Anthony is a new investor and has been closely watching a company by the name of CLS Ltd., a pharmaceutical company aiming to develop a coronavirus vaccine.

Anthony believes the following returns are possible in 2020 and has attached a probability to each potential outcome:

a) Calculate the Expected Return for CLS Ltd. in 2020.

Show formula, calculation and a concluding statement in your response.

b) Calculate the Risk (Standard Deviation) for CLS Ltd. in 2020.

Show formula, calculation and a concluding statement in your response.

c) Anthony is considering investing all his savings in buying shares in CLS Ltd. Explain to Anthony why he should not do this by referring to the risk/return trade-off. What action can Anthony take to reduce some of the risk?

d) Explain what the standard deviation actually measures in Finance. Include in your answer an explanation of what a high and low value for the standard deviation means.

1) Carol works for ABC Company and earned $64,500 for the entire year 2018. How much in FUTA tax is her employer required to withhold in her name? Assume that the employer receives the maximum credit for state unemployment taxes.

Choices:

A) $0

B) $435.00

C) $46.40

D) $42.00

2) Alice is single and self-employed in 2020. Her net business profit on her Schedule C for the year is $158,000.

What is her self-employment tax liability and additional Medicare tax liability for 2020? (Round your final answer to the nearest whole dollar amount. Leave no answer blank. Enter zero if applicable.)

Self-Employment Tax Liability =

Additional Medicare Tax Liability =

3) Rasheed works for Company A, earning $360,000 in salary during 2020.

Assuming he is single and has no other sources of income, what amount of FICA tax will Rasheed pay for the year? (Round your intermediate and final answer to the nearest whole dollar amount.)

Amount of FICA Tax =

Article:
American factories are running short of parts. Suppliers of everything from engines to electronic components aren’t keeping up with a boom in U.S. manufacturing, which has lifted demand in markets such as energy, mining and construction. As a result, some manufacturers are idling production lines and digesting higher costs. Many industrial companies have reported strong sales and profits in recent weeks, and the pace of factory hiring has more than doubled this year compared with the first seven months of 2017. However, deliveries from suppliers have slowed for 22 consecutive months through July, according to the latest survey of U.S. manufacturers by the Institute for Supply Management. More than one-quarter of respondents said it took longer for materials to arrive in July than in June. Machinery was the hardest-hit sector. These bottlenecks were evident in the earnings reports manufacturers delivered over the past few weeks. Terex Corp. said its mobile-crane-making unit incurred a loss in the second quarter as parts shortages hurt efficiency at its plants. “The reality of it is that elements of our supply base could not keep up,” Chief Executive John Garrison said on an Aug. 1 earnings call. Machinery giant Caterpillar Inc. and power-equipment maker Eaton Corp. are among those struggling to keep up with orders as supply-chain kinks join labor shortages and cost pressures from transportation and import tariffs as threats to the sector’s recovery. Eaton last week cut financial guidance for its $2.5 billion hydraulics unit as a result. Caterpillar said it is paying more for smaller or incomplete orders from suppliers that have struggled to meet demand. Interim Chief Financial Officer Joseph Creed said in an interview that castings—the metal building blocks for engines and other large vehicle parts—were in particularly short supply. Delays are forcing some manufacturers to curb output. Oshkosh Corp. idled production of its mobile cranes because of parts shortages several times in the past quarter. “We think we’ll probably continue to see some of that in the fourth quarter, although we do expect some progression,” Oshkosh CEO Wilson Jones said on a July 31 investor call. Like their customers, many suppliers to companies that make products including trucks and tractors shed workers after the financial crisis. Now some suppliers say they are struggling to find skilled staff and remain hesitant to ramp up production because they worry a machinerysector recovery that began in late 2016 is now drawing to a close. Leggett & Platt Inc., a maker of the part that moves the pronged metal lifts at the front of forklifts, acknowledged it is struggling to meet “very, very strong” demand for parts from its recently acquired Precision Hydraulic Cylinders business. Leggett, based in Carthage, Mo., is paying its workers more in overtime to expand production hours and is considering more permanent measures to increase capacity. Aerospace and car companies are also compiling big order books and experiencing supplier delays. Boeing Co. recently had more than two dozen partly finished 737 airliners parked outside its Renton, Wash., assembly plant and an adjoining airport awaiting engines and other components. A shortage of specialized workers including welders and truck drivers is exacerbating the crunch. The number of job openings in manufacturing climbed to 482,000 in June, the Federal Reserve Bank of St. Louis said Tuesday, the highest level in 17 years. A monthslong crunch in supplies of some basic electronic components is also cascading through the manufacturing sector, as more industrial equipment is linked to the web to provide data that can be used to predict maintenance and replacement needs. Most of those components are manufactured in Asia, where producers are already working flat out to supply the consumer-electronics sector. “The electronics supply-chain environment remains challenging and we continue to see constraints across several component categories,” said Mike McNamara, CEO of Flex Ltd. , a maker of so-called smart-technology products. “The lead times have significantly lengthened and we see increasing shortages,” he said on the company’s earnings call last month. “The good news is that demand is really strong,” said Tom Derry, chief executive of the Institute for Supply Management, which publishes a closely watched monthly survey on U.S. industrial conditions. “The irony is we reached the limits of our ability, in the current configuration we have, to keep up with demand,” he added. Years spent making supply chains as lean and efficient as possible are hurting big customers now as demand climbs, industry consultants said. “Suppliers have not been willing to jump on adding capacity because they’ve been burned badly before,” said Shiv Shivaraman, a managing director at consultant AlixPartners LLC who advises auto and machinery makers on supply chains and production processes. “You will see many people limping for a while.” Some companies are stockpiling parts to head off future challenges, potentially exacerbating the supply pressures. “We built some inventory last quarter because we had seen the lead times extend and we are trying protect our customers,” said Andrew Silvernail, CEO of Idex Corp. , a maker of pumps, valves and meters that is based in Lake Forest, Ill. Still, executives expressed confidence that booming order books will encourage suppliers to boost output, either by increasing wages to attract staff or investing in more capacity. “We are getting better. Our suppliers are getting better. We’re doing a much better job of shortening lead times,” said Craig Arnold, Eaton’s CEO.

