what is audit risk

Audit Risk is the risk that an auditor expresses an inappropriate opinion on the financial statements.
Audit Risk = Inherent Risk x Control Risk x Detection Risk
Audit risk may be considered as the product of the various risks which may be encountered in the performance of the audit. In order to keep the overall audit risk of engagements below acceptable limit, the auditor must assess the level of risk pertaining to each component of audit risk.

Explain how the degree of operating and financial leverage can change the profitability of the firm when sales levels change significantly. Use examples and explain your answers.

Operating and financial leverage both will result in the magnification of changes to earnings due to the presence of fixed costs in a company’s cost structure. Financial leverage is the enlargement on the bottom half of the income statement on how earnings per share changes in response to changes in EBIT, the pertinent fixed costs is the fixed cost of financing in particular interest. Operating leverage is the enlargement on the top half of an income statement on how EBIT changes in response to changes in sales, the pertinent fixed cost is the fixed cost of operating the business.
Operating leverage can be calculated by dividing the difference between sales revenue and variable cost by the difference between sales revenue and total costs.
If a company has $10,000 in sales revenue, $5,000 in variable costs, $2,000 if fixed costs (therefore $7,000 in total costs), its operating leverage would be ($10,000-$5,000)/ ($10,000-$7,000) =1.67. On the other hand, if that same company had $2,000 in variable costs and $5,000 in fixed costs, which results in the same total costs of $7,000, its operating leverage would be ($10,000-$2,000)/($10,000-$7,000)=2.67 (http://www.ehow.com/info).
A positive financial leverage means that the assets acquired with the funds provided by creditors and preferred stockholders generate a rate of return that is higher than the rate of interest or dividend payable to the providers of funds. Positive financial leverage is beneficial for common stockholders. For example, XYZ Company obtains a long term debt at a rate of 12%. The company can use the funds to earn an after-tax rate of 14%. The interest on debt is tax deductible. If the tax rate is 40%, the after-tax interest rate would be 7.2% [12% × (1 – 0.4)]. The difference of 6.8% (14% – 7.2%) is, therefore, the benefit of common stockholders.
A negative financial leverage occurs when the assets acquired with the debts and preferred stock generate a rate of return that is less than the rate of interest or dividend payable to the providers of debts or preferred stock. Negative financial leverage is a loss for common stockholders.

References
Brigham, E. F., & Houston, D. J. F. (2014). Fundamentals of Financial Management, Concise Edition (with Thomson ONE – Business School Edition 6-Month Printed Access Card), 8th Edition. [VitalSource Bookshelf version]. Retrieved from http://digitalbookshelf.southuniversity.edu/books/9781305217218/outline/13

Corporate Finance – Effects of Debt on the Capital Structure. Retrieved from www.investopedia.com/…/debt-effects-capital-structure.asp
What Effect Does Operating Leverage Have on a Company’s Profits? Retrieved from http://www.ehow.com/info

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Financial Analysis In this paper I’ve reviewed the annual reports for PepsiCo, Inc. and The Coca-Cola Company and attempted to analyze the financial statements of two industry leaders in the field of

Financial Analysis

In this paper I’ve reviewed the annual reports for PepsiCo, Inc. and The Coca-Cola

Company and attempted to analyze the financial statements of two industry leaders in the field of

soft drinks or also known as “cola or sodas”. These two major companies have for years compete

to be the number one soft drink not only in the United States but as well as international. Both,

PepsiCo, Inc. and Coca-Cola Company have been rivals for many years and the outcome of my

financial analysis will determine which one is the strongest and gains more profit.

In doing the financial analysis, I will conduct a Vertical Analysis (also called common-

size analysis) which is a technique that expresses each financial statement item as a percent of a

base amount. This would include the base for assets is Total Assets, for liabilities and

stockholders’ equity, the base is the Total Liabilities, and Stockholders’ Equity, and finally for

Income Statement accounts, the base is Net Sales or Net Revenues.

I have also concluded a Horizontal Analysis (also known as Trend Analysis) which is a

technique for evaluating a series of financial statement data over a period of time. Its purpose is

to determine the increase of decrease that has taken place. This change may be expressed as

either an amount or a percentage. The comparisons are performed using the Balance Sheet,

Retained Earnings, and Income Statement. And last I will provide recommendations on each

corporation that can help improve their financial health.

Through examining the financial statements of PepsiCo, Inc. and Coca-Cola Company, I

would like to present the following analysis and when it is completed you will notice that both

companies seem to be improving in one area according to the Horizontal Analysis and Vertical

analysis on the Appendix A and B. Almost all item on the PepsiCo’s balance sheet have

FINANCIAL ANALYSIS

favorable increased between 2004 and 2005; yet it is obvious that current assets have not

increased with the same rate as current liabilities, which would explain why the current ratio

have decreased from 2004 to 2005.

