Question 1:

Kayla Company uses the perpetual inventory system and the LIFO method. The following information is available for the month of June:

The selling price (price the company charged the customers) was $10 per unit.

a) Show the calculation of cost of goods sold and ending inventory under LIFO.

b) What is the amount of Sales Revenue?

c) Prepare a journal entry for the sale of inventory on June 15.

d) In which financial statement does the amount of ending inventory appear?

e) In which financial statement do the amount of sales and amount of cost of goods sold appear?

f) What is the amount of gross margin for month June?

g) What is the gross margin percentage?

Question 2: The controller of Alt Company is applying the lower-of-cost-or-net realizable value basis of valuing its ending inventory. The following information is available:

Compute the value of the ending inventory by applying the lower-of-cost-or-NRV. Show your work.

Question 3: The management of Svetlana Corp. is considering the effects of inventory-costing methods on its financial statements and its income tax expense. Assuming that the price the company pays for inventory is increasing, which method will:

a. Provide the highest net income, LIFO or FIFO?

b. Provide the highest ending inventory, LIFO or FIFO?

c. Result in the lowest income tax expense, LIFO or FIFO?

Gallatin Carpet Cleaning is a small, family-owned business operating out of Bozeman, Montana. For its services, the company has always charged a flat fee per hundred square feet of carpet cleaned. The current fee is $22.65 per hundred square feet. However, there is some question about whether the company is actually making any money on jobs for some customers—particularly those located on remote ranches that require considerable travel time. The owner’s daughter, home for the summer from college, has suggested investigating this question using activity-based costing. After some discussion, she designed a simple system consisting of four activity cost pools. The activity cost pools and their activity measures appear below:

Resource consumption is distributed across the activities as follows:

Job support consists of receiving calls from potential customers at the home office, scheduling jobs, billing, resolving issues, and so on.

1. Prepare the first-stage allocation of costs to the activity cost pools.

2. Compute the activity rates for the activity cost pools.

3. The company recently completed a 600 square foot carpet-cleaning job at the Flying N Ranch—a 51-mile round-trip journey from the company’s offices in Bozeman. Compute the cost of this job using the activity-based costing system.

4. The revenue from the Flying N Ranch was $135.90 (600 square feet @ $22.65 per hundred square feet). Calculate the customer margin earned on this job.

If you need more information please ask the cheeg system says there is a bad word in it somewhere and I can't find it.

Bad Bad Benny: A True Story (Identifying Controls for a System) In the early 20th century, there was an ambitious young man named Arthur who started working at a company in Chicago as a mailroom clerk. He was a hard worker and very smart, eventually ending up as the president of the company, the James H. Rhodes Company. The firm produced steel wool and harvested sea sponges in Tarpon Springs, Florida for household and industrial use. The company was very successful, and Arthur decided that the best way to assure the continued success of the company was to hire trusted family members for key management positions—because you can always count on your family. Arthur decided to hire his brother Benny to be his Chief Financial Officer (CFO) and placed other members of the family in key management positions. He also started his eldest son, Arthur Junior (an accountant by training) in a management training program, hoping that he would eventually succeed him as president. As the company moved into the 1920s, Benny was a model employee; he worked long hours, never took vacations, and made sure that he personally managed all aspects of the cash function. For example, he handled the entire purchasing process—from issuing purchase orders through the disbursement of cash to pay bills. He also handled the cash side of the revenue process by collecting cash payments, preparing the daily bank deposits, and reconciling the monthly bank statement. The end of the 1920s saw the United States entering its worst Depression since the beginning of the Industrial Age. Because of this, Arthur and other managers did not get raises, and, in fact, took pay cuts to keep the company going and avoid layoffs. Arthur and other top management officials made ‘‘lifestyle’’ adjustments as well—for example, reducing the number of their household servants and keeping their old cars, rather than purchasing new ones. Benny, however, was able to build a new house on the shore of Lake Michigan and purchased a new car. He dressed impeccably and seemed impervious to the economic downturn. His family continued to enjoy the theater, new cars, and nice clothes. Arthur’s wife became suspicious of Benny’s good fortune in the face of others’ hardships, so she and Arthur hired an accountant to review the books. External audits were not yet required for publicly held companies, and the Securities and Exchange Commission (SEC) had not yet been formed (that would happen in 1933–1934). Jim the accountant was eventually able to determine that Benny had diverted company funds to himself by setting up false vendors and having checks mailed to himself. He also diverted some of the cash payments received from customers and was able to hide it by handling the bank deposits and the reconciliation of the company’s bank accounts. Eventually, Jim determined that Benny had embezzled about $500,000 (in 1930 dollars). If we assume annual compounding of 5% for 72 years, the value in today’s dollars would be about $17.61 million! Arthur was furious and sent Benny away. Arthur sold most of his personal stock holdings in the company to repay Benny’s embezzlement, which caused him to lose his controlling interest in the company and eventually was voted out of office by the Board of Directors. Jim, the accountant, wrote a paper about his experience with Benny (now referred to as ‘‘Bad Bad Benny’’ by the family). Jim’s paper contributed to the increasing call for required annual external audits for publicly held companies. Arthur eventually reestablished himself as a successful stockbroker and financial planner. Benny disappeared and was never heard from again.

