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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
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)
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