Directions:Download and read Chapter 5 of theContinuing Case Chapters 1-10pdf document. Next, complete the following for this assignment: - Complete all Chapter 5 Case requirements for instructions item Part I (a). - Complete all Chapter 5 Case requirements for instructions item Part I (b). - Complete all Chapter 5 Case requirements for instructions item Part II (a). - Complete all Chapter 5 Case requirements for instructions item Part II (b).

Note:Detailed requirement instructions are found in the Continuing Case.

You will need the following Excel file to complete the assignment: (Click on the link to download to your computer.) Excel file 4a

Submit this assignment to your instructor via the dropbox LP5.2 Assignment: Chapter 5 Accounting in Action Case. This assignment is worth 20 points and will be graded according to the scoring guide below.

CM Corporation Balance Sheet December 31, 2011 % Assets Current assets Cash and cash equivalents Accounts receivable Allowance for doubtful accounts Inventory Prepaid expenses Other current assets Total current assets $120,670 576,454 (84,975) 847,460 18,841 4,612 508,140 0.22 0.13 $2,287,792 Other Assets Investments Goodwill Other intangible assets 0.65 296,590 Property, plant and equipment Accumulated depreciation Net fixed assets 1,483,062 1.00 845,198 0.37 278,525 0.12 1,164,069 0.51 $2,287,792 1.00 1,100,105 (591,965) 100,150 87,740 108,700 Total assets Liabilities and Stockholders' Equity Current liabilities Accounts payable Dividends payable Unearned revenue Accrued liabilities Total current liabilities $315,395 48,000 73,500 408,303 Long-term liabilities Stockholders' equity Contributed capital Common stock, $2 par value (4,000,000 shares authorized),460,000 shares issued of which 440,000 shares 920,000 are outstanding 105,000 Paid-in capital common stock 1,025,000 Total contributed capital Accumulated other comprehensive income Retained earnings Less common stock in treasury, at cost Total stockholders' equity Total liabilities and stockholders' equity 0 539,069 (400,000) CM Corporation Income Statement For the Years Ended 2011 Revenue Net product sales revenue Service revenue Total revenue Cost of goods sold Products Services Total cost of goods sold Gross profit Operating expenses Advertising Bad debt expense Depreciation and amortization Dues and subscriptions Equipment expenses Insurance Legal and accounting fees Miscellaneous Office expense Payroll taxes Property taxes Repair and maintenance Research and development Telephone Travel and entertainment Utilities Wages - Employees Wages - Officers Total operating expenses $8,984,852 975,860 9,960,712 Income (loss) before income taxes Income tax (expense) benefit Net income (loss) 1.00 5,801,655 4,159,057 0.42 3,030,626 0.30 1,128,431 0.11 5,356,018 445,637 123,869 28,640 125,500 19,730 64,781 90,144 87,650 12,010 214,138 131,170 93,400 37,543 278,000 21,085 60,402 37,876 954,688 650,000 Income (loss) from operations Other income and (expense) Interest expense Gain (loss) on disposal of assets Investment income Total other income (expense) % (27,800) (26,950) 9,230 (45,520) 1,082,911 (379,019) 0.11 $703,892 0.07 CM Corporation Statement of Cash Flows ( Indirect Method ) For the Years Ended 2011 Cash flows from operating activities Net income (loss) Adjustments to reconcile net income to Net cash provided from operating activities Depreciation and amortization Net (gain) loss on assets (Increase) decrease in accounts receivable Increase (decrease) in allowance for doubtful accounts (Increase) decrease in inventory (Increase) decrease in prepaid expenses (Increase) decrease in other current assets Increase (decrease) in accounts payable Increase (decrease) in unearned revenue Increase (decrease) in interest payable Increase (decrease) in wages and payroll taxes payable Increase (decrease) in income taxes payable $703,892 125,500 26,950 (188,643) (7,564) (125,360) (14,650) 4,612 263,400 46,820 3,456 (5,478) (278,950) Total adjustments Net cash provided by operating activities (149,907) 553,985 Cash flows from investing activities (Purchase) of fixed assets (Purchase) of intangibles (Purchase) of investments Net cash used by investing activities (274,300) 0 (12,650) (286,950) Cash flows from financing activities Dividends paid Net cash used by financing activities (32,000) (32,000) Net increase (decrease) in cash and cash equivalents 235,035 Cash and cash equivalents at beginning of period (114,365) Cash and cash equivalents at end of period $120,670 General Ledger Account Names Balance Sheet Accounts Cash and cash equivalents Accounts Receivable 782,080 Allowance for doubtful accounts Inventory 2013 Projections Debit # Credit 170,000 Balance 12/31/12 Debit Credit 72,337 133,195 915,275 16,530 102,470 404,683 1,340,902 Proposed Trial Balance 2013 Debit Credit 242,337 Proposed ajes Debit