1. Identify the five control weaknesses in Revenue and Purchase process.

2. Identify the five General controls Arthur should have implemented in the company.

3. From Chapter 13, identify the five internal control activities Arthur should have considered (or implemented) to thwart Benny’s bad behavior.

A particular ranking system determines the cost of living in the most expensive cities in the world as an index. This index scales city X as 100 and expresses the cost of living in other cities as a percentage of the city X cost. For​ example, in​ 2007, the cost of living index in city Y was 125.7 ​, which means that it was 26 ​% higher than city X. The accompanying scatterplot shows the index for 2007 plotted against the 2006 index for 15 cities. Complete parts a through e below. LOADING... Click the icon to view the data table and scatterplot. ​a) Describe the association between the cost of living indices in 2007 and 2006. Choose the correct answer below. A. The association between the cost of living indices in 2007 and 2006 is​ negative, linear, and strong. B. The association between the cost of living indices in 2007 and 2006 is​ negative, linear, and weak. C. The association between the cost of living indices in 2007 and 2006 is​ positive, linear, and strong. Your answer is correct. D. The association between the cost of living indices in 2007 and 2006 is​ positive, curved, and strong. E. The association between the cost of living indices in 2007 and 2006 is​ positive, linear, and weak. F. There is no association between the cost of living indices in 2007 and 2006. ​b) The Upper R squared for the regression equation is 0.847 . Interpret the value of Upper R squared . Select the correct choice below and fill in the answer box to complete your choice. ​(Type an integer or a​ decimal.) A. The value of Upper R squared equalsnothing ​% indicates the percentage of the variability in cost of living in 2006 that can be explained by variability in cost of living in 2007. B. The value of Upper R squared equals84.7 ​% indicates the percentage of the variability in cost of living in 2007 that can be explained by variability in cost of living in 2006. Your answer is correct. C. The value of Upper R squared equalsnothing ​% indicates the percentage of the variability in cost of living in 2006 that cannot be explained by variability in cost of living in 2007. D. The value of Upper R squared equalsnothing ​% indicates the percentage of the variability in cost of living in 2007 that cannot be explained by variability in cost of living in 2006. ​c) Find the correlation. The correlation coefficient is . 920 . ​(Round to three decimal places as​ needed.) ​d) Using the data​ provided, find the least squares fit of the 2007 index to the 2006 index. ModifyingAbove 2007 Index with caret equals3.605plusleft parenthesis nothing right parenthesis times 2006 Index ​(Round to three decimal places as​ needed.) ​e) Predict the 2007 cost of living index of city 2 and find its residual. The predicted 2007 cost of living index of city 2 is nothing . ​(Round to one decimal place as​ needed.)

City   Index_2006   Index_2007
1   117.3   125.7
2   121.8   122
3   102.3   104.3
4   93   95.8
5   111.7   119.6
6   112.9   124.8
7   95.3   97.3
8   109.9   111.5
9   100.5   101.8
10   95.8   103.6
11   121.2   121.4
12   119.3   124.6
13   105.9   118.3
14   111.2   119.4
15   111.3   115.8