Questions:
1- How do fixed costs and lengthening delivery times for component parts combine to reduce a manufacturers' profitability?
2- How do the lengthening delivery times and an increasing pace of factory hires combine to impact efficiency ratios?

Question No. 1 (Marks 15)

C Company’s forecasted 2020 financial statements are given below, along with industry average ratios.                                                                                    

C Company: Forecasted Balance sheet as of December 31, 2020

C Company: Forecasted Income Statement for the year ended December 31, 2020

Per Share data            

EPS                                                                                                     4.71

DPS                                                                                                     .95

Market Price Per Share                                                                       23.57

P/E Ratio                                                                                             5 times

Total No. of Shares                                                                             23,000

Industry Average Ratios - 2020

Quesytion : Calculate C Company’s forecasted Ratios, compare them the industry average data and comment briefly on strength and weaknesses of the company ?

Question

C Company’s forecasted 2020 financial statements are given below, along with industry average ratios.                                                                                    

C Company: Forecasted Balance sheet as of December 31, 2020

C Company: Forecasted Income Statement for the year ended December 31, 2020

Per Share data            

EPS                                                                                                     4.71

DPS                                                                                                     .95

Market Price Per Share                                                                       23.57

P/E Ratio                                                                                             5 times

Total No. of Shares                                                                             23,000

Industry Average Ratios - 2020

Required: Calculate C Company’s forecasted Ratios, compare them the industry average data and comment briefly on strength and weaknesses of the company.