JE# Credit Forcasted Trial Bal 12/31/13 Debit Credit 242,337 915,275 119,000 119,000 1,745,585 1,745,585 Prepaid expenses 17,174 17,174 17,174 Other Current Assets 16,063 16,063 16,063 1,195,192 1,195,192 Property, Plant and Equipment 365,000 1,560,192 Accum Depr 739,085 205,500 132,500 666,085 666,085 Investments 140,186 140,186 140,186 Goodwill 397,740 397,740 397,740 Other intangible assets 253,900 248,900 248,900 5,000 Accounts Payable 1,169,343 30,657 1,200,000 1,200,000 Dividends payable 110,000 5,000 115,000 115,000 Accrued liabilities 340,759 187,991 528,750 528,750 Unearned revenue 102,860 34,200 137,060 137,060 Long term liabilities 588,500 508,500 508,500 Common Stock 920,000 920,000 920,000 Paid-in capital common stock 105,000 105,000 105,000 Treasury Stock 80,000 400,000 Retained Earnings 400,000 802,557 802,557 115,000 Dividends Net Income 115,000 0 4,980,574 400,000 802,557 115,000 331,500 4,980,574 5,433,452 Income Statement Accounts Product sales revenue 5,433,452 331,500 5,433,452 5,433,452 9,100,000 Product sales returns & discounts 9,100,000 975,000 Service revenue 9,100,000 975,000 975,000 500,000 450,000 450,000 20,000 20,000 137,500 Depreciation and amortization 5,400,000 20,000 Bad debt expense 5,400,000 450,000 Service cost of goods sold 500,000 5,400,000 Products cost of goods sold 500,000 137,500 137,500 Gain/loss on disposal 10,000 Income tax expense 10,000 10,000 178,500 178,500 178,500 Insurance 80,000 80,000 80,000 Interest expense 48,000 48,000 48,000 Investment income 10,500 10,500 10,500 Other operating expenses 900,000 900,000 900,000 Research and development 200,000 200,000 200,000 1,050,000 1,050,000 1,050,000 800,000 800,000 800,000 Wages- employees Wages - Officers Net (Income) Loss 0 (331,500) (331,500) 0 0 9,764,000 10,872,378 10,872,378 0 9,764,000 0 0 9,764,000 9,764,000 CM Corporation Balance Sheet Remember the 2013 column is management's projection December 31, 2013 December 31, 2012 Assets Current assets Cash and cash equivalents Accounts receivable Allowance for doubtful accounts Inventory Prepaid expenses Other current assets Total current assets Property, plant and equipment Accumulated depreciation Net fixed assets Other Assets Investments Goodwill Other intangible assets $72,337 782,080 (102,470) 1,340,902 17,174 16,063 $242,337 915,275 (119,000) 1,745,585 17,174 16,063 2,817,434 0.68 2,126,086 0.57 821,107 0.22 1,560,192 (739,085) 1,195,192 (666,085) 529,107 0.13 140,186 397,740 253,900 140,186 397,740 248,900 786,826 791,826 0.21 $4,133,367 Total assets 0.19 1.00 $3,739,019 1.00 Liabilities and Stockholders' Equity Current liabilities Accounts payable Dividends payable Unearned revenue Accrued liabilities Total current liabilities $1,169,343 110,000 102,860 340,759 $1,200,000 115,000 137,060 528,750 1,980,810 1,722,962 0.46 508,500 Long-term liabilities 0.48 0.12 588,500 0.16 Stockholders' equity Contributed capital Common stock, $2 par value (4,000,000 shares authorized),460,000 shares issued of which 440,000 shares are outstanding 920,000 Paid-in capital common stock 105,000 Total contributed capital 1,025,000 Accumulated other comprehensive income Retained earnings Less common stock in treasury, at cost Total stockholders' equity Total liabilities and stockholders' equity 920,000 105,000 1,025,000 0 1,019,057 0 802,557 (400,000) (400,000) 1,644,057 0.40 1,427,557 0.38 $4,133,367 1.00 $3,739,019 1.00 Remember the 2013 column is management's projection CM Corporation Income Statement For the Years Ended December 31, 2013 Revenue Net product sales revenue Service revenue Total revenue Cost of goods sold Products Services Total cost of goods sold Gross profit Operating expenses Bad debt expense Depreciation and amortization Insurance Other operating expenses Research and development Wages - Employees Wages - Officers Total operating expenses $9,575,000 5,400,000 450,000 5,850,000 3,725,000 Income (loss) before income taxes Income tax (expense) benefit Net income (loss) 0.90 0.10 1.00 $8,732,684 1,261,645 0.56 0.05 $8,600,000 975,000 5,315,848 570,811 $9,994,329 0.91 0.13 1.04 0.56 0.06 5,886,659 4,107,670 0.39 0.41 17,508 147,120 85,744 1,063,741 470,680 998,545 710,000 20,000 137,500 80,000 900,000 200,000 1,050,000 800,000 NOTE: some of the operating expenses detailed in Chapter 3 Excel files have been combined herein as "other operating expenses" 3,187,500 0.33 3,493,338 0.35 537,500 Income (loss) from operations Other income and (expense) Interest expense Gain (loss) on disposal of assets Investment income Total other income (expense) December 31, 2012 0.06 614,332 0.06 (52,965) 0 13,230 (48,000) 10,000 10,500 (27,500) (39,735) 510,000 (178,500) 574,597 (201,109) $331,500 0.03 $373,488 0.04 CM Corporation Statement of Retained Earnings For the Years Ended December 31, 2013 December 31, 2012 Beginning balance $802,557 $539,069 Net income (loss) 