3

For Coca-Cola Company, however current assets have decreased from $12,281 in 2004

to $10,250 in 2005, while current liabilities have decreased from $11,133 in 2004 to $9,836 in

2005.

PepsiCo, Inc, Inventories have increased from $1,541 in 2004 to $1,693 in 2005; this

could be a favorable sign especially when we see the improvement in the inventory turnover

ratio and day’s sales in inventory. The increase in inventory is unfavorable at times, but in this

case it appears that the increase in inventory is to meet increased demand for the company’s

products.

For the Coca-Cola Company, Inventories have increased from $1,420 in 2004 to $1,424

in 2005, which shows that the expected demand Coca-Cola’s management is expecting is not as

high as the one expected by PepsiCo’s management team leaders.

For PepsiCo, Inc., Cash and Cash Equivalents have increased from $1,280 in 2004 to

$1,716 in 2005 (34.06% increase), while Accounts Receivables have increased from $2,999 in

2004 to $3,261 in 2005 (an 8.74% increase) while sales have increased from $29,261 in 2004 to

$32,562 in 2005 (an 11.28% increase). This explains the increase in inventory as PepsiCo, Inc.

seems to be an increase in the demand for its products. The larger increase in Cash and Cash

Equivalents in comparison to the increase in receivables is probably due to stricter measures in

the company’s credit policy.

FINANCIAL ANALYSIS

4

Also, as a result of the increase in demand, PepsiCo Inc is probably in a stronger position

and can therefore ask its customers to purchase its products in cash.

For the Coca-Cola Company, Cash and Cash Equivalents have decreased form $6,707 in

2004 to $4,701 in 2005 (29.91% decrease), while receivables have increased from $2,244 in

2004 to $2,281 in 2005 (8.2% increase). This is couple with an increase in sales from $21,742 in

2004 to $23,104 in 2005 (6.26% increase).

Coca-Cola Company management should seek new ways to regain its market share as

PepsiCo, Inc. has been acquiring more market share as clear form comparing the percentage

increase in sales of the two companies.

The Retained Earnings as a percentage of Total Liabilities and Stockholders’ Equity have

decreased from 66.92% in 2004 to 66.56% in 2005 for PepsiCo, Inc., which indicates that

PepsiCo is maintaining a constant payout ratio of dividends.

However for Coca-Cola Company the Retained Earnings as a percentage of total

Liabilities and Stockholders’ Equity has increased from 92.57% in 2004 to 106.36% in 2005

(7.54% increase), this indicates that Coca-Cola Company is decreasing its payout ratio so as to

meet future expansion needs.

Conducting a Ratio Analysis of both PepsiCo, Inc. and Coca-Cola Company, the

outcome of the analysis is as follow:

Liquidity Ratios:

FINANCIAL ANALYSIS

5

After thoroughly examining the Current Ratio (measures the company’s short-term debt-

paying ability), and the Acid Test Ratio (quick ratio which measures the immediate short-term

debt-paying ability ), then was it noticeable that both companies have suffered a drop in their

current and quick ratios, yet most companies their receivables turnover ratio (measures the

liquidity of receivables), days sales in receivables (measures the number of days it takes the

company to convert its receivables into cash), inventory turnover (measures the liquidity of

inventory), and days’ sales in inventory (the number of days merchandise remain in inventory

until sold) ratios have improved.

This all means that both PepsiCo, Inc., and Coca-Cola Company are collecting their

money faster, and therefore are able to turnover its receivables quicker in 2005 than 2004. The

same can be noticed for the inventory turnover figures, for PepsiCo, Inc.; however the

percentage of current assets to total assets has increased from 30.9% in 2004 and 32.9% in 2005.

This is a good sign that signifies PepsiCo, Inc. is trying to lower its investments in noncurrent

assets.

The Profitability Ratios:

After examining the analysis in the appendix A and B and reviewing the Ratio, Vertical

and Horizontal Analysis form week Seven CheckPoint, one can see that the profit margin ratios

(which measures the percentage of net income that is generated by each dollar of sales) of both

companies PepsiCo, Inc., and Coca-Cola Company has dropped between 2004 and 2005, this

could be the result of these two companies always trying to compete against each other. The cost

of goods sold has increased for both these companies between 2004 and 2005.

