I have the answer (exept 2), I need to show the work. I now you are the document in your library

Accounting 562 Fall, 2013 - Professor Smith Final Exam: 300 Points Name: Patricia Pantin Hand in to Dropbox on or before WEDNESDAY December 11 at 11:59 p.m. CHAPTER 17 1 POINTS: 70 (10 points each, a-f) Westwood Manufacturing Company has experienced the following earnings record over the last five years. Year 1 Year 2 Year 3 Year 4 Year 5 $ 6,500,000 $ 6,800,000 $ 7,300,000 $ 7,500,000 $ 9,500,000 Revenue Cost of goods sold Gross profit Operating Expenses Net income 3,700,000 2,800,000 3,900,000 2,900,000 4,300,000 3,000,000 4,400,000 3,100,000 6,000,000 3,500,000 2,350,000 $ 450,000 2,400,000 $ 500,000 2,450,000 $ 550,000 2,500,000 $ 600,000 2,600,000 $ 900,000 Westwood is a closely held company with five family members owning stock. The stock is not traded on any stock exchange and none of the shares have ever been sold after the initial sale of the stock from the company to the shareholders. One shareholder wants to sell her stock back to the company and cease any activities with the company. She owns 20 percent of the outstanding shares of the company stock. Similar companies' stock has traded with price/earnings (PE) ratios of 8, 9, 10, 11, and 9 over the past five years. 1a. Points: 10 Calculate the average earnings for the five-year period. Show your work. Year 1 Year 2 Year 3 Year 4 Year 5 $ 450,000 $ 500,000 $ 550,000 $ 600,000 $ 900,000 $ 3,000,000.00 3,000,000/5= = $600,000.00 1b. Points: 10 Assigning more weight to the more recent years, calculate (show your work) the value for the five-year period. YEAR Year 1 Year 2 Year 3 Year 4 Year 5 INCOME $ 450,000 $ 500,000 $ 550,000 $ 600,000 $ 900,000 = WEIGHT WEIGHT ED EARNINGS 1 $ 450,000 2 $ 1,000,000 3 $ 1,650,000 4 $ 2,400,000 5 $ 4,500,000 $ 15.00 $ 10,000,000.00 10,000,000/15= $666,666.67 1c. Points: 10 Using the average earnings model and using the average price/earnings ratio for similar companies for the five year period, calculate the value of Westwood Manufacturing at the end of year five. Show your work. AVERAGE EARNINGS PE (SIMILAR COMP) $ 600,000 8 $ 600,000 9 $ 600,000 10 $ 600,000 11 $ 600,000 9 = 28,200,000/5= $ 0.125 $ 0.111 $ 0.100 $ 0.091 $ 0.111 $ 4,800,000.00 $ 5,400,000.00 $ 6,000,000.00 $ 6,600,000.00 $ 5,400,000.00 $28,200,000.00 $5,64 0,000.00 Giving more weight to the most recent year's earnings and using the average price/earnings ratio of similar companies for the five year period, the value of Westwood Manufacturing at the end of year five is: PE (SIMILAR COMP) WEIGHTED AVERAGE EARNINGS $ 666,667 $ 666,667 $ 666,667 $ 666,667 $ 666,667 = 8 9 10 11 9 31,333,333/5= $ 0.125 $ 0.111 $ 0.100 $ 0.091 $ 0.111 WEIGHTED BUSINESS VALUE $ 5,333,333.33 $ 6,000,000.00 $ 6,666,666.67 $ 7,333,333.33 $ 6,000,000.00 $31,333,333.33 $6,266,666.67 1e. Points: 10 Using the average earnings model and using the average price/earnings ratio for similar companies for the five year period, calculate the value of the stock that the shareholder wants to sell to the company. AVERAGE EARNINGS PE (SIMILAR COMP) $ 600,000 8 $ 600,000 9 $ 600,000 10 $ 600,000 11 $ 600,000 9 $ 0.125 $ 0.111 $ 0.100 $ 0.091 $ 0.111 value of the stock that WEIGHTED the shareholder BUSINESS wants to sell to the VALUE company. 4800000 $ 960,000.00 20% 5400000 $ 1,080,000.00 6000000 $1,200,000.00 6600000 $1,320,000.00 5400000 $ 1,080,000.00 is that it's a weighted average you want 1f. Points: 10 Assume for this question that the computed value of the 20 percent share of the company is $1,400,000. Because the share being sold is 20 percent of a closely held company, the value of the stock is which of the following. EXPLAIN YOUR ANSWER. Might be higher than $1,400,000 because the shareholder is one of only a few shareholders in the company. Might be lower than $1,400,000 because the shareholder owns a minority share of stock in a closely held company without a regular market in which to make a sale. a. b. c. Might be subject to special SEC regulations before the stock can be valued and sold. d. Is completely unrelated to the fact that the stock is a minority interest in a closely held company. Might be lower than $1,400,000 because the shareholder owns a minority share of stock in a closely held company without a regular market in which to make a sale. Because $1400,000 is the 20% share value and it is the minority interest of the owner, limited of the regular market sales factor. CHAPT ER 18 2 Points: 10 What is meant by "analytical anomalies" in the T ruGloss Shanghai case? TruGloss Shanghai case involved a qualitative narration of contextual information