331,500 373,488 (115,000) (110,000) $1,019,057 $802,557 Dividends Ending balance Remember the 2013 column is management's projection CM Corporation Statement of Cash Flows ( Indirect Method ) For the Years Ended December 31, 2013 Cash flows from operating activities Net income (loss) Adjustments to reconcile net income to Net cash provided from operating activities Depreciation and amortization Net (gain) loss on assets (Increase) decrease in accounts receivable Increase (decrease) in allowance for doubtful accounts (Increase) decrease in inventory (Increase) decrease in prepaid expenses (Increase) decrease in other current assets Increase (decrease) in accounts payable Increase (decrease) in unearned revenue Increase (decrease) in accrued liabilities December 31, 2012 $331,500 $373,488 137,500 (10,000) (133,195) 16,530 (404,683) 0 0 30,657 34,200 187,991 147,120 0 (205,626) 17,495 (493,442) 1,667 (11,451) 853,948 29,360 (67,544) (141,000) 271,527 190,500 645,015 169,500 169,500 (460,087) (455,200) (40,036) (955,323) Cash flows from financing activities Proceeds from (payment on) long-term liabilities Dividends paid Net cash used by financing activities (80,000) (110,000) (190,000) 309,975 (48,000) 261,975 Net increase (decrease) in cash and cash equivalents 170,000 (48,333) 72,337 120,670 $242,337 $72,337 Total adjustments Net cash provided by operating activities Cash flows from investing activities Proceeds from sale (purchase) of fixed assets (Purchase) of intangibles (Purchase) of investments Net cash used by investing activities Cash and cash equivalents at beginning of period Cash and cash equivalents at end of period Chapter 1 Accounting in Action: CM Corporation (CMC) CM Corporation (CMC) was founded in 2000 by Eric Conner and Phil Martin. The company designs, installs, and services security systems for high-tech companies. The founders, who describe themselves as "entrepreneurial geeks," met in a computer lab when they were teenagers and found they had common interests in working on security systems for critical industries. In January 2012, CMC hired you as an accounting intern. Lately Conner and Martin have been working with \"radio frequency identification\" (RFID) technology. They have developed a detailed system designed to track inventory items using RFID tags embedded invisibly in products. This technology has numerous inventory applications in multiple industries. One of the most basic applications is tracking manufacturing components; if tagged components "go walking" (if employees attempt to take them), companies can easily track and find them. Conner and Martin have sold their system to several high-tech companies in the area. These companies have a number of government contracts that require extensive security systems to protect sensitive data from infiltration by terrorists and others. To date, CMC's cash flow from sales and services has adequately funded its operations. CMC anticipates growth potential for its products. As a result, it is planning to go to the market with a new common stock issue at the end of 2013. Many of the issues you will address in this continuing problem involve choices that are affected by preparing for this anticipated stock issue. Continuing Case 1 Instructions Conner and Martin have asked you to explain to them the importance of SEC regulations and FASB standards to a non-public company like CMC. Prepare a brief memorandum with responses to the following questions. (a) As a non-public company, with no securities traded on a stock exchange, is CMC subject to SEC regulations? Explain. (b) Since CMC's stock is privately held and not traded on any stock exchange, must a CPA audit the company's books? Must these audited statements be prepared in accordance with GAAP? Support your answer. Continuing Case 2 Chapter 2 Accounting in Action: CM Corporation (CMC) As indicated in Chapter 1, CMC intends to issue stock to the public. Potential investors will be concerned about the company's operating results, cash flows, and financial position. Conner and Martin have heard words such as \"relevant,\" \"faithful representation,\" \"comparability,\" and \"consistency\" used in discussions about financial statements. They have no clue as to what these words mean. They ask you to explain. Instructions Prepare a brief memorandum to Conner and Martin describing the elements of the FASB conceptual framework. Specifically address the following: (a) What is the basic objective of financial reporting? How do general purpose financial statements help achieve this objective? (b) Exactly what do \"relevant\" and \"faithful representation\" mean when applied to financial statements? If they are both important, can information always have both of these characteristics? Why or why not? (c) What other characteristics of financial accounting information might contribute to its usefulness? Continuing Case 3 Chapter 3 Accounting in Action: CM Corporation (CMC) In anticipation of growing demand for their products and services, Conner and Martin hired two new directors, Suzanne Lopez and Allison Knepp, giving them stock in the company as part of their hiring bonus. The founders, Conner and Martin, along with the two new directors, will be the management \"team.