FINANCIAL ANALYSIS

6

The Asset Turnover (which measures how efficient is management in managing its asset

base to generate sales) for PepsiCo had dropped from 1.05 in 2004 to 1.03 in 2005, while the

Coca-Cola Company the Asset Turnover has increased from 0.69 in 2004 to 0.79 in 2005. This

indicates that Coca-Cola Company has a better managing the assets base than PepsiCo Inc, At

the same time PepsiCo, Inc, return on assets (measures the overall profitability of assets) has

dropped from 15.05% in 2004 to 12.85% in 2005, while it increased for Coca-Cola from 15.42%

to 16.56% for the same period.

One of the most important measures of profitability for many investors is the Return on

Equity, for this measures the profitability of their investment has dropped for PepsiCo, Inc, and

Coca-Cola Company between 2004 and 2005; probably due to the drop in the profit margin for

both companies.

Next the earnings per share (a ratio that measures net income earned by each share of

stock) has dropped for PepsiCo, Inc. from $2.48 in 2004 to $2.44 in 2005, while the price

earnings ratio (the ratio of the market price per share to earnings per share). The higher the price

earnings ratios the higher interest of investors in the companies operations have increased from

25.15 in 2004 to 25.57 in 2005 which is an indication that the investors have an increased

confidence in the company’s future performance.

For Coca-Cola where the earnings per share have increased form $2.00 in 2004 to $2.04

in 2005, yet the price earning ratio have dropped form 26.39 to 25.88 for the same period, which

can also indicate that not too many investors were interested in the company’s operations. With

these figures and analysis of increase and ratio drop is not a good sign that management for both

of these companies need to evaluate their options and keep a balance of increase and decrease in

FINANCIAL ANALYSIS

the profitability ratios.

7

Solvency Ratios:

We will look at the debt to assets ratio (the percentage of total assets financed by

creditors as opposed to the percentage financed by investors) for PepsiCo Inc. had an increased

form 0.52 in 2004 to 0.55 in 2005, I suggest that management should evaluate their capital

structure because the increase of debt in the capital structure is not a good sign. An increase in

the debt ratio signifies a heavier reliance on debt; the interest paid on debt obligations have to be

paid whether the company’s operations are successful or not. A large increase in this ratio could

expose the company to the threat of bankruptcy if it can’t meet its obligations. The times interest

earned ratio has also decreased from 34.21 in 2004 to 25.93 in 2005, this proves that the debt

ratio since the times interest earned ratio measure the company’s ability to meet interest payment

obligations as they are due.

Coca-Cola, however the debt to assets ratio have decreased from 0.49 in 2004 to 0.44 in

2005, which is a favorable outcome because the debt ratio measures the percentage of total assets

provided by creditors and the lower the ratio the safer the company will be from any threat. The

times interest earned ratio have also decreased from 32.74 in 2004 to 28.88 in 2005. This is

probably due to an increase in the cost of debt although the debt had decreased; the interest paid

on debt had increased from $196 in 2004 to $240 in 2005. Management should conduct and

evaluate all necessary analysis to investigate as to why there is an issue and try to lower its

interest payment.

Conclusion

FINANCIAL ANALYSIS

8

In the conclusion, I want to point out that both mogul corporations PepsiCo Inc. and

Coca-Cola Company are successful and even though PepsiCo Inc, has succeeded in gaining

more customers than Coca-Cola Company. Good marketing, advertisement, and promotions are

probably responsible for the success of PepsiCo, Inc. From my analysis, I believe that if both

companies continue to engage in stock repurchases plans which can result with increase in the

earnings per share since the amount of shares outstanding is now lower. If they continue with

this and work on keeping their percentage low on the solvency, both of these companies will

succeed as they are already successful.

I would also recommend that management try to analyze the components of their current

assets so as to increase both the current and acid test ratios, maybe lower their inventories a bit

will be great. Both of these companies PepsiCo Inc, and Coca-Cola Company should try to

increase their acid test ratio to at least 1:00 to 1:00 to ensure they have enough liquidity to meet

sudden short-term financing needs in the future.

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This report will

Principles of Accounting

Abstract

This report will go over and discuss some key points in accounting with the primary objectives in accounting and its basic terminology.  Effects that accounting can have on a personal or professional ethics basis.  Most importantly what technology; or should say how far technology and what it has done for the accounting world today.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Principles of Accounting I

Describe for the students the primary objectives of accounting.

In business accounting is a language on its own.  This is a system of summarizing, recording and analyzing the status of fiscal transactions.  People who rely on this budgetary information would include a firm’s manager or employees who are considered internal users; external users are investors, banks and government agencies to name some.  All these users are depending on the data supplied by accountants to answer questions about a company.

Example:

a)  Is the firm profitable?

b)  Do they have enough cash in meeting their payroll needs?

c)  What is their net income compared to their budget?

