I seriously need help on the following:

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. (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. (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. ?

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 Proposed Trial Balance 2013 Debit Credit 242,337 133,195 915,275 16,530 102,470 404,683 1,340,902 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 4,980,574 5,433,452 Service cost of goods sold Bad debt expense Depreciation and amortization 5,433,452 331,500 5,433,452 5,433,452 9,100,000 9,100,000 975,000 975,000 975,000 500,000 500,000 500,000 5,400,000 5,400,000 5,400,000 450,000 450,000 450,000 20,000 20,000 20,000 137,500 137,500 137,500 Gain/loss on disposal Income tax expense 115,000 9,100,000 Service revenue Products cost of goods sold 802,557 331,500 Income Statement Accounts Product sales revenue Product sales returns & discounts 115,000 0 4,980,574 400,000 10,000 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 Wages- employees 1,050,000 Net (Income) Loss 1,050,000 800,000 Wages - Officers 1,050,000 800,000 800,000 0 0 (331,500) 0 9,764,000 10,872,378 10,872,378 0 9,764,000 (331,500) 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