\" Conner and Martin consider themselves "upper management" and the two new directors "middle management." Conner and Martin have little accounting or business training so they are relying on Lopez and Knepp, both of whom have MBAs, to provide the business background. With the additions to the management team, CMC changed the company name to CM2. Given the lack of any trained accountant on board, an accounting intern can be of great value to CM2. To familiarize you with the company's operations, Conner and Martin have provided an unadjusted trial balance from the end of last year (2012) on an Excel spreadsheet. When you look at it, you find that the accounts are not in any particular order, which surprises you. Instructions (a) Download file 3a from the website. Prepare a trial balance in good form. (b) From the website, access file 3b, which has the unadjusted trial balance with the accounts in proper order. This file also contains an accounting \"system\" comprised of a series of linked spreadsheets. The linkages enable the effects of all accounting entries (journal, adjusting, and closing) to flow through to spreadsheets for the income statement, balance sheet, Continuing Case 4 and statement of cash flows. You notice that for the fiscal year ended December 31, 2012, someone has made all the journal entries but none of the adjusting or closing entries. The following information is provided for adjustments prior to closing the books. Lopez and Knepp ask you to enter the adjustments into the spreadsheet, in the two columns to the right of the unadjusted trial balance. (CM2 uses a perpetual inventory system.) 1. Wages earned by employees during December and to be paid in January are $33,875; associated payroll taxes on these wages are $2,710. 2. On July 1, a client paid CM2 $205,720 in advance for a year of consulting services. 3. You discover that a product sale was made and recorded in December for $128,600; the product had not yet been shipped. The cost of the product was $68,742. 4. Bad debt expense has been calculated to be $17,508 but has not yet been recorded. 5. The Prepaid Expense account has a balance of $22,774. This balance includes $11,200 for a two-year insurance policy purchased on January 1, 2012. 6. Depreciation expense for the year is $82,620. 7. Interest expense accrued on its long-term liabilities is $7,765. Continuing Case 5 8. On December 15, CM2 declared a dividend of $110,000, to be paid on January 15, 2013. 9. (c) Income tax expense is $201,109. After making the adjusting entries in (b), make the appropriate closing entries on the spreadsheet provided. (d) Prepare a memo to management explaining the importance of the adjusting entries made in part (b). As part of this discussion, explain how accrual accounting improves the usefulness of the company's financial statements. Additional Activity: Extend your accounting knowledge You know that CM2 is going to the market with a stock offering at the end of 2013. You have heard that investors look at certain relationships (or ratios) on the financial statements to understand the financial health of a company in which they plan to invest. You decide to examine several of these ratios to get a feel for how this company is doing. You know the following: (1) The relationship of current assets to current liabilities is important to assess the liquidity of the company and its ability to pay its current bills. (2) The total debt to total assets relationship describes where the money came from to acquire the assets. (3) The net income to sales relationship tells how much of each sales dollar ends up as profit. Continuing Case 6 Instructions Calculate these three relationships for CM2 for 2012 and the prior year, and write a short assessment of CM2's financial position and performance. Continuing Case 7 Chapter 4 Accounting in Action: CM2 With the books closed for the prior year (thanks to your work), the four CM2 owners are meeting to discuss what they expect to happen in 2013. They include you in this meeting since they consider you an important part of the decision "team." The company generates revenue from two sources, sales of RFID systems and service of those systems. After much discussion, Conner and Martin settle on the following revenue estimates: sales of RFID systems are predicted to be $9,100,000, and service revenue will be $975,000. All forecasted revenue and expenses are recorded to the appropriate balance sheet and income statement