Standard Rate
2,940  (Standard Hours  1,750) x 14
Standard Hours  (24,500  2,940)14  1,960

2. Standard Hours allowed for the Output Achieved 1,960.

Exercise 8-46
1. Computation of Variances
Material Price Variance  (5.50 - 5.30) x 27,000  5,400 F.
Material Usage Variance
Standard materials for actual production (60 x 430) 25,800 pounds
Actual materials used 27,000 pounds
Material Quantity Variance (pounds) 1,200 (U)
Standard Rate 5.50
Material Quantity Variance () 6,600 (U)
Total Material Variance 5,400 - 6,600  1,200 (U).
Labor Rate Variance (16 - 15.90) x 670  67 F
Labor Efficiency Variance
Standard hours for actual production (1.5 x 430) 645 hours
Actual hours worked 670 hours
Labor Efficiency Variance (hours) 25 (U)
Standard Labor Rate 16
Labor Efficiency Variance () 400 (U)
Total Labor Variance 67 - 400  333 (U)
Standard Overhead (2,808  (430 x 5.76) 5,285
Actual Overheads 5,335
Overhead Expenditure Variance 50 (U)
Actual Production 430
Budgeted Production 450
Production Variance 20 (U)
Overhead Absorption Rate 12
Overhead Volume Variance 240 (U)

2. A favorable material price variance indicates that actual price of materials was lower than the envisaged price.  This may be because the purchasing manager bought materials of a lower quality, which hold a lower price.  On the contract an unfavorable material usage variance was noted, which means that more material was used than expected.  The reason behind such variance may be that since the material was of a lower quality more wastage took place leading to higher usage.

A favorable labor rate variance was outlined, which implies that actual labor rate was lower than expected.  Such a favorable variance may arise due to lower skilled workers employed who demand a lower wage rate.  The opposite occurred for the labor efficiency variance, where an adverse variance took place.  This pinpoints lower efficiency for employees, where more time was taken to produce the units.  If lower skilled workers were employed there is the possibility that their level of efficiency is lower than what is normally expected leading to such variance.

The unfavorable overhead expenditure variance means that more overheads were incurred than budgeted.  This may result due to higher utilization of resources leading to more variable overheads since employees may be unskilled.  The adverse overhead volume variance indicates that less production was made than expected.  Such lower production may be the result of ineffective resources or unskilled workers unable to reach the desired production.

3. Standard Hours for Actual Production 645
Actual Hours Worked 670
25 (U)
Standard Variable Overhead Rate 3.84
Variable Overhead Efficiency Variance 96 (U)
Standard Overhead (2,808  (670 x 3.84) 5,381
Actual Overheads 5,335
Overhead Expenditure Variance 46 F

This change in the cost function would lead to a favorable overhead expenditure variance rather than an adverse one.  In this case, the actual overhead expenditure is higher than the budgeted one, which is a positive element.  However, the unfavorable variable overhead efficiency variance still indicates problems in the production process in line with the premise above.  An adverse variance is still taking placing because employees were less skilled than expected.

Describe how accounts receivable arise and how they are accounted for, including the use of a subsidiary ledger and an allowance account.

Accounts receivable arise from sales on credit and represent future cash collections. When a sale on credit is made Accounts Receivable is increased and when customers make payments on their accounts it is decreased (Meigs, 1999). Suppose ABC Company made sales of 1 million all on credit and after a while company received 750,000. The following accounting entry is made

Sold on Credit
Accounts Receivable 1,000,000
Sales 1,000,000
Received Cash 750,000
Cash 750,000
Accounts Receivable 750,000

The purpose and use of subsidiary ledger is to provide timely and accurate information, as well as good internal control procedures, requires that certain backup accounts be maintained. To illustrate, management needs to know not only the total of its accounts receivable but also the amount that each individual customer owes. The same type of information is needed in regard to payables. Management needs to know the total it owes its various vendors as well as how much it owes its individual vendors and when each payment is due (Meigs, 1999). Similar backup information is often necessary for such items as prepaid insurance and plant and equipment.  

The allowance account is a contra assets account in that it is as asset account with a credit balance. Other titles for this account include Allowance for Doubtful accounts and allowance for bad debts. In preparing a balance sheet, the dollar balance in the allowance account is netted against the dollar balance of gross accounts receivable (Meigs, 1999). This net amount represents managements estimate of the net realizable value of the firms receivables.  

This paper explore the various aspects of Crazy Eddies fraud operation and how they played a role in the activities of this business. Furthermore, it also talks about how this fraud could have been prevented with respect to the fraud triangle.

The elements of the fraud triangle that we are looking for in this case are i) The motivation to commit the fraud, ii) The rationalization of the fraud that the committer gives to himherself iii) and the opportunity  to commit fraud.

Crazy Eddies fraud was such a viable enterprise because all these three elements of the fraud triangle were in the favor of the Antar family, who owned and managed Crazy Eddie. First of all, the motivation to commit the fraud was their greed and the motivation to gain more and more wealth. As Crazy Eddies sales were not such that it quenched the greed of the Antar family by legal means, they decided to gain the desired wealth by illegal means. Hence they skimmed their profits and showed decreased income in their books. This enabled them to avoid taxes (Wells, 2000).