READ AND SUMMARIZE THE CONCEPT OF DIFFERENCE IN ENFORCEMENT OF ACCOUNTING STANDARDS  

Differences in countries’ institutional settings have long been recognised in accounting research. Countries have been grouped based on political, economic and legal systems, albeit in rudimentary ways (Nobes and Parker, 2006). Mueller (1967) provided an early classification of accounting systems, drawing on political and economic differences between countries. Nobes (1983) extended this work, considering legal system, economic environment, tax law, business practices, professional regulation and public sector accounting enforcement to arrive at a classification of accounting systems. In general there is recognition that a range of factors, captured within a country’s culture and its legal, financing and taxation systems, will affect the output of the financial reporting process. Table 1 provides a list of institutional features that have been considered important and the proxies used to capture them. The broadest classification relates to origin of the legal system (code law or common law), a simple dichotomy that also reflects differences in other aspects such as financing systems. The legal system classification can be further explored by considering specific attributes of the system that provide protection for investors, for example shareholder (or anti-director) rights and creditor rights (La Porta et al., 1998; Djankov et al., 2008). Attributes of the legal setting considered important for investor protection are observance of the “rule of law”, including judicial efficiency, corruption, risk of expropriation and risk of contract repudiation (La Porta et al., 1998).2 Kaufmann et al. (2010) provide a proxy for “rule of law” based on perceptions of the extent to which market participants have confidence in and comply with the laws of society. Their proxy is an aggregate indicator based on a wide range of specific components reflecting the quality of contract enforcement, property rights, the police, and the courts, as well as the likelihood of crime and violence. It is widely used to measure differences between countries. Usually it is referred to as “legal setting” or “legal enforcement”, or just “enforcement”, often without further definition of what is meant by the concept (Byard et al., 2011; and Landsman et al., 2011).

Another sub-classification of legal enforcement is public or private enforcement. La Porta et al.’s (2006) proxy for public enforcement summarises self-constructed country-level indices relating to country-specific supervisor characteristics, rulemaking power, investigative powers, orders and criminal sanctions. The proxy for private enforcement summarises country indices relating to the liability standard for companies and managers, for distributors (underwriters) and accountants. It also captures variation in mandatory disclosures such as the prospectus, compensation, shareholders, inside ownership, irregular contracts and transactions. Taking a different approach, Jackson and Roe (2009) proxy for public enforcement activity using “resources” measures based on the budget and staffing levels of security market regulators. Overall, the approaches to the measurement of enforcement used in most studies do not consider enforcement of accounting standards per se. Studies use legal setting as the proxy for country differences but they do not measure enforcement of accounting standards (as defined above) specifically. Nevertheless many studies conclude that “enforcement” is an important factor in explaining various capital market and financial reporting outcomes (Daske et al., 2008; Li, 2010; Landsman et al., 2011; Florou and Pope, 2012; and Florou and Kosi, 2013). This missing link, common to almost all international accounting studies, motivated us to develop an index that proxies specifically for the degree of enforcement of financial reporting at the country level. We focus on audit and accounting enforcement because of the importance attached to these activities in improving the “quality” of financial information available in capital markets.3 Put simply, the theory of efficient markets predicts that share prices reflect all publicly available information. Further, market efficiency implies the information content of the disclosure, not the act of disclosure itself, is more important (Scott, 2006, p. 88). Given the information asymmetry problems between firms’ managers and their capital providers (Jensen and Meckling, 1976), external auditors are engaged to provide assurance about the quality of information provided by the managers. However, the extent to which auditors can fulfil this role depends on their effectiveness. Mautz and Sharaf (1961) developed a theory of auditing, identifying essential elements of audit practice including evidence, due audit care, fair presentation, independence and ethical conduct. These elements of audit have been incorporated into auditing standards and regulations and promoted through private sector organisations (e.g., professional associations) and government entities (Nobes and Parker, 2006, pp. 464–68). The basic proposition underlying the development of standards and requirements for the audit profession has been that improving auditor practice (e.g., through more training, ongoing professional development, resourcing and independence) will improve audit quality.4 Other features that can promote audit quality include monitoring and sanctioning by peers, regulatory agencies and the media, and the threat of litigation against firms for audit failure (Baker et al., 2001; Khurana and Raman, 2004). Van der Plaats (2000) lists several factors that, if present in the institutional setting, will help to ensure an auditor’s objectivity: (1) exposure to liability; (2) quality assurance system; (3) system of professional disciplinary sanctions; and (4) damage to the brand name of the audit firm. Many studies point to differences between countries in the governance role of auditors, arguably linked to the national legal setting, firm financing and litigation risk (Choi and Wong, 2007). The collapse of Enron and Arthur Andersen led to changes in the US and other countries to improve the quality of audit from 2002 onwards. Key initiatives to increase auditor independence include restricting provision of non-audit services to audit clients, requiring firm audit partner rotation and introducing independent oversight bodies with the power to review audit firms’ working papers and to take any corrective action deemed necessary (Zhang, 2007; and Hart, 2009). The latter two changes were introduced because they were expected to encourage a more independent and rigorous approach to completing an audit. At the same time, regulators in the EU were engaged in initiatives to strengthen the regulation of the audit profession in Europe, as part of the EC’s Financial Services Action Plan, including more public oversight of auditors. Priorities included improving disciplinary sanctions and reinforcing auditor independence and codes of ethics (Dewing and Russell, 2004).5 Accounting standards also have a role in reducing information asymmetry as they provide a means of communication between a firm’s managers and investors. Financial reports based on accounting standards provide a cost-effective way of providing information to assist investors’ decision making. Firm managers control the preparation and release of accounting information and their incentives to provide the high quality information demanded by investors will vary with specific contracting relationships, including financing and remuneration (Watts and Zimmerman, 1986). While some theorists argue market forces (arising from markets for finance, corporate control and labour supply) will promote information release, others argue the supply of information will be insufficient without regulatory intervention (Scott, 2006, pp. 382–83). Capital market regulators are concerned with not just the supply of information but also its quality or usefulness for investor decision making, because of the link between high quality information and lower information asymmetry, greater market liquidity, and lower cost of capital (Hail and Leuz, 2007). Compliance with accounting standards is seen as a way to promote information with desirable qualitative characteristics including relevance and representational faithfulness (IASB, 2010). While external auditors have a role in providing assurance about the quality of financial information, other entities such as a stock exchange or government body may play a role in promoting or monitoring the accounting information provided in capital markets (Frost et al., 2006). The concept underlying the role of a security market regulator is that the regulator promotes fair and efficient operation of the market and intervenes when necessary to ensure a “level playing field”, which also means promoting compliance with the rules regulating behaviour of market participants (CESR, 2003). Increasingly, accounting standards are seen as part of the set of requirements with which listed companies must comply (Berger, 2010).