accounts. Instructions [Note: From Chapter 4 on, the linked Excel spreadsheets contained in the various chapters already have programmed income tax expense at 35%. Therefore, you do not need to worry about making adjustments to income tax expense.] (a) Access file 4a on the website. The file contains worksheets with the final balance sheet for 2012 and a worksheet with the forecasts for 2013. Examine the 2013financial statements based on management's projections. Calculate the gross margin ratio (Gross margin Sales), and operating income and net income as a percentage of sales. Calculate the same ratios for 2011 and 2012, and compare the three sets of measures. Discuss similarities and differences and what the changes indicate. Continuing Case 8 (b) Assume, instead, that the sales and service revenue are 10% higher than projected and that all the additional revenue is on account. Assume also that the gross margin ratio will remain the same and that operating expenses will increase 8%. Where appropriate, assume these expenses are not yet paid and are to be credited to accrued liabilities. [Note: Other income (expense) items such as interest expense, investment income, and gain (loss) on sale of assets are not operating expenses.] Make these adjustments in the spreadsheet file in the columns labeled Proposed Adjustments. Recalculate the ratios described above in light of the new assumptions. Comment on the difference in trends over the three years, including the effects of these assumptions. (c) Now assume that the sales were 5% lower than projected, and repeat the above requirements. Use a similar decrease in operating expenses of 8%. Recalculate the ratios based on the decreased expectations, and comment on the difference in trends across the three years of income statements under these circumstances. (d) During the budget meeting, there is a discussion of the possibility of acquiring a company with a strong distribution system which would be helpful in selling their existing product. CM2 expects to sell off any parts of the business not central to the development of the RFID product line. CM2 has asked you to research the current GAAP for: (1) Reporting the effects of discontinuing a business component. Continuing Case 9 (2) \"Pro-forma\" reporting of the restructuring charges associated with integrating the new business into CM2. Management would like to report these expenses below \"Income from operations\" to avoid distorting income from operations. Prepare a memo to management explaining the accounting and reporting for these two items. Include in your memo discussion of how irregular items, such as discontinued operations, affect the quality of earnings. Continuing Case 10 Chapter 5 Accounting in Action: CM2 As indicated in Chapter 4, you have been participating in a forecasting meeting with CM2 management. You know you are going to be responsible for information on liquidity and future cash flows. You want to be sure to appear knowledgeable, so you carry out the following analysis. Part I: Analysis of Balance Sheet and Statement of Cash Flows Instructions Access file 4a at the website. This file contains spreadsheets for 2011 and 2012, along with the original projections for 2013. (a) Calculate the liquidity ratios (current ratio, quick ratio) and the solvency ratios (total debt to equity, total debt to total assets) for each of the three years. The current ratio is useful in assessing the liquidity of the firm since it shows the firm's ability to pay off its short-term liabilities with short-term (readily accessible) assets. The debt ratios described are useful in assessing the firm's ability to pay off all of their debt in that they show the relationship of the debt obligations both to the firm's equity and to their total asset position. Discuss possible causes of any changes you observe in these relationships over time. (b) Compute free cash flow for each of the three years. Comment on investment decisions and cash management, using the three years of statements of cash flows provided. Part II: Transparent Reporting Continuing Case 11 CM2 is a technology company in the computer software and services industry. These companies, which often are run by individuals who have little accounting experience, typically must attract investments from venture capitalists and other investors to provide financing for their businesses. These investors depend on financial statements to evaluate alternative investments. Conner and Martin ask you to consider some ways the company can provide information that better presents the company's financial position. Assume that you discovered the following items. 1. One quarter of the reported long-term debt is actually due in 10 months. Assume this same amount is due 10 months from each of the year-ends (2011-2013). 