They were principally motivated with a desire to reduce their income taxes and thats how they rationalized their fraud. There may be lingering guilt in their minds about their fraud but they did not let this get in the way of continuing their fraudulent enterprise. Furthermore, the opportunity was always there because they managed and had full control of the business. They could do whatever they wanted inside their business as there was little or no outside scrutiny in the organization (Herb, 2007).

The fraud could have been prevented by removing one or all of the fraud triangle. For example, from Sam Antars interview we can infer that if we removed the opportunity to commit fraud in this case by increasing the scrutiny to business, the fraud could have been prevented (Crazy eddys fraud,). Similarly, if we decrease the motivation to commit fraud by decreasing, for example, greed in the society frauds such as these can be prevented. The motivators of fraud are an important factor in committing fraud because they are the first step that take people towards that direction. Furthermore, people who commit fraud should not be able to rationalize their fraud, this can be done by communicating in the society by media and other channels that such activities cannot be tolerated. People should clearly know what is illegal and legal, and also that illegal things are morally and ethically wrong and illegal for a reason.

Home ownership is one of the major decisions that a tax payer my need to make in hisher investment plans.  The homeowner may get about three tax benefits.  These include, interests on mortgages may be deductible, taxes on real estates may also be deductible, and tax exclusions are gained on the resident capital resident. The cost of owning a home is reduced up on the reception of the tax gains mentioned.  The law provides for such exclusive benefit each of which has a certain percentage of deduction for example, tax deduction on real estates is estimated to 24.6B, while the deductions on mortgage interest is estimated to 67.0B and capital benefit exclusions are 16.8B as agreed in the taxation committee of 2008.  These estimations favor the majority of homeowners (Michael, 19). The law on taxation allows homeowners to recalculate their taxable income and generate workable plans for housing investments.

Also, they take away allocable interest on equity loan for homes by up to 100,000. Additionally, tax payers may reduce equity loan interests which are non-home, from the AMT income tax.  In addition, homes occupied by owners may gain some deduction on the tax for real estates after homeowners have itemized them.  Although there are some limits on the exclusions on the capital tax benefits from a principal residence sales, this depends on the kind or type of homeowner married or single.

According to the homeownership law, people buying homes form parties that are not related to them before 1st may ,2010, and who did not own a principal residence within the previous three year duration that ended on the purchase date ,if they bought it at a fair market price may claim a 10 refundable tax on the buying price. This rule governs homeowners at their first time purchase of a home. There are also some clauses that govern the militia or citizen that have been out of the country for more than 90 days during January 2009 and April 2010. These may claim credit for home ownership (John, 14).

However, in the cases where the homes were bought before 7th November 2009, the credit value is reduced considerably depending on the AGI standards.  For home bought after 6th November 2009, there is no claim for ownership credit. This is only eligible if the buying price is greater than 800,000, or if it is bought by someone who can eligibly be an accepted dependant to other taxpayers and also for buyers aged less than 18 years unless heshe is married to a spouse whose age is more than 18 years.

If one is making hisher credit claim in 20092010, they should attach their settlement statement to the return that shows the completion of purchase payments.  Moreover, for homes already sold for over 36 months, any extension on credit is mandatory to repayment unless otherwise exceptional.  If the home was purchased in 2009 or 2010, persons may lay credit claims on the years purchase returns.   In addition, those who do not itemize their property can claim up to a 500 or 1000 for joint return, tax on state or real property (Solomon, 25).

Finally, after all tax deductions and numerous claims, you may get carried away and forget to clam for loan deduction on the origination fees that is considered in terms of points in which case one point is equivalent to 1 of the loan. These must be deducted depending on the year they are paid. These claims relieve taxpayers of their burden hence benefiting them.

Opinion on the Article Beyond the Numbers
In his article Ken Schermann has spoken in great favor of Statement 34 which is a Governmental Accounting Standard. Statement 34 emphasizes the importance of management reporting as part of the financial reporting for government organizations.

As mentioned in the article, Statement 34 mentions eight different areas which should be incorporated in a managements discussion and analysis. These areas add considerable value to the information being provided to the reader of it for instance comparison of totals in financial statements of the current year with the previous year along with valid explanations will enable to user to properly understand the reason behind any decrease or increase.

The explanation provided by Ken in the case of a government system legally adopting a budget is quite valid since the rationale behind this explanation is to help readers overcome any ambiguity they might come across when dealing with the budget information in the financial statements.

Explanation of any material activity in capital assets or long term liabilities is essential since these areas are of grave concern to the users. Users are very much interested in the leverage an entity is facing or an increase in its non-current assets which reflect initiatives towards progress or growth.

Ken has rightly pointed out that the information provided should not only mention what happened but also determine the course of the future as a result of those activities, probably because this will provide the readers of the MDA an appropriate direction of where the organization is heading to.

Furthermore, the proposition of the Chief Financial Officer (CFO) behind the writing of MDA is well place since heshe is the one with the requisite financial knowledge of a government system. However whether the CFO will be able to present it in a manner which is easily readable for even a college student is questionable (Schermann, n.d.).