Carvajal and Elliot (2009) identify three essential elements in securities regulation: the legal framework, the supervision programme and the enforcement programme.6 IOSCO7 principles relating to enforcement call for securities market regulators to have “comprehensive inspection, investigation and surveillance powers” (principle 8), and “comprehensive enforcement powers” (principle 9); and for the regulatory system to ensure “effective and credible use of inspection, investigation, surveillance and enforcement powers” and the “implementation of an effective compliance program” (IOSCO, 2003). The extent to which a government (or private sector) entity is involved in supervision and enforcement of accounting information requirements varies between countries according to the predominant social and political views on the role and importance of a regulator. In theory, a more active regulator will promote the quality of financial reporting information by encouraging and assisting firms to provide the required information, identifying cases where suitable information has not been provided and taking action to ensure defective reporting is corrected. Carvajal and Elliot (2009) argue that non-compliance is a serious matter, as the credibility of the system relies on effective discipline with “the probability of real consequences for failure to obey the law” (p. 1). Similarly, Leuz (2010) states the benefits of regulation will not materialise unless the rules are properly implemented and enforced. The experience of the US Securities and Exchange Commission (SEC), an active regulator of financial reporting, indicates firms respond to regulatory initiatives to promote compliance with accounting standards and that fines and penalties, as well as likely adverse share price reaction, appear to provide strong incentives for compliance (Dechow et al., 1996; Nobes and Parker, 2006, p. 178). Hitz et al. (2012) report that accounting enforcement actions under the structure introduced in Germany from 2005 are associated with unfavourable market reactions for firms receiving sanctions. Ernstberger et al. (2012) find evidence of higher accounting quality (less earnings management) and positive market outcomes (relating to liquidity and valuation) for German firms under the new regime. Christensen et al. (2013) report that benefits of IFRS (measured by changes in proxies for market liquidity) occurred in countries that increased their accounting enforcement activity at the time of adoption of IFRS in 2005. The above discussion singles out the importance of the activities of auditors and enforcement bodies in promoting the quality of financial information. In addition, studies have highlighted a widespread reliance on external auditors to help achieve high quality financial reporting (FEE, 2001; World Bank, 2011) despite substantial differences between the capabilities and capacities of audit firms (e.g., Big 4 and non-Big 4) and variation in the intensity of audit activity across countries (Khurana and Raman, 2004; and Choi and Wong, 2007). Other reports point to the important role of independent enforcement bodies and argue that, absent enforcement, high quality financial reporting is unlikely to be achieved (SEC, 2002; CESR, 2003). For these reasons we have focused on measurable country differences in relation to audit and enforcement activities. In each of 51 countries for which we could obtain sufficient data, we measure the audit environment by considering the presence or absence of a number of factors that are likely to affect the skills and training of auditors and their incentives to carry out their role effectively, as discussed earlier in this section. We include factors relating to audit licencing, training and oversight as well as levels of audit fees and litigation risk. In relation to enforcement bodies, we focus on the activities of security market regulators (and other bodies) with respect to monitoring and reviewing company financial statements and sanctioning companies for non-compliance with accounting standards. Our data are hand-collected from public sources, including IFAC’s surveys of member compliance, the World Bank’s Review of Standards and Codes (ROSC) reports, and from annual reports and websites of security market regulators and auditing oversight bodies (IFAC, 2011; World Bank, 2011). There have been many changes in the audit and accounting enforcement environment since mandatory adoption of IFRS began in 2005. Capturing these changes presents a challenge to researchers as existing proxies are often aged and static (e.g., many of the La Porta et al. (1998) measures derive from data from the 1980s–1990s) or do not significantly change over time (e.g., see Chen et al.’s 2010 report on the Kaufmann et al. proxies). Examples of changes in the audit environment include the introduction of auditor rotation and auditor oversight bodies following the collapse of Arthur Andersen in 2001 and the passage of the Sarbanes–Oxley Act in the US in 2002. Although other countries may not have experienced corporate collapses on the same scale as those in the US, many followed the US lead in introducing new rules and structures to improve auditor independence and oversight, particularly from 2003–04. Similarly, in many countries the activities of enforcement bodies changed with the introduction of IFRS, for example the UK and Germany (FRRP, 2005; Ernstberger et al., 2012; Hitz et al., 2012; Christensen et al., 2013). A contributing factor was the promulgation of CESR Standard No. 1, which required all European Union (EU) members to have an independent enforcement body responsible for review of financial reporting, beginning 2005 (CESR, 2003). Our index aims to capture salient aspects of the environment in which auditors carry out their work and to measure the activities of enforcement bodies during the period 2002–08. We explain the construction of the index in the next section.

