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The following information was reported by GAP Inc. in its 2005 annual report: 2001 7387 (153) 2005 Total Assets $10048 Working Capital 2004 10713 4156 2003 10283 2972 2002 8096 1018 062 Note: An within bracket indicates a negative figure. Instructions 1. By what percentage did total assets increase from 2001 to 2005? What was the average increase for each year? 2. Calculate the current ratios for each year 3. Comment on the change in the Gap's liquidity position. 4. What could be the possible reasons for the change in Gap's liquidity position? 5. Would you be concerned about the liquidity position of the company? Why? 6. What additional information do you need to evaluate Gap's liquidity position more accurately 7. Recommend some actions to Gap to ensure better liquidity position In the wake of financial scandals that are still making an impression, the Canadian Securities Administration introduced requirements in 2005 for management to evaluate the reliability of a company's accounting system and controls. This includes a review of year-end procedures, including the procedures that are used to record adjustment entries 8. Explain with examples how an adjustment entry be used to overstate net income figure. Financial Statement Ef ACCOUNTING IN ACTIONEthics Insight Over the years, inventory has played a role in many fraud cases. A classic one involved lad oil. Management filled storage tanks mostly with water, and since oil rises to the top, the audi- sthought the tanks were full of oil. In this instance, management also said the company had more han it really did-numbers were repainted on the tanks to confuse the auditors ther involves a building supplies company in Prince George, B.C., where a manager falsified records by altering written records of physical inventory counts to match computerized ords. The overstatement increased over time as the manager did not write off damaged ntory, inventory lost as a result of theft, or donations of inventory to local charities. not responsible since they depended on the information Ano inventory rec or obsolete inve In this case, the company's auditors were management provided. rce: Trevor McCann, "Who's at Fault?" CAmagazine, June 2005. Why might a manager deliberately overstate inventory? Is it a problem? BEFORE YOU GO ON Action Plan e Use income e statement relationships to determine the impact of an error on the income statement. relationshi Use the accounting equation to determine the impact of an error on the balance sheet. Solution (a) The correct inventory count should have been $690,000 ($600,000+ $90,000). D) Income statement accounts: Purchases are understated (U) by $90,000. However, since ending inventory is also understated, cost of goods sold and net income will be correct. Beginning inventory Plus: Cost of goods purchased U$90,000 Cost of goods available for sale U $90,000 Less: Ending inventory Cost of goods sold No effect U $90,000 No effect because the errors cancel each other Balance sheet accounts: Merchandise Inventory (ending) is understated by $90,000, as is Ac- counts Payable. lassets (U $90,000) liabilities (U $90,000) + owner's equity] avig elated exercise material: BE6-5, BE6-6, BE6-7, BE6-8, E6-5, E6-6, E6-7, and B The following information was reported by GAP Inc. in its 2005 annual report: 2001 7387 (153) 2005 Total Assets $10048 Working Capital 2004 10713 4156 2003 10283 2972 2002 8096 1018 062 Note: An within bracket indicates a negative figure. Instructions 1. By what percentage did total assets increase from 2001 to 2005? What was the average increase for each year? 2. Calculate the current ratios for each year 3. Comment on the change in the Gap's liquidity position. 4. What could be the possible reasons for the change in Gap's liquidity position? 5. Would you be concerned about the liquidity position of the company? Why? 6. What additional information do you need to evaluate Gap's liquidity position more accurately 7. Recommend some actions to Gap to ensure better liquidity position In the wake of financial scandals that are still making an impression, the Canadian Securities Administration introduced requirements in 2005 for management to evaluate the reliability of a company's accounting system and controls. This includes a review of year-end procedures, including the procedures that are used to record adjustment entries 8. Explain with examples how an adjustment entry be used to overstate net income figure. Financial Statement Ef ACCOUNTING IN ACTIONEthics Insight Over the years, inventory has played a role in many fraud cases. A classic one involved lad oil. Management filled storage tanks mostly with water, and since oil rises to the top, the audi- sthought the tanks were full of oil. In this instance, management also said the company had more han it really did-numbers were repainted on the tanks to confuse the auditors ther involves a building supplies company in Prince George, B.C., where a manager falsified records by altering written records of physical inventory counts to match computerized ords. The overstatement increased over time as the manager did not write off damaged ntory, inventory lost as a result of theft, or donations of inventory to local charities. not responsible since they depended on the information Ano inventory rec or obsolete inve In this case, the company's auditors were management provided. rce: Trevor McCann, "Who's at Fault?" CAmagazine, June 2005. Why might a manager deliberately overstate inventory? Is it a problem? BEFORE YOU GO ON Action Plan e Use income e statement relationships to determine the impact of an error on the income statement. relationshi Use the accounting equation to determine the impact of an error on the balance sheet. Solution (a) The correct inventory count should have been $690,000 ($600,000+ $90,000). D) Income statement accounts: Purchases are understated (U) by $90,000. However, since ending inventory is also understated, cost of goods sold and net income will be correct. Beginning inventory Plus: Cost of goods purchased U$90,000 Cost of goods available for sale U $90,000 Less: Ending inventory Cost of goods sold No effect U $90,000 No effect because the errors cancel each other Balance sheet accounts: Merchandise Inventory (ending) is understated by $90,000, as is Ac- counts Payable. lassets (U $90,000) liabilities (U $90,000) + owner's equity] avig elated exercise material: BE6-5, BE6-6, BE6-7, BE6-8, E6-5, E6-6, E6-7, and B