Accountants must be able to show a firms financial information in clear and concise reports.  The most common accounting reports that are used are called financial statements.

Explain the basic terminology of the accounting process or financial reporting.

Our accounting process takes cash and accruals from many transactions to produce financial statements and reports.  The information goes through an accounting system in four general steps.

Explain the basic terminology of the accounting process or financial reporting.

The accounting process takes cash and accruals from many transactions to generate financial statements and reports.  The information goes through an accounting system in four general steps:

i. The first being to create the journal entries as well as the adjusting ones.  The general journal lists each transaction, amount and the account that was affected in chronological order.  At the end of the accounting period adjustments are made to record the accruals not yet made.

ii. The G.L. or general ledger will also show journal entries sorted by affected accounts other than the usual chronological order.  This is useful when reviewing activity in a certain account.

iii. When the end of an accounting period comes an initial trial balance is usually prepared listing the ending balances of each account on its specific date.  If or when needed adjusting entries get recorded in an adjusted trial balance.

iv. Financial statements are written and prepared as the final product of the system all based on the totals from an adjusted trial balance.

Financial reporting is affected by choice of accounting methods plus the estimates that overhead uses to determine the value of an asset.  In order for one to have a greater degree understanding of the earnings potential of a firm an analyst must comprehend the accounting process one uses to produce the financial statements in order to understand better the firm and the results for that period of time.

Much detailed information on management’s accruals and adjustments along with estimates is usually in footnotes to the statements and management’s discussion and analysis; which are very important that the analyst goes over these sections of the financial statement when using this information an analyst should determine.

a)   The many accruals, adjustments and assumptions that had gone into the financial statement.

b)   Detailed information that underlines the accounting system of the firm.

c)   How well the financial statements compare to the firms actual performance.

d)   How data needs to be adjusted for an analyst’s own analysis.

 

Only because adjustments and assumptions are at the discretion of overheads; analysts should always be looking for possible manipulation in the financial statements.

Explain how accounting has affected your personal life emplacing professional ethics.

In accounting professional integrity was held high at one point in time.  Held high in the highest regarded to all the professionals in the business world; over the decades though integrity of accounting as a profession and practice has been taking a beating.  Why?  The effects of scandals which leads to a need for better ethics in the organization and in the development of the profession; most experts agree that between professional training, work experience and one’s education all combined the ability to recognize ethical issue in their course of employment and to take the appropriate course of action when these dilemmas arise.

Numerous authors seem to believe that “overlapping objectives” in teaching ethics in your accounting and business courses are beneficial.  Although the behavioral and cognitive “objectives” of one’s ethics education are expressed in a variety of ways; they generally center on three key points:

  1.                                             i.            Evaluating ones ethical sensitivity.
  2.                                           ii.            Legitimizing ethical decision-making (or ethical judgment) in helping to reduce conflict resolution.
  3.                                         iii.            Engendering a commitment to ethical behavior.

 

 

Theoretical Underpinning: Stages of learning Objectives

Ethical Knowledge—ethics education as base stage and aims to instill more knowledge on concerning professional values, attitudes and ethics.

Ethic Sensitivity—this is moral sensitivity; the most important forming a critical point of the ethical decision making process.

Ethical Judgment—emphasis on ethical values over other personal values so one can do what is professionally and morally right.

Ethical Behavior—acting on principles not just believing in them.

 

Explain the role that technology has played in small business accounting.

The information technology field has made a huge impact on accounting in a very good way; from the old ways of just paper and pencil to computers.

Equipment

This is our most obvious change in technology to accounting is the present use of p.c.’s; scanners and printers; let’s not forget faxing also.  Information technology or (IT) has really transformed accounting; plus it is affordable on most every piece of equipment.  This can be used from a homeowner to small and large businesses at a reasonable cost; IT equipment that is.

Software

The spreadsheet programs are very efficient in assisting accountants with their reports and calculation.  The accounting programs on the market today are affordable to most and are quite easy to use so this makes them a favorite with home owners and the small business owners.

Internet

This (internet) opened doors for accountants to be able to share or research documents.

Security

Instead of the old paper ledgers open for anyone to be able to get to; information technology allows security in accounting with passwords and limited access to confidential information.  Accounting information can also be encrypted so there will be no unauthorized use.