What are the adjusting entries for the following?

These are the orginial events that took place, and their journal entries

There are no opening balances

b)Social
c)Technological
d)Market
e)None. All of the above are major kinds of globalization drivers

a)existed before the time of Christ.
c)B and D.
d)was influenced by the rise of the Ottoman Empire.

b)more liberal
c)harsher
d)more confronting
e)A and C

b)if they are going to work in a firm with no foreign operations.
c)Neither A nor B because they can learn on the job.
d)Both A and B.

8.International business differs from domestic business in that a firm operating across borders must deal with

b)C and D.
c)the foreign environment.
d)the international environment.
e)the domestic environment.

b)international business.
c)the Pacific Rim.
d)foreign exchange.

Is Your Car “Made in the U.S.A.”? The phrase “made in the U.S.A.” has become a familiar battle cry as U.S. workers try to protect their jobs from overseas competition. For the past few decades, a ma- jor trade imbalance in the United States has been caused by a flood of imported goods that enter the country and are sold at lower cost than comparable American-made goods. One prime concern is the automotive industry, in which the number of imported cars steadily increased during the 1970s and 1980s. The U.S. automobile industry has been besieged with complaints about product quality, worker layoffs, and high prices, and has spent billions in advertising and research to produce an American-made car that will satisfy consumer demands. Have they been successful in stopping the flood of imported cars purchased by American consumers? The data in the table represent the numbers of imported cars y sold in the United States (in millions) for the years 1969–2009. To simplify the analysis, we have coded the year using the coded variable x = Year - 1969.

1. Using a scatterplot, plot the data for the years 1969–1988. Does there appear to be a linear relationship between the number of imported cars and the year?

2. Use a computer software package to find the least-squares line for predicting the number of imported cars as a function of year for the years 1969–1988.

3. Is there a significant linear relationship between the number of imported cars and the year?

4. Use the computer program to predict the number of cars that will be imported us- ing 95% prediction intervals for each of the years 2007, 2008, and 2009.

5. Now look at the actual data points for the years 2007–2009. Do the predictions obtained in step 4 provide accurate estimates of the actual values observed in these years? Explain.

6. Add the data for 1989–2009 to your database, and recalculate the regression line. What effect have the new data points had on the slope? What is the effect on SSE?

7. Given the form of the scatterplot for the years 1969–2009, does it appear that a straight line provides an accurate model for the data? What other type of model might be more appropriate? (Use residual plots to help answer this question.)

1. In the following table, assume that someone retires in 2006 with an initial income payment of $25,000 per year in benefits. The benefit payment is then indexed to the Consumer Price Index (CPI) for the next 20 years. Assume also that the CPI would rise by 2% per year. Column (1) shows the value of the CPI in each year, using 2006 as the base year. Calculate the indexed nominal benefits by 2% per year in column (2), the real annual benefits in column (3), the indexed nominal benefits by 3% per year in column (4), and the real annual benefits in column (5).

Consider the following data:

a. Calculate the profit for each quantity. How many units should this firm produce to maximize profit?

b. Calculate MR for each quantity. Calculate MC for each quantity. Does the profit-maximizing formula support your answer from part a?

c. Is this firm perfectly competitive? How do you know? Is it in the long-run equilibrium? How do you know?

d. Depict the graph.