Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

As an auditor to Tennessee Company, you are concerned that the company might have adopted a significant amount of discretionary accruals in 2015. To estimate

image text in transcribed

As an auditor to Tennessee Company, you are concerned that the company might have adopted a significant amount of discretionary accruals in 2015. To estimate the magnitude of discretionary accruals, you have decided to use the Jones model approach. You have collected all the necessary information, as follows: The following information is available for use in the Jones model: a = 0.1163 B1 = 1.2558 B2 = 0.0023 Other information (CAD millions): 2014 revenue = $2,741 2015 revenue = $2,449 Gross property, plant, and equipment on December 31, 2014 = $ 19,255 Gross property, plant, and equipment on December 31, 2015 - $ 18,619 Cash flow from operations on December 31, 2014= $1127 Cash flow from operations on December 31, 2015 = $ 968 Net income (Loss) on December 31, 2014 = $125 Net income (Loss) on December 31, 2015= $(809) Required Using Jones model: 1-Did Tennessee adopt any discretionary accruals during 2015? Show all calculations. (7 points) 2. Are these discretionary accruals income increasing or income- decreasing accruals? (1 Point) 3. Give the reasons why a manager, whose remuneration includes a bonus based on net income, may wish to reduce reported net income by accruals. (2 points) As an auditor to Tennessee Company, you are concerned that the company might have adopted a significant amount of discretionary accruals in 2015. To estimate the magnitude of discretionary accruals, you have decided to use the Jones model approach. You have collected all the necessary information, as follows: The following information is available for use in the Jones model: a = 0.1163 B1 = 1.2558 B2 = 0.0023 Other information (CAD millions): 2014 revenue = $2,741 2015 revenue = $2,449 Gross property, plant, and equipment on December 31, 2014 = $ 19,255 Gross property, plant, and equipment on December 31, 2015 - $ 18,619 Cash flow from operations on December 31, 2014= $1127 Cash flow from operations on December 31, 2015 = $ 968 Net income (Loss) on December 31, 2014 = $125 Net income (Loss) on December 31, 2015= $(809) Required Using Jones model: 1-Did Tennessee adopt any discretionary accruals during 2015? Show all calculations. (7 points) 2. Are these discretionary accruals income increasing or income- decreasing accruals? (1 Point) 3. Give the reasons why a manager, whose remuneration includes a bonus based on net income, may wish to reduce reported net income by accruals. (2 points)

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

A Non-Technical Guide To International Accounting

Authors: Roger Hussey, Audra Ong

1st Edition

1946646865, 9781946646866

More Books

Students also viewed these Accounting questions