Education

Because of the closeness of accounting and information systems there are many colleges that have started to offer the two programs together.  The accountant of the present and of the future will need to be a tech savvy to be relevant.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

References

Dellaportas, S., Jackling, B., Leung, P., & Cooper, B. (2011). Developing an Ethics Education Framework for Accounting. Business And Economics, Philosophy, 8, 63-82. doi:997905850

 

Godwin, A. (2010). Chapters 1, 3, and 8. In Financial Accounting. Cengage. doi:9781111219543

 

N, A. (2012). Financial Statements – Accounting Process. In Investopedia. Retrieved April 29, 2012, from Investopedia website: Investopedia.com

 

Shanker, S. (2012). Small Business [How Is Information Technology Used in Accounting]. In small business. Retrieved April 29, 2012, from Hearst Communications Inc website: http://smallbusiness.chron.com/information-technology-used-accounting-2101.html

 

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Explain the rules of

1) Explain the rules of debits and credits for the balance sheet and income statement.

Debits and credits are equipment used in keeping a record of all dealing in inventory (accounting).  Debits typically in accounting mean the left side of the column, and Credits mean to the right side of the column; another way of helping to shortcut things debits can be abbreviated as (dr.) and Credits as (cr.).  The guidelines for debits and credits can and is an important piece to a dual or paired entry system.  For each business deal the debits and credits are too always equal.

ASSESTS = LIABILITIES + OWNERS EQUATITY – REVENUE – EXPENSES – OWNERS     WITHDRAWALS.

2)  Provide examples from the manufacturing industry of; a journal entry that would be recorded that impacts the balance sheet and a journal entry that would be recorded that affects the income statement. 

Income statements recap returns or income along with expenditure and costs incurred; balance sheet lists the possessions, property, legal responsibility, obligations, and owners’ equity.  These kinds of accounts are usually viewed in what is called a “T” account; simply, because it looks like the letter “T.”   Left side is the debit and of course, the right being the credit side.  The record book will contain each account along with group and number by category listed as ASSEST = LIABILITIES + OWNERS EQUAITY

Assets such as; possessions and property and expenses like obligations or legal responsibilities are consistently raised by debits and minimized by credits; liabilities like a note payable to a relative and owner’s equity with revenues increase by credits regularly decrease with debits.

A ledger’s standard balance is on the side of the current account debit or credit where increases are listed.  The typical calculated balance of assets and expenses is a debit; with the usual balance of liabilities, revenues and owner’s equity being a credit.  Withdrawal’s ledgers which minimize an owner’s equity generally will have a debit for a balance.  Revenues are a plus for owner’s equity and will increase them and will typically have a credit for the balance.  Of course will all know expenses will decrease; in owner’s equity, it should have a debit for the usual balance.

BALANCE SHEET

A firm’s assets, liabilities and equities are reported on a balance sheet.  A balance sheet also shows a firms asset, liabilities and equity at any point and time.  Its main purpose is to be able to show any interested party (or for their own purpose); that their capital, wealth, sources, and their means against all other its claims against those resources.  The balance sheet is typically reported at a certain point in time and is usually referred to in the business world as a “snapshot” of the firm.

 

EXAMPLE: A

 

Auto Body Shop

Balance Sheet

May 31, 2012

ASSETS =

LIABILITIES +

EQUITY

     
Cash                 Supplies                 Tools Note payable to relative

Contributed Capital & Retained Earnings

     
$250                    $75                        $175             $250                  $250

 

“T” Factor

Debits

 

5/ 5/2012       Cash $250

5/ 14/ 2012     Supplies $75

5/ 28/ 2012     Tools $175

Total Assets =

Credits

 

 

 

 

$500

 

5/ 20/ 2012 Note payable to relative

$250

Total Liabilities =

5/ 17/2012  Contributed Capital

$100

5/ 30/2012 Retained Earnings  $150

 

Total Equity =

 

Total Liabilities and Equity =

 

 

$250

 

 

 

 

 

$250

 

$500

 

Here Total Assets = $500 and Total Liabilities and Equity equal $500; perfectly balanced.

 

A few definitions to help understand the transactions:

Contributed Capital:  Resources that investors contribute to a business in exchange for ownership interest.

Liability:  Obligation that a firm owes from current or past transactions.

Equity:  difference between a firm’s assets and liabilities representing the share of assets that is claimed by the firm’s owners.

Retained Earnings:  Profits retained in the business.

Revenue:  Net sales; investment income and interest.

Expenses: Examples of expenses are advertisements for selling, taxes that may be owed, payroll.

INCOME STATEMENT

The income statement is in which a firm’s overhead cost or expenditures along with proceeds or profits are tallied and accounted for.  According to Godwin et at, (2010) “An income statement is a financial statement that shows a firm’s revenues and expense over a certain period of time with the main purpose to demonstrate the financial success or failure of the firm.”