deemed important in fraud detection studies. In which described the analytical anomalies as a symptom of a fraud, which include transaccion or events that appear out of the ordinary or results too unusual or unrealistic to be believable. For instance, analitical anomalies are transaccion that not make sense when compared to normal activity. Analitical anomalies include missing documents, excessive voids or credits, Faculty journal entries, Inaccuracies in ledgers, etc. CHAPT ER 9 3 Points: 5 T rue or false: accountants have accountant-client privilege under federal and state common law. FALSE 4 POINT S: 5 True or false: Benford's Law can be used to identify fraud in large data sets by detecting potentially invented numbers by fraudsters. T RUE 5.a 5b. 5c. 5d. 5e. Discuss direct and circumstantial evidence. Explain the best evidence rule. Discuss privileged information. Discuss whether draft copies of an expert report must be saved and provided on discovery. Explain the hearsay rule. Discuss direct and circumstantial evidence. Direct evidence it is evidence that directly establishes a fact in an investigation, this is the only thing that can absolutely prove or disprove a person's involvement in a crime. The most common form of this evidence is testimony based on witness's personal knowledge or observation of facts in controversy. While Circumstantial Evidence can often do much less absolute and is subject to probability and simply suggest strongly as to a person's placement and actions, this evidence is more objective but less able to directly prove it, the facts at issue may be proved indirectly Explain the best evidence rule. The best evidence rule demands that the original of any document, photograph, or recording be used as evidence at trial, rather than a copy. A copy will be allowed into evidence only if the original is unavailable or when a copy was executed and intended to have the same effect. The photocopies never were duplicate originals, so they have to be treat it as a copies. This rule is influenced by practicality and is often overned by statute. CHAPT ER 10 6 POINT S: 5 Courts are expected to provide an important "gatekeeper" function in determining who may provide expert advice to the court. The United States Supreme Court case that gave rise to this function is the: a. b. c. d. Enron case. WorldCom case. Daubert case. All of the above. Daubert case. 7 Points: 10 Jim Company sold assets to Fred Company with an alleged value of $2,400,000. Jim Company paid $2,100,000 for the assets. The actual value of the assets was $1,700,000. Calculate fraud damages using the "out-of-pocket" damage loss rule. SHOW YOUR WORK. Out-of-pocket Loss rule: $2,100,000 - $1,700,000=$4 00,000 6. Points: 10 Georgetown Company's weekly store operating costs for a 10-week period had a value of $300,000 and a low value of $260,000. Sales volumes for the two weeks were $4,000,000 and $3,200,000 respectively. Estimate the variable cost per dollar of sales using the high-low method. SHOW YOUR WORK. Operating Cost Sales Volumens High activity 300,000.00 4,000,000.00 Low activity 260,000.00 3,200,000.00 4 0,000 High-low cost = 9 800,000 4 0,000/800,000= 0.05 Points: 30 (15 each for 9a and 9b) - Select a multiple choice answer (5 points) explain your answer (10 points) Assume that a cable television company charges its customers a "late fee" of $5 whenever a customer fails to pay his bill within 45 days of the billing date. Further assume that the law allows such a fee as long as the costs incurred by the cable company is approximately what it costs to service the accounts of those late-paying customers. For example, the cable company must contact the late paying customers by mail and by phone. Sometimes agents are sent to customers' house to seek payment or turn off their cable service. There are numerous other activities that are carried out to deal with late-paying customers. About 5 percent of all customers are charged a late fee in any given month. 