2. The contract with a customer representing 20% of net accounts receivable calls for full payment in 18 months but is classified in the current assets section. Assume this applies to each of the year-ends (2011-2013). 3. CM2 owes a substantial amount to its suppliers for raw materials. In fact, about 80% of the accounts payable balance is with three suppliers who are concerned about a downturn in the general economy and have asked for faster payment from CM2. Assume this applies to each of the yearends (2011-2013). Instructions (a) Describe how the company should report this additional information on the balance sheet. Recalculate the ratios from Part I (a) after adjusting for the Continuing Case 12 new information you have discovered. Describe the effects of the information on the balance sheet ratios. (b) Do you think the company should disclose this information? Cite the authoritative literature that supports your answer. Continuing Case 13 Chapter 7 Accounting in Action: CM2 The CM2 management team is discussing how it can \"put its best foot forward\" in regards to the anticipated stock offering at the end of 2013. They recognize that the financial statements will be extremely important in determining the success or failure of this stock offering. They also recognize that the higher CM2's reported net income and the stronger its balance sheet, the more likely that CM2 will achieve a higher stock price in this initial offering Part I One accounting issue the management team is discussing relates to the accounting for bad debt expense. CM2 currently charges bad debt expense based on a percentage of receivables. The rate used is 13% of ending accounts receivable. Two of the management team want to forget about bad debt expense altogether. They argue that there is no cash flow effect related to this expense. Therefore, they ask, why increase expenses and reduce net income? The other two members of the management team take a different position. They believe bad debt expense has to be recorded but believe it should be recorded only when the receivable is declared to be uncollectible. Using this direct write-off approach will lead to less bad debt expense in the current year and therefore higher net income. You are surprised by this entire discussion. You thought everyone understood the accrual system of accounting. You jump into the discussion to explain the proper accounting for bad debts. The management team is skeptical Continuing Case 14 and asks you to explain in writing why bad debt expense should continue to be reported on an accrual basis. Instructions Write a memo to the management team explaining why the approaches they suggest are not in conformance with generally accepted accounting principles. Be sure to explain why the present accounting is correct. Part II Another approach to increase net income is also being considered. Some members of the CM2 management team believe that the company might provide incentives to present and potential customers to purchase its products. Presently only a few select customers receive a small sales discount if they pay promptly. CM2 is considering offering this sales incentive to all its customers and changing the present terms from 1/10, n/ 20 either to 2/10, n/30 or to 4/15, n/45. In addition the CM2 managers wonder whether the use of trade discounts might increase sales significantly. Instructions Write a memorandum to management, explaining what the terms 2/10, n/30 and 4/15, n/45 mean. What will be the likely effect on the balance sheet if one or the other of these discount terms is used? What does the term \"trade discount\" mean? What might be the advantage of using trade discounts rather than sales discounts to enhance sales revenue? Continuing Case 15 Additional Activity: Extend your accounting knowledge Note - (Access the original spreadsheet from Chapter 4 Excel File to address the following. Assume that CM2 management believes that product sales will go up by an additional 5% from its original projections if the company offers one of these new discount terms to all customers. Management believes service revenue would be unaffected by the discounts. In addition, Knepp and Lopez believe that the Sales Discounts taken would quadruple, from management's projected $50,000 to $200,000. Do not record any changes to the cost of goods sold accounts. Conner and Martin want to see what the effect on the income statement and balance sheet would be if this change were made to the discount terms. They project that at the end of the year, half of the 5% increase in sales would still be in Accounts Receivable (uncollected) and half would have been collected and would be recorded as Cash. The additional sales discounts of $150,000 would also reduce Accounts Receivable and Cash by an equal amount. Instructions (a) On the spreadsheet, make adjustments in the specified column (proposed AJEs) to