Example: B

INCOME STATEMENT

Auto Body Shop

For the month ending May 31, 2012

REVENUE -

EXPENSES –

Interest; Depreciation

NET INCOME OR NET LOSS

Previous Cash       800 Interest   80

800

  Depreciation  60                 –    440
  Sales       100  
  Administrative    200

Total Expenses = $440

Net Income $360

 

Journal Entries

Transaction date and summary                                                            Ledger

                                                                                                                Entry

    (Income Tax Transaction)     (assets + revenue)              

April 12, 2012   Customer purchased $75 worth of Supplies in cash    Cash dr. $75

Sales Revenue cr. $75

April 17, 2012   New Computer for Auto Body Shop paid with cash   Office Supply dr. $500

(+asset – asset) (Balance Sheet Transaction)                                        Cash cr. $500

April 28, 201   Borrow 20,000 from the bank to purchase new             Cash dr.  $20,000

Equipment and some inventory; loan goes directly              Loan Payable $20,000

into bank.  (asset + liability)(Balance Sheet Trans.)

 

 

 

 

References

Godwin, A. (2010). Financial Accounting. In Financial Accounting (pp. 1-20). Cengage. doi:9781111219543

Godwin, A. (2010). Recording Accounting Transactions. In Financial Accounting (pp. 44-64). Cengage. doi:9781111219543

M.U.S.E. (2012, April 24). Fundamental Accounting Principles [A.I.U. Online]. Retrieved from https://mycampus.aiu-online.com/courses/ACCT205/u1/hub1/hub.html

 

 

 

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Both FedEx and UPS

Both FedEx and UPS have taken into consideration the Financial Accounting Standards Board (FASB) Pronouncement Statement No. 123, “Share-Based Payment” which was established in December, 2004. FAS 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values, beginning with the first interim or annual period after June 15, 2005, with early adoption encouraged. UPS will adopt FAS 123R in the third quarter of 2005, using the prospective method of adoption. The prospective method requires that compensation expense be recorded for all unvested stock options and restricted stock at the beginning of the first quarter of adoption of FAS 123R.  As stated in the UPS annual report, there will be no impact upon adoption, as UPS will already be expensing all unvested option and restricted stock awards. (UPS 2004)  FedEx plans to adopt this standard using the modified prospective method and not until 2007.According to the FedEx annual statement, the impact of the adoption of SFAS 123R cannot be predicted at this time because it will depend on levels of share-based payments granted in the future, as well as the assumptions and the fair value (FedEx 2005). FedEx also feels that if applied to the years ended May 31, 2005 and 2004, the impact of that standard would have materially approximated that of SFAS 123 to the accompanying consolidated financial statements, which will roughly reduce earnings per diluted share in 2005 and 2004 by $0.12 and $0.08.

UPS has also considered to use is FSP No. 109-2 “Accounting and Disclosure Guidance for the Foreign Earnings repatriation Provision within the American Jobs Creation Act of 2004.”   FSP 109-2 provides guidance under FAS 109 with respect to recording the potential impact of the repatriation provisions of the American Jobs Creation Act of 2004 on enterprises’ income tax expense and deferred tax liability. The Jobs Act was enacted on October 22, 2004. FSP 109-2 states that an enterprise is allowed time beyond the financial reporting period of enactment to evaluate the effect of the Jobs Act on its plan for  reinvestment or repatriation of foreign earnings for purposes of applying FAS 109. UPS have not yet completed their evaluation of the impact of the repatriation provisions of the Jobs Act. Accordingly, as provided for in FSP 109-2, has not adjusted their income tax provision or deferred tax liabilities to reflect the repatriation provisions of the Jobs Act.

On the other hand FedEx has considered consolidating two lease MD11 aircrafts worth $25 million under the provisions of Financial Accounting Standards Board Interpretation FIN No.46, “Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51.” According to the annual report, the debt requires interest at LIBOR plus a margin and is due in installments through March 30, 2007. FedEx issued other financial instruments in the normal course of business to support their operations. Letters of credit at May 31, 2005 were $580 million. The amount unused under our letter of credit facility totaled approximately $39 million at May 31, 2005. This facility expires in May of 2006. These instruments are generally required under certain U.S. self-insurance programs and are used in the normal course of international operations. The underlying liabilities insured by these instruments are reflected in the balance sheet, where applicable. Therefore, no additional liability is reflected for the letters of credit.

Both companies discussion and analysis of their financial condition and results of operations are based on their consolidated financial statements, which are prepared in accordance with accounting principles generally accepted in the U.S. FedEx and UPS’ consolidated financial statements, the amounts of assets, liabilities, revenue, and expenses reported in their financial statements are affected by estimates and judgments that are necessary to comply with generally accepted accounting principles. Both companies base their estimates on prior experience and other assumptions that they consider reasonable to their circumstances. Actual results could differ from their estimates, which would affect the related amounts reported in their financial statements. While estimates and judgments are applied in arriving at many reported amounts, they both believe that the following matters may involve a higher degree of judgment and complexity.