9a. Based on the information provided above, which of the following accounting concepts would be most useful in evaluating the costs incurred by the cable company in defending itself against a class action suit alleging that the "late fee" is too high? a. b. c. d. e. Differential/incremental costs. Allocated costs. The proper treatment of repair and maintenance expenditures. Proper revenue recognition models. All of the items above are equally valuable in this case. 9b. If you are an financial expert witness working for the defendant (the cable company) a. The only costs that will be included in your measurement of cost that the cable company incurs in connection with servicing late-paying customers will be variable costs. b. Fixed costs, because of their nature, would not be utilized in your analysis. You would most likely consider all costs that are incremental to the activities associated with servicing late-paying customers regardless of whether they were fixed or variable. c. All of the answers above are correct. d. CHAPT ER 12 10 POINT S: 75 (20 points for 10a; 15 points for 10b; 10 points for each of 10c - 10f) Judy is a successful physical therapist in Atlanta. As part of her business practice she purchased a comprehensive injury and disability insurance policy that she has carried for the last ten years. During the first fifteen years of her practice Judy has experienced the following earnings from her physical therapy practice. Year 1 2 3 4 5 6 7 8 Earnings Year $66,000 74,000 79,000 87,000 95,000 101,000 107,000 114,000 9 10 11 12 13 14 15 Earnings $124,000 135,000 145,000 156,000 120,000 117,000 121,000 At the beginning of her 13th year of practice, Judy had an accident at the office in which she fell and hurt her back. Ever since the accident, Judy has experienced serious back pain and some dizziness that she had not experienced before the accident. As the result of these symptoms, Judy in unable to work the long hours that she normally had worked and as a result has been unable to grow or even maintain her physical therapy practice as she did before the accident. Her intentions before the accident were to grow the business about 10 percent a year for the foreseeable future. Judy claimed that she planned to operate her physical therapy business until she was 65 years old. Judy has filed a claim with the insurance company and the company is contesting her claim. Judy hired an attorney to sue the insurance company in an attempt to get the insurance company to honor her claim. You have been hired to help in this litigation. Judy was 49 years old at the time of the accident, and she just turned 52 last week. 10a. The approximate percentage annual growth rate in Judy's earnings until her accident was (rounded to the nearest whole percentage): = Year 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 8% Earnings $66,000 74,000 79,000 87,000 95,000 101,000 107,000 114,000 -4.60% 1.046 124,000 135,000 145,000 156,000 93% 120,000 130% 117,000 103% 1.075862069 0.7692307692 0.975 121,000 97% 1.0341880342 10b. Assume the average annual earnings growth rate for Judy through year 12 was six percent. What is Judy's estimated damage for year 13 only? = $ 45,350 10c. Given that Judy has stated she wants to grow the business by 10 percent a year until she retires, as the insurance company's forensic accounting expert witness I would probably: Use that information directly because only she knows what her work plans are. a. b. Use U.S. Government statistics on income growth for this profession to see if her estimated long term growth rates are realistic. c. Reduce Judy's estimates by about 50 percent to allow for the overly enthusiastic estimates that are common among plaintiffs in cases. Use Judy's estimates but ignore any "lost household services claims." d. Judy's estimate of working to the age of 65: 10d. Is logical because that is when most people retire. a. Should be adjusted for probability of death. b. Is low because statistically women live longer than men. c. Should be adjust ed for "expect ed t ime in t he workforce." d. 10e. The circumstances in Judy's case suggest that: She has no real cause for damages because she is self employed and therefore working for herself. It is very similar to a wrongful discharge type of case. She may be able to claim "lost household services" as part of her insurance claim. Probabilit y of life adjust ment s would never be used in t his t ype of case. a. b. c. d. As a general model for computing damages in this case, Judy's financial expert would: 10f. The most believable and probably successful approach with a jury would be to use national average earnings data for all physical therapists in the country. a. Determine the lost earnings over Judy's remaining professional life and adjust for expected earnings growth and discount to their present value. b. Determine the lost earnings over Judy's remaining professional life and adjust for expected earnings growth and discount to their present value. These amounts would then be adjusted with inflation and compared to the national average of earnings for all physical therapists. Determine the lost earnings over Judy's remaining professional life and adjust for expected earnings growth and discount the amounts to their present value. This amount