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(1) Rules governing the investment practices of individual certified public accountants prohibit them from investing in the stock of a company that their firm audits. The Securities and Exchange Commission (SEC) became concerned that some accountants were violating this rule. In response to an SEC investigation, PricewaterhouseCoopers fired 10 people and spent $25 million educating employees about the investment rules and installing an investment tracking system. (a) Why do you think rules exist that restrict auditors from investing in companies that are audited by their firms? (b) Some accountants argue that they should be allowed to invest in a company's stock as long as they themselves aren't involved in working on the company's audit or consulting. What do you think of this idea? (c) Today, a very high percentage of publicly traded companies are audited by only four very large public accounting firms. These firms also do a high percentage of the consulting work that is done for publicly traded companies. How does this fact complicate the decision regarding whether CPAs should be allowed to invest in companies audited by their firm? (d) Suppose you were a CPA and you had invested in IBM when IBM was not one of your firm's clients. Two years later, after IBM's stock price had fallen considerably, your firm won the IBM audit contract. You will be involved in working with the IBM audit. You know that your firm's rules require that you sell your shares immediately. If you do sell immediately, you will sustain a large loss. Do you think this is fair? What would you do? (e) Why do you think PricewaterhouseCoopers took such extreme steps in response to the SEC investigation? (2) The following information was reported by Gap, Inc. in its 2010 annual report. 2010 2009 2008 2007 2006 Total assets (millions) $7,065 $7,985 $7,564 $7,838 $8,544 Working capital $1,831 $2,533 $1,847 $1,653 $2,757 Current ratio 1.87:1 2.19:1 1.86:1 1.68:1 2.21:1 Debt to assets ratio 0.42:1 0.39:1 0.42:1 0.45:1 0.39:1 Earnings per share $1.89 $1.59 $1.35 $1.05 $0.94 Determine the overall percentage decrease in Gap's total assets from 2006 to 2010. What was the average decrease per year? (Round to 1 decimal places, e.g. 17.5%) Average decrease per year % per year (3) Purpose: Identify summary liquidity, solvency, and profitability information about companies, and compare this information across companies in the same industry. Address: http://biz.yahoo.com/i, or go to www.wiley.com/college/kimmel 1. Type in a company name, or use the index to find a company name. Choose Profile. Choose Key Statistics. Perform instruction (a) below. 2. Go back to Profile. Click on the company's particular industry behind the heading \"Industry.\" Perform instructions (b), (c), and (d). Answer the following questions. (a) What is the company's name? What was the company's current ratio and debt to equity ratio (a variation of the debt to assets ratio)? (b) What is the company's industry? (c) What is the name of a competitor? What is the competitor's current ratio and its debt to equity ratio? (d) Based on these measures, which company is more liquid? Which company is more solvent? (4) The Feature Story described the dramatic effect that investment bulletin boards are having on the investment world. This exercise will allow you to evaluate a bulletin board discussing a company of your choice. Address: http://biz.yahoo.com/i, or go to www.wiley.com/college/kimmel STEP: 1.Type in a company name, or use the index to find a company name. 2. Choose Msgs or Message Board. (for messages). 3. Read the 10 most recent messages. Answer the following questions below. (a) State the nature of each of these messages (e.g., offering advice, criticizing company, predicting future results, ridiculing other people who have posted messages). (b) For those messages that expressed an opinion about the company, was evidence provided to support the opinion? (c) What effect do you think it would have on bulletin board discussions if the participants provided their actual names? Do you think this would be a good policy? (5) As a financial analyst in the planning department for Shonrock Industries, Inc., you have been requested to develop some key ratios from the comparative financial statements. This information is to be used to convince creditors that Shonrock Industries, Inc. is liquid, solvent, and profitable, and that it deserves their continued support. Lenders are particularly concerned about the company's ability to continue as a going concern. Here are the data requested and the computations developed from the financial statements: Current ratio 2014 2013 3.1 2.1 Working capital Up 22% Down 7% Free cash flow Up 25% Up 18% 0.60 0.70 Debt to assets ratio Net income Earnings per share Up 32% Down 8% $2.40 $1.15 Shonrock Industries, Inc. asks you to prepare brief comments stating how each of these items supports the argument that its financial health is improving. The company wishes to use these comments to support presentation of data to its creditors. With the class divided into groups, prepare the comments as requested, giving the implications and the limitations of each item regarding Shonrock's financial well-being (6) F. P. Fernetti is the chief executive officer of Tomorrow's Products. Fernetti is an expert engineer but a novice in accounting. Write a letter to F. P. Fernetti that explains (a) the three main types of ratios; (b) examples of each, how they are calculated, and what they measure; and (c) the bases for comparison in analyzing Tomorrow's Products' financial statements