Sandhill Machinery Corporation, a private company following ASPE sold manufacturing equipment for $2,100 each. Each machine carried with it a 2-year warranty against manufacturing defects. From experience, Sandhill Machinery Corporation determined that each machine sold would average $253 in replacement parts. In 2020, the company sold 1,000 machines. Also in 2020, the company incurred $125,000 in total repair costs (the cost of replacement parts from inventory). Sandhill Machinery Corporation also sold an extended warranty for its machines. For $430, customers could purchase an extended warranty that extended the warranty on the machine for an additional 2 years. 800 of the customers that bought machines also purchased the extended warranty. Assume the revenue is earned evenly over the two-year contract. Using the Revenue Approach, prepare the journal entry to record the sale of the machines and extended warranties. (Ignore any cost of goods sold entry).Using the Revenue Approach, prepare the journal entry to record the warranty costs incurred during 2020.

Using the Revenue Approach, prepare the journal entry to record the year-end adjusting entries at December 31, 2020,for the assurance-type warranties assuming Sandhill’s year-end is December 31. Using the Revenue Approach, prepare the journal entry to record the year-end adjusting entries at December 31, 2022 for the service-type warranties. (Note: assume that the cost of repairs has already been recorded during 2022 and prepare any other adjusting entry needed). (

Volmar Company had sales in 2020 of $1,602,000 on 53,400 units. Variable costs totalled $534,000, and fixed costs totalled $911,400.

A new raw material is available that will decrease the variable costs per unit by 20% (or $2.00). However, to process the new raw material, fixed operating costs will increase by $43,500. Management feel that one half of the decline in the variable costs per unit should be passed on to customers in the form of a sales price reduction. The marketing department expects that this sales price reduction will result in a 10% increase in the number of units sold.

Prepare a CVP income statement for 2020: (Round per unit cost to 2 decimal places, e.g. 15.25.)

(a) Assuming the changes have not been made:

(b) Assuming that changes are made as described.

Part 1. Going Concern

Facts:

• A Chicago area company (“Company”) has been manufacturing metal gas tanks for passenger automobiles since 1918.  The Company has always been a privately held family run business.
• The Company has been profitable for much of its history; retained earnings at the end of 20X1 was $20 million.
• Recently mandated EPA mpg requirements have caused automobile manufacturers to move to utilizing plastic gas tanks – which are much lighter than metal.  This change in materials helped automobile manufacturers reduce auto weights and meet the increased mpg requirements.
• The Company decided not to convert their operation to plastic gas tanks because their expertise was only in manufacturing metal products.
• A few years back, the owners were faced with two options:  Liquidate and distribute available assets or move into a different line of business.  The Company decided to do the latter.  The Company felt it could use its expertise to manufacture metal frames for televisions (like for Toshiba, Panasonic, etc.)
• The Company built a new manufacturing plant in Georgia for manufacturing these metal TV frames; the plant was financed with low interest rate IRBs (Industrial Revenue Bonds).
• The IRBs were for $25 million with a 20-year term.  The Company has no other debt.
• Unfortunately, in its first two years of operation of the new metal picture frame plant– 20X2 & 20X3 – the Company lost $11 million and $8 million, respectively.  The metal TV frame business is extremely competitive; sales prices of metal TV frames are quite low.  The Company was simply unable to produce large quantities of metal frames at a cost which would enable the Company to generate adequate gross profit.
• You are finishing your Audit of 20X3 & discussed the Going Concern issue with the Company’s management, including the family owners.  The owners / managers feel they have no choice but to continue producing metal TV frames – due to the 20-year IRB term.
• Management prepares financial projections for the next year which shows the Company breaking even; the projections reflect a significant increase in the gross profit – it is unclear how management will improve their gross profit margin so significantly.

Required: Part 1

1. State whether you believe there is or is not substantial doubt about the Company’s ability to continue as a Going Concern.  Provide your supporting arguments, specifically addressing:

• Conditions and Events
• Management’s Plans
• Stating that you believe there is substantial doubt means that your Audit Firm’s Independent Auditor’s Report for the year of 20X3 will include an emphasis of a matter paragraph with the supporting footnote.  (There is no need to formally draft the paragraph & supporting footnote.)

Stating that you believe there is not substantial doubt means that your Audit Firm’s Independent Auditor’s Report for the year of 20X3 will not include an emphasis of a matter paragraph but the Audited Financial Statements will include a footnote describing the conditions and events and how management’s plans alleviated the conditions and events.  (There is no need to formally draft the footnote.)