reflect the anticipated changes caused by the change in sales discount terms. (b) Having made these adjustments to management's projections, write a memo describing your assessment of the effectiveness of the management of Accounts Receivable. Explain to Conner and Martin how the effectiveness can be measured by certain ratios and changes in the Continuing Case 16 ratios over time. In developing your assessment of accounts receivable, examine any changes in the following ratios to illustrate their use: accounts receivable turnover and average collection period. In addition to the ratios reflecting liquidity and solvency, look at changes in the relationship of sales discounts to sales and allowance for doubtful accounts to Accounts Receivable. To further support your argument, find a real-company competitor (e.g., Cisco or Nortel) on the Web and examine the relationships for accounts receivable turnover and average collection period. Write a memo reflecting your assessment and findings. Continuing Case 17 Chapter 8 Accounting in Action: CM2 You thought that things had settled down after you left the meeting at which the managers had discussed bad debts and sales discounts. However, when you arrived today there was another heated discussion going on about how inventory should be recorded. Upon your arrival, Conner and Martin request that you help them understand the various ways that inventory can be recorded. Also, they wonder whether it makes sense to change from LIFO (the company's present method) to another method. You thought this would be an easy explanation after all, you learned about inventory cost flow methods in your first accounting course. Instructions (a) Prepare a written report for CM2's management, explaining the differences between allowable cost flow assumptions. Provide an example of how a change from LIFO to FIFO in times of rising prices affects the balance sheet and income statement. (b) Conner, Martin, Lopez, and Knepp are trying to figure out how, if they do not change inventory methods, the company can take advantage of a LIFO liquidation this year so that the income statement \"looks better.\" They ask your opinion about whether they should do this. Prepare a memorandum to CM2's management about the dangers of managing earnings in this manner. Continuing Case 18 (c) After submitting your report on earnings management, you find that Lopez agrees with your position. She asks how the company might ensure that it can minimize LIFO liquidations in the future. As the discussion continues, you realize that the best option for the company is to change to dollar-value LIFO to minimize LIFO liquidations. You decide to research this tonight as well and make a recommendation to the management team at tomorrow's meeting. Prepare a report on dollarvalue LIFO, explaining how it might minimize LIFO liquidations. Continuing Case 19 Continuing Case 20 Chapter 9 Accounting in Action: CM2 In anticipation of further discussion of inventory procedures and their effects, you discover that the price of most technical equipment has declined. This raises the concern that the value of some of CM2's inventory has declined and that a lowerof-cost-or-market (LCM) adjustment is required. Instructions (a) Prepare a report explaining how the lower-of-cost-or-market is computed. In this report, explain the rationale used to justify the floor and the ceiling computation. (b) Inventory Scanners Optical Readers Card Digitizers Servers Routers Network Cards Fire Wire USB Cable Fiber Optic Cabling The following information regarding current costs is provided for the calculation: Current Cost $143,320 116,900 125,460 120,870 175,980 262,150 95,610 86,240 77,590 Continuing Case Replacement Cost Sales Price $144,200 115,500 127,400 118,300 195,000 260,500 94,600 86,400 78,100 $180,000 135,000 140,000 145,000 200,000 270,000 100,000 95,000 80,000 Disposal Costs $5,400 4,050 4,200 4,350 6,000 8,100 3,000 2,850 2,400 Ceiling $174,600 $130,950 $135,800 $140,650 $194,000 $261,900 $97,000 $92,150 $77,600 Normal Profit $27,000 20,250 21,000 21,750 30,000 40,500 15,000 14,250 12,000 Floor Market $147,600 110,700 114,800 118,900 164,000 221,400 82,000 77,900 65,600 $147,600 115,500 127,400 118,900 194,000 260,500 94,600 86,400 77,600 21 Calculate what the inventory value would be using LCM. In your calculation, compute LCM under each of three different scenarios: by individual item, by category (category 1: scanners, optical readers, card digitizers; category 2: servers, routers, network cards; category 3: fire wire, USB cable, fiber optic cabling), and in total. Continuing Case 22 Continuing Case 23 Chapter 10 Accounting in Action: CM2 CM2 is considering a significant equipment replacement. Conner and Martin believe that the best time for this equipment replacement is at the end of 2013. However, they are concerned