would then be adjusted for Judy's expected worklife and probability of life. c. d. 11 Points: 50 (11a: 20; 11b: 10; 11c: 20) Anita had a ten-year contract with city of West Haven to operate the city's visitor and convention bureau. For a variety of reasons, Anita and the city manager had several major differences of opinion. With seven years still remaining on the contract, the city unilaterally cancelled the contract and quit paying Anita her salary and other benefits. Anita sued the city, and the court found the city liable under the contract. At the time the contract was terminated (at the beginning of the fourth year of the contract), Anita was 55 years old, and when the court liability ruling was issued Anita was 57. The present value of the lost salary and benefits for the last seven years of the contract are respectively: $110,000, $112,000, $113,000, $115,000, $116,000, $118,000, and $135,000. Below is a table from the National Vital Statistic Report identifying the number of people alive out of 100,000 people for females in the United States for ages 50 - 67: Age 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 Number Alive 95,733 95,445 95,139 94,813 94,462 94,085 93,676 93,213 92,754 92,235 91,672 91,058 90,385 89,674 88,842 87,974 87,043 86,045 Adjusting for the probability of life, Anita's total damages would be (show your work) 11a. $803,974.00 Assume all other issues in the case remain the same except that Anita was 60 years old at the time of the breach of contract. Given this information, select the best answer and explain why you selected it. 11b. a. The amount of the damages would be unchanged. b. The amount of the damages would be greater than in the original scenario. c. T he amount of t he damages would be less t han in t he original scenario. d. It cannot be determined because of Medicare issues that would arise. ExpLANAT ION Assume all other issues in the case remain the same except that Anita was 60 years old at the time of the breach of contract, and she is 61 at the time the court rules in her favor. Given this information, the amount of damages would be: 11c. ExpLANAT ION $797,092.00 CHAPT ER 16 12 POINT S: 10 The Columbine Company wants to evaluate the estimated net profit in a three-year federal government contract it is considering signing. The contract is for providing maintenance in a remote national forest. Once the contract is signed, Columbine will be committed to the contract without any changes for the entire three-year period. Which of the following methods should be used to evaluate the net profit in the contract? a. b. c. d. Real Option Valuation. Payback Method. Net Present Value Met hod. Any of the above methods are acceptable. Select the best answer, a-d (3 points) and explain your answer (7 points). ExpLANAT ION 9 Points: 30 (15 each for 9a and 9b) - Select a multiple choice answer (5 points) explain your answer (10 points) Assume that a cable television company charges its customers a "late fee" of $5 whenever a customer fails to pay his bill within 45 days of the billing date. Further assume that the law allows such a fee as long as the costs incurred by the cable company is approximately what it costs to service the accounts of those late-paying customers. For example, the cable company must contact the late paying customers by mail and by phone. Sometimes agents are sent to customers' house to seek payment or turn off their cable service. There are numerous other activities that are carried out to deal with late-paying customers. About 5 percent of all customers are charged a late fee in any given month. 9a. Based on the information provided above, which of the following accounting concepts would be most useful in evaluating the costs incurred by the cable company in defending itself against a class action suit alleging that the "late fee" is too high? a. b. c. d. e. Differential/incremental costs. Allocated costs. The proper treatment of repair and maintenance expenditures. Proper revenue recognition models. All of the items above are equally valuable in this case. 9b. If you are an financial expert witness working for the defendant (the cable company) a. The only costs that will be included in your measurement of cost that the cable company incurs in connection with servicing late-paying customers will be variable costs. b. Fixed costs, because of their nature, would not be utilized in your analysis. c. You would most likely consider all costs that are incremental to the activities associated with servicing late-paying customers regardless of whether they were fixed or variable. d. All of the answers above are correct. CHAPTER 