Part 2.  Subsequent Events

Facts:

You are performing an annual audit of a company with a December 31, 20X1 year-end.  Your firm is planning to complete the audit on March 1, 20X2 and release the report on March 31, 20X2.  On March 15, 20X2, two material subsequent events occur:

• A fire caused extensive damage to the company’s manufacturing plant in New Jersey.
• A large customer went bankrupt.  At December 31, 20X1, the Company had a receivable of $2,500,000 from this customer; at December 31, 20X1 the Company had established an allowance for doubtful accounts of $700,000 for this customer.

Required:

1. Explain whether each subsequent event is a Type 1 or Type 2 Subsequent Event.
2. What is the impact of each subsequent event on the company’s audited financial statements for the year ended December 31, 20X1?  Be specific as to whether (a) there will be an adjustment which will cause the company’s balance sheet and / or income statement to change plus footnote disclosure, (b) there will only be footnote disclosure, or (c) there will be no impact to either the financial statements or the footnote disclosures.

How should your Audit Firm date its audit report?

Item A.  Payments to Company’s Former President

Facts:

Joan Smith, CPA, receives a telephone call from her client, XYZ Company.  The company’s controller states that the board of directors of XYZ has entered into two contractual arrangements with Steve Green, the company’s former president, who has recently retired.  Under one agreement, XYZ Company will pay the ex-president $7,000 per month for five years if he does not compete with the company during that time in a rival business.  Under the other agreement, the company will pay the ex-president $5,000 per month for five years for such advisory services as the company may request from the ex-president.  

XYZ’s controller asks Smith whether the balance sheet as of the date the two agreements were signed should show $144,000 in current liabilities and $576,000 in long-term liabilities, or whether the two agreements should only be disclosed in a contingency note to the financial statements (i.e. no amounts should be accrued in the financial statements pursuant to these two agreements).

Required:

1. How should Joan Smith reply to the controller’s questions?  Note: your answer could be different than either of the alternatives suggested by the XYZ controller.

Item B. Contingent Liability

Facts:

• You are auditing a very successful and highly profitable manufacturing company as of December 31, 2020.
• The Company has always maintained adequate insurance in different areas.  The Company has decided, effective January 1, 2021, not to purchase insurance against risk of loss that may result from injury to others, damage to the property of others, or interruption of its business operations.
• The Company would like to record a $5,000,000 reserve as of December 31, 2020 for claims associated with future events which may occur.

Required:

1. Should the Company record this $5,000,000 Reserve for Claims (a contingent liability) in its 12/31/2020 Financial Statements?  Why or why not?

• A Chicago area manufacturing company (“JKL”) has 2 unrelated owners.  The CPA firm (“Flexible”) for the manufacturing company prepares annual compiled financial statements and corporate tax returns (1120S).  In addition, Flexible prepares the personal income tax returns for one of the owners – a different tax accountant prepares the personal income tax returns for the other owner.  The Company has a December 31^st year end.
• Toward the end of February each year, there is an annual meeting in the western suburbs, with the following in attendance:  the 2 owners of JKL, Flexible’s CPA Partner, the tax accountant for the other owner, and pension consultants.
• In anticipation of the meeting, Flexible prepares and distributes draft financial statements, and a year to date General Ledger; everything is complete except the amount of any pension accrual and the final amount of inventory.
• The purposes of the meeting are to determine:

1. the pension accrual
2. the desired taxable income for the year
3. the amount of inventory necessary to bring taxable income to the desired level (achieved through a debit or credit to inventory with an offsetting debit or credit to cost of goods sold).

Required:  For the situation described above, please answer the following two questions:

1. What are the business ethical issues?

What are the professional ethical issues for Flexible’s CPA Partner?

Read the article “Nintendo Slashes U.S. Price of GameCube,” published in the New York Times, September 24, 2003. What type of price discrimination was applied by the company? What were the available conditions that made the discrimination possible?