about the effects this replacement might have on their financial statements. The equipment originally cost $440,000 and after depreciation expense is recorded in 2013, the equipment's accumulated depreciation balance will be $390,000. At this point the equipment will be fully depreciated to its salvage value. Conner, Martin, Knepp, and Lopez tell you that they have thought of four options regarding the replacement of the old equipment. They could (1) construct the new equipment themselves and then sell the old equipment, (2) exchange the old equipment for new equipment that is more efficient, (3) purchase new equipment and sell the old equipment, or (4) overhaul the old equipment. When you heard this, you wondered about the current employees and whether acquiring new equipment will result in shifting jobs within the business and possibly lead to some layoffs. Because you are not sure how Conner and Martin will react to this concern, you decide not to bring up the subject at this time. Conner and Martin appear increasingly confident in your analysis skills, and they have asked you to determine the effects of the above alternatives for replacing or upgrading this equipment. Knepp and Lopez have gathered the following information to help with this analysis. Continuing Case 24 Option 1: Construct the new equipment in-house and sell the old equipment for cash at a fair value of $60,000. CM2 would take out a one-year construction loan for $350,000 at the beginning of 2013 at a short-term borrowing rate of 10% for the construction. CM2 's present debt composition is as follows: (1) a $200,000 note at a 9% rate, (2) a $308,500 note at a 8% rate. Anticipated actual expenditures for constructing the equipment are $650,000, and on a weighted-average basis the expenditures are approximately $425,000. The bulk of the $650,000 will be financed with the construction loan, and the balance will be financed through accounts payable. The interest on the short-term note is due and payable by year-end. (Note: Construction is assumed to be completed at year-end.) Option 2: Exchange the equipment for a similar piece of equipment with a fair value of $685,000. Knepp and Lopez have checked the secondary market and have found that the fair value of the old equipment is $60,000. They estimate that CM2 can borrow $350,000 on a one-year, 10% note at the end of 2013; the balance will be funded with an accounts payable arrangement with the supplier. (Assume the exchange has commercial substance.) Option 3: Purchase the new equipment by giving a non-interest-bearing note with five payments of $164,000 to the supplier (starting on the first day of note's term and each year thereafter) and selling the old equipment for $60,000 cash. The first $164,000 payment would be made in late December 2013. The prevailing interest rate for obligations of this nature is 10%. Continuing Case 25 Option 4: Overhaul the existing equipment. The following expenses are anticipated under this approach: (1) The normal annual cost for lubrication and replacement of minor parts to maintain the integrity of the exterior body would be $27,000. (2) The cost of re-wiring interior components in an overhaul would be $125,000. (3) Replacing old worn components would cost $82,000 with associated labor costs of $210,000 for installation. The overhaul is estimated to extend the useful life of the equipment another four years. (The present equipment's original useful life was eight years, starting January 1, 2006.) The costs will be financed at the end of 2013 through a one-year loan for $350,000 at 10%, and the balance will be charged on account. Instructions (a) Access File 10a on the website, Excel File. For each of the four options presented, prepare journal entry(ies) in proper form in the proposed adjustments columns on the trial balance. This will require four separate spreadsheet files for the four options. For any loans created, record the current portion to the accounts payable line on the trial balance, and change the description to accounts payable and short-term debt (both on the trial balance and on the balance sheet). Record any long-term portion to long-term liabilities. Write a brief memo on how each option affects the financial statements. Include your journal entry(ies) in the body of your memo for each option. Discuss the strengths and weaknesses of each option. Continuing Case 26 (b) Since you are now in the process of analyzing the quantitative effects of this decision, you decide to also consider whether the acquisition of any new equipment will cause any employees to lose jobs. Also you wonder if there are other non-financial and/or ethical considerations you should include in your analysis. Write a memo describing other qualitative or subjective issues that you think Conner and Martin should consider in their analysis. Continuing Case 27