 

References:

FedEx Corporation (2005). Critical Accounting Polices and estimates. 2005 Annual Report. Pg.52-68, Retrieved on February 17, 2006, from http://www.fedex.com

United Parcel Service Inc. (2004). New Account Pronouncements. 2004 Annual Report. Pg.26-42, Retrieved on February 17, 2006, from http://www.ups.com

 

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In accounting there are several legal and ethical ramifications of all types of dishonesty. The specific dishonesty I speak of today is executive compensation with stock options. This is the act of back dating or forward dating the actual date that the stock option is granted. There is a very fine line between legal and ethical when it comes to this type of an action. The board of a company generally grants a stock option to their executives, although some executives take it upon themselves to summit a Form 4 that has a previous or future date depending on the present, past or future stock. This allows the particular executive to receive a lower stock price, another wards harvest the tax benefits at the money instead of in the money. This in return affects all shareholders and costs the company billions of dollars. When this is done fraudulently the ethical and legal ramifications are quite large.

 

Legal & Ethical Issues of Stock Options

James Clevenstine

ACC201: Principles of Financial Accounting (ABR1201C)

Instructor:  Stephen Russell

6th February, 2012

 

 

 

 

 

 

 

 

 

In accounting there are several legal and ethical ramifications of all types of dishonesty.  The specific dishonesty I speak of today is executive compensation with stock options.  This is the act of back dating or forward dating the actual date that the stock option is granted.  There is a very fine line between legal and ethical when it comes to this type of an action.  The board of a company generally grants a stock option to their executives, although some executives take it upon themselves to summit a Form 4 that has a previous or future date depending on the present, past or future stock.  This allows the particular executive to receive a lower stock price, another wards harvest the tax benefits at the money instead of in the money. This in return affects all shareholders and costs the company billions of dollars.  When this is done fraudulently the ethical and legal ramifications are quite large.

Legal issues are always there when something is done illegally or out of rule.  In this particular case there are many charges that can be brought against someone.  Charges such as securities fraud, a type of conspiracy, a form of mail fraud and also falsified books for the company can be assessed.  Next, as with anything dealing with money we see tax issues. With back and forward dating the executive has caused the company to fall into a different tax category and there is no qualifying for particular exemptions.  Third we look at the falsified financial reporting and disclosure issues.  These issues arise because a cheated book can cause lower reported income and can affect the balance sheet immensely.  Fourthly, the issues caused by backdating can include Incentive issues.  When back dating and forward dating the executive gains even if the stock is not on the rise or is falling rapidly.  The manipulation of stock options can be due to poor incentives given to executive’s etcetera. These types of operation and many more, in the long run, can cause much disruption and be very unethical.

An executive that causes this type of uproar also causes much loss of money to the shareholders themselves.  First we can clearly see that the difference in pay between two employees can be substantially different.  These executive employees are pulling the wool over the eyes of many stakeholders by lying about numbers and allowing them to lose more money.  This unethical issue is an integrity problem and is believed to be somewhat overcome when there are two or more executives to be one another’s accountability.  Also tax forms from the company are to be submitted within a short period of time to hopefully close the gap for falsified information.  Finally, one must continue to have the reliability to keep all records fair ethically and legally to continue a smooth form of operation and not have the legal and ethical ramifications against oneself or the particular company down the road.

Reference:

Narayanan, M. P. R., Schipani, C., & Seyhunj, H. (2006). The economic impact of backdating of executive stock options. (105 ed., Vol. 8, p. 66).

Edmonds, McNair, Olds,  Tsay. 2012. Survey of Accounting. New York. The McGraw-Hill Companies, Inc

 

 

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Discuss the advantages and disadvantages of sole proprietorships, partnerships, and corporations.

Aaron Gersh SID # 61516
BAM 110 August 3, 2012 Introduction to Accounting Unit 1 2) Discuss the advantages and disadvantages of sole proprietorships, partnerships, and corporations. Sole Proprietorship A sole proprietorship is owned and operated by an individual. In this model, the owner is the business and the business in turn owns the owner. The owner takes all of the risk/reward for both profits and losses of the business. All liability from the business operations also falls to the owner. Taxes incurred by the business are paid via personal income tax return. Ultimately, the sole proprietor makes the decision to “go it alone”, providing the opportunity to be his or her own boss and have ultimate control over their business. However, they have done so without many of the legal safety nets that exist in the partnership or corporate business models. Partnership A partnership operates in similar fashion to a sole proprietorship. However there are several individuals running the business. The partners share the risk reward of profits and/or losses. They have control and liability of the business and its operations. Taxes are paid by the partners on their personal tax returns, in proportion to their share of ownership. Similar to the sole proprietorship, the partners have the autonomy of only answering to each other, and of course their customers. One solid benefit of the partnership business model is the potential diversity of talents that can be brought in a team setting that may not exist with a sole proprietor going it alone.
Aaron Gersh SID # 61516
Corporation A corporation is established as a separate legal entity from its owners. A Board of Directors is selected and makes all operational decisions. The owners are legally protected from liabilities of the corporation, and the corporation pays corporate income taxes. Because the owners cede power of oversight to the Board of Directors in trade for the protection under the corporate laws and structure, the owner(s) also relinquish much of the direct control over the business model that exists within the sole proprietor and partnership models.

