I need help/answers to the attached homework questions

ABC Inc. Consolidated Balance Sheets 2011 2012 Assets Current Assets Cash and cash equivalents Receivables - net Inventories Deferred income taxes Total Current Assets Land Buildings Machinery Accumulated depreciation Total Fixed Assets Total Assets Liabilities and Owners' Equity Current Liabilities Accounts payable Taxes payable Total Current Liabilities $ 2013 $ 1,542 $ 5,602 1,524 851 9,519 $ 851 $ 4,115 1,112 302 6,380 $ 317 3,329 900 456 5,002 $ 22,547 10,982 6,233 (396) 39,366 48,885 $ 15,239 8,475 5,008 (305) 28,417 34,797 $ 12,045 7,698 3,511 (235) 23,019 28,021 5,603 $ 786 6,389 4,112 $ 543 4,655 4,758 235 4,993 $ Long-term Liabilities Long-term debt Deferred income taxes Total Long-term Liabilities 16,987 845 17,832 16,115 562 16,677 19,546 354 19,900 Owners' Equity Common stock Retained earnings Total Owners' Equity Total Liabilities and Owners' Equity $ 22,220 2,444 24,664 48,885 $ 12,764 701 13,465 34,797 $ 2,907 221 3,128 28,021 ABC Inc. Consolidated Statements of Income 2011 2012 Revenues $ 26,534 $ 22,473 $ Cost of goods sold 18,201 18,161 Gross margin 8,333 4,312 2013 18,739 15,406 3,333 Operating expenses 5,428 3,512 2,965 Operating income before taxes Income taxes Net Income $ 2,905 800 368 1,162 1,743 $ 320 480 $ 147 221 Week 9 Homework Questions Instructions Download a copy of this file. Type your answer into the file after the questions, rename the file with your own name and HW9 (e.g., Jim Peters HW9.docx), and reattached the completed file to the assignment. You will lose points if you don't rename your files. Questions 1) Wearever Appliances, a mid-sized manufacturer of small appliances, agreed to guarantee a loan for BioGenics, a startup pharmaceutical firm that has developed a bioengineered drug that would treat certain types of hard-to-treat cancers. The amount of the loan would be 50% of BioGenic's total assets and 10% of Wearever's. Because Wearever is an established, profitable firm with strong market position, bank approved the loan to BioGenics at a favorable interest rate. Wearever also is publicly traded and meets SEC guidelines concerning the makeup of its Board of Directors and Audit Committee The pharmaceutical industry is consider highly risky because firms can invest millions in developing a drug only to have it fail clinical trials and, therefore, fail to receive FDA approval. Recent studies show that only one in ten drugs like BioGenics produces even make it to the second round of FDA approval.1 Currently, BioGenics has little capital and only the one drug ready to submit for FDA approval. Thus, it has no other sources of revenue should the FDA deny approval and would probably have to go out of business without a significant infusion of new capital from lenders or new stockholders. You work in the Director of Internal Audit department of Wearever and are reviewing the draft financial statements for the current year, which includes the loan guarantee for BioGenics. The CFO has not disclosed the loan guarantee in any way in the draft financial statements, to include not including it as a liability of the firm. The text's coverage of contingent liability rules under GAAP is incomplete in that a contingent liability not only needs to be probably, but the amount also needs to be estimable before GAAP requires that it be recorded as a liability. Here is a diagram of the contingent liability decision rules under GAAP. 1 See https://www.bio.org/media/press-releaseew-study-shows-rate-drugapprovals-lower-previously-reported-0 downloaded 1/13/15. 1 Contingent Loss/liabilit y Probability Proba Reasona Remote of ble ble Estimable? Occurrence Yes No Accounting Accru Disclo Disclo Ignore Treatment e se se 2) a) What should the accounting treatment for the loan guarantee be on Wearever's financial statements and why? b) Do you see factors in this case that would suggest fraud? What are they and why might they indicate fraud? c) Assuming that you, as the Director of Internal Audit, do suspect fraud. What would your next steps be and why? Using the financial statement data provided for ABC Inc. provided below, calculate ratios that would help you determine whether they are underreporting accounts payable. I have provided these data in the "Supporting Case Data Week 9" spreadsheet file attached to this assignment. Show your ratios either in this Word document or attached a copy of your spreadsheet file if you used it to calculate the ratios. 2 3 If you spot possible evidence of underreporting of accounts payable, explain the evidence and how it might indicate fraud. 3) The text briefly discusses setting up "cookie jar" reserves. a) Describe what a "cookie jar" reserve is and how management can create them. b) The year in which management sets up "cookie jar" reserves the financial statements will show lower income and either lower assets or higher liabilities than they would show without the reserves. Why would management want to manipulate financial statements so that they have less income and less assets or more liabilities? c) In my conversations with auditors, they describe the establishment of "cookie jar reserves" as a significant audit issue. However, the text states that they very rarely are involved in frauds. Speculate on what this difference in emphasis occurs. This is a thought provoking question, which is why I used the term "speculate." I just want to see what you can reason out and will not grade this part of the question "tightly." 4