12 10 POINTS: 75 (20 points for 10a; 15 points for 10b; 10 points for each of 10c - 10f) Judy is a successful physical therapist in Atlanta. As part of her business practice she purchased a comprehensive injury and disability insurance policy that she has carried for the last ten years. During the first fifteen years of her practice Judy has experienced the following earnings from her physical therapy practice. Year 1 2 3 4 5 6 7 8 Earnings Year $66,000 74,000 79,000 87,000 95,000 101,000 107,000 114,000 9 10 11 12 13 14 15 Earnings $124,000 135,000 145,000 156,000 120,000 117,000 121,000 At the beginning of her 13th year of practice, Judy had an accident at the office in which she fell and hurt her back. Ever since the accident, Judy has experienced serious back pain and some dizziness that she had not experienced before the accident. As the result of these symptoms, Judy in unable to work the long hours that she normally had worked and as a result has been unable to grow or even maintain her physical therapy practice as she did before the accident. Her intentions before the accident were to grow the business about 10 percent a year for the foreseeable future. Judy claimed that she planned to operate her physical therapy business until she was 65 years old. Judy has filed a claim with the insurance company and the company is contesting her claim. Judy hired an attorney to sue the insurance company in an attempt to get the insurance company to honor her claim. You have been hired to help in this litigation. Judy was 49 years old at the time of the accident, and she just turned 52 last week. 10a. The approximate percentage annual growth rate in Judy's earnings until her accident was (rounded to the nearest whole percentage): = 8% 10b. Assume the average annual earnings growth rate for Judy through year 12 was six percent. What is Judy's estimated damage for year 13 only? = $45,350 11 Points: 50 (11a: 20; 11b: 10; 11c: 20) Anita had a ten-year contract with city of West Haven to operate the city's visitor and convention bureau. For a variety of reasons, Anita and the city manager had several major differences of opinion. With seven years still remaining on the contract, the city unilaterally cancelled the contract and quit paying Anita her salary and other benefits. Anita sued the city, and the court found the city liable under the contract. At the time the contract was terminated (at the beginning of the fourth year of the contract), Anita was 55 years old, and when the court liability ruling was issued Anita was 57. The present value of the lost salary and benefits for the last seven years of the contract are respectively: $110,000, $112,000, $113,000, $115,000, $116,000, $118,000, and $135,000. Below is a table from the National Vital Statistic Report identifying the number of people alive out of 100,000 people for females in the United States for ages 50 - 67: Age 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 Number Alive 95,733 95,445 95,139 94,813 94,462 94,085 93,676 93,213 92,754 92,235 91,672 91,058 90,385 89,674 88,842 87,974 87,043 86,045 Adjusting for the probability of life, Anita's total damages would be (show your work) 11a. show work $803,974.00 11b. Assume all other issues in the case remain the same except that Anita was 60 years old at the time of the breach of contract. Given this information, select the best answer and explain why you selected it. a. The amount of the damages would be unchanged. b. The amount of the damages would be greater than in the original scenario. c. The amount of the damages would be less than in the original scenario. d. It cannot be determined because of Medicare issues that would arise. ExpLANATION Assume all other issues in the case remain the same except that Anita was 60 years old at the time of the breach of contract, and she is 61 at the time the court rules in her favor. Given this information, the amount of damages would be: 11c. ExpLANATION $797,092.00 CHAPTER 16 12 POINTS: 10 The Columbine Company wants to evaluate the estimated net profit in a three-year federal government contract it is considering signing. The contract is for providing maintenance in a remote national forest. Once the contract is signed, Columbine will be committed to the contract without any changes for the entire three-year period. Which of the following methods should be used to evaluate the net profit in the contract? a. b. c. d. Real Option Valuation. Payback Method. Net Present Value Method. Any of the above methods are acceptable. Select the best answer, a-d (3 points) and explain your answer (7 points). ExpLANATION Y1: $74/$66 = 12.12%