Micron Electronics Case

In January 2020 you are assigned to the 2019 audit of Micron Electronics. Micron Electronics is a closely held corporation managed by the founder and principal shareholder, Kevin B. Malone. Your firm has audited Micron Electronics for the last five years. The audited financial statements for the years ended December 31, 2018 and 2017 are presented in a spreadsheet included with this case, along with the client's unaudited financial statements for 2019.

Additional Information:

Micron Electronics primarily manufactures and sells two smartphone components: 5G modems and OLED displays.

All sales are on credit to department stores and electronics wholesaling companies. Credit terms are net 30 days.

Micron Electronics offers a one-year warranty covering manufacturing defects.

Micron Electronics uses a periodic inventory system and determines its year-end inventory by taking a physical count on December 31. You and your supervisor observed the count on December 31, 2019 and performed numerous test counts, but you have not performed further audit tests regarding inventory.

The interest rate on all debt is 8 percent. Annual interest and principal payments are due each December 1st.

Required:

The engagement partner has asked you to perform analytical procedures to identify potential risks and areas of audit focus in Micron Electronics' 2019 financial statements.

1.Review the financial statements and identify accounts that appear to have unusual balances or appear to be anomalous and the reasons you identified them as such.

a.A helpful hint is to examine income statement and balance sheet accounts that relate to each other.

b.Horizontal analysis and ratio analysis will likely prove useful.

2.Try to use other information in the financial statements to determine the potential accounting issues or operating problems that might have caused the unexpected fluctuations you identify.

3.Identify areas of the company's operations that you believe should receive special attention during the 2019 audit.

Micron Electronics Inc. INCOME STATEMENTS ($000's) Years ended December 31 2019 2018 2017 Sales revenue $ 7,800 $ 7,713 $ 7,493 Cost of goods sold 5,505 5,381 5,225 Gross prot 2,295 2,332 2,268 Selling and general expenses 1,671 1,622 1,577 Depreciation expense 46 55 49 Warranty expense 75 65 55 Bad debt expense 90 85 90 Legal fees 13 14 12 Interest expense 110 127 135 Income before taxes 290 364 350 Income tax expense 46 109 104 Net income $ 244 $ 255 $ 246 Dividends paid $ 125 $ 125 $ 100 The following schedule shows the sales revenue and components of costs of goods sold for each of Micron's two products. SCHEDULES 0F GROSS PROFIT ($000's) Years ended December 31 5 G Smarl'phone Modems Sales $ Cost of goods sold: Materials Labor Overhead Standard cost variances Depreciation Gross Prot $ OLED Displays Sales $ Cost of goods sold: Materials Labor Overhead Standard cost variances Depreciation Gross Prot $ 2019 5,080 1,395 1,103 639 3 50 3,740 1,340 2,720 888 537 301 (2) 41 1,765 955 2018 $ 4,932 1,335 1,074 664 5 70 3,643 $ 1,234 $ 2,781 868 532 276 (3) 60 1,733 a: 1,043 2017 $ 4,791 1,731 1,043 662 (4) 63 3,550 $ 1,241 $ 2,702 340 505 270 2 53 1,675 a: 1,027 Note: The overhead standards shown above do not include depreciation. When the nished goods are transerred to inventory, a factor for depreciation is added to the material-labor-overhead standard to determine the inventory carrying cost. BALANCE SHEETS (snows) December 31 2019 2018 2017 Cash $ 21 1 $ 165 $ 77 Accounts receivable 695 674 658 Bad debt allowance (70) (60) (60) Inventories: Raw materials (at cost) 322 304 286 Finished goods: (at standard) SG Smartphone Modems 763 738 710 OLED Displays 475 390 374 Prepaid expenses 8 2 4 Current assets 2,404 2,213 2,049 Land 450 450 450 Building and equipment 1,865 1,858 1,831 Accumulated depreciation 895 790 610 Total assets $ 3,824 $ 3,731 $ 3,720 Accounts payable $ 757 $ 675 $ 694 Taxes payable 16 14 13 Accrued interest - 10 1 1 Warranty liability 40 40 40 Current portion of long-term debt 100 100 100 Current liabilities 913 839 858 Long-term debt 1,300 1,400 1,500 Total liabilities 2,213 2,239 2,358 Paid-in-capital 550 550 550 Retained earnings 1,061 942 812 Total stockholders'equity 1,611 1,492 1,362 Total liabilities and equity $ 3,824 $ 3,731 $ 3,720