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Companies’ primary objectives are to be able to operate profitably, which many rely on annual reports by calculating the inventory and expenditures to restructure the business for a better year. The Topps Company, INC who specializes in confectionary and entertainment primary goal for 2006 was to adjust the business to enterprise profit while operating. The following will view if the company was able to do so by viewing the company’s inventory turnover ratio, average days it took to sell the inventory, if the company was being well managed and which cash flow method did Topps use to account for the inventory.

Topps Restructure for an Improved Year

ACC281: Accounting Concepts for Health Care Professionals

Mark Stricklett

January 9, 2011
Topps Restructure for an Improved Year

Companies’ primary objectives are to be able to operate profitably, which many rely on annual reports by calculating the inventory and expenditures to restructure the business for a better year.  The Topps Company, INC who specializes in confectionary and entertainment primary goal for 2006 was to adjust the business to enterprise profit while operating.  The following will view if the company was able to do so by viewing the company’s inventory turnover ratio, average days it took to sell the inventory, if the company was being well managed and which cash flow method did Topps use to account for the inventory.  In order to work out the figures the facts will be gathered from the company’s Consolidated Statements of Operations report (Edmonds, Appendix B pg. 15).

In order to complete the inventory turnover ratio, the first thing is to first define it.  The inventory turnover ratio is the cost of goods sold divided by the inventory (Edmonds, CH 4 pg. 151).  The inventory turnover ratio measures the quantity of periods the company sells its inventory throughout a fiscal year, the company is enhanced the higher the number is.  Topps cost of goods sold in 2005 was $198,054, in 2006 it was $189,200 and in 2005 the inventory was $36,781, in 2006 it was $32,936 (Edmonds, Appendix B pgs. 15-16).  By dividing 198,054/36,781, it shows that in 2005 the ratio is 5.74, and by diving 189,200/32,936 it shows that the ratio in 2006 is 5.38, showing the Topps had a better year in 2005.

To further analyze, the ratio configured can be used to determine the average number of days it took to sell the inventory.   The average number of days it takes to sell the inventory is calculated by dividing 365 days by the inventory turnover ratio (Edmonds, CH 4 pg. 151).  By dividing 365/5.74 which is the 2005 inventory turnover ratio we can see that the average number of days it took to sell the product in 2005 was 64 days.   Then calculating 2006 average number of days by dividing 365/5.38 showing it took an average of 68 days to sell the inventory.  The calculations show that in 2006 it took four more days then in 2005 to sell the product, representing that the management of inventory is getting worse.

The cash flow method that Topps used was the (FIFO) method which is the “First-in, First-out” method (Edmonds, Appendix B, pg. 20).  “It requires that the cost of items purchased first be assigned to cost of goods sold (Edmonds, CH 4 pg. 134).”  This is important for Topps since they want to sell their older products first and give their customers the best quality product, since the company is dealing with consumable products.

In conclusion Topps inventory performance was not well managed since it showed that it took four more days then the year before to sell the products, making income flow to be slower.  As for the company using the FIFO method it is better utilize since the company can show the cost of goods sold as when first purchased since the company uses raw materials to make their product.  By viewing the figures the company will be able to better anticipate for the following years by restructuring the management of inventory that leaves the company.

 

 

References

Edmonds, T. P., Olds, P. R., McNair, F. M., & Tsay, B.-Y. (2010). Appendix B. In Survey of

     Accounting (pp. 15-20) [Afterword]. New York: McGraw-Hill/Irwin.

Edmonds, T. P., Olds, P. R., McNair, F. M., & Tsay, B.-Y. (2010). Chapter 4. In Survey of

     Accounting (pp. 134-153) [Basic Section]. New York: McGraw-Hill/Irwin.

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What is a committed fund balance in a governmental funds balance sheet? How does it differ from a restricted fund balance?

DQ 1 What is a committed fund balance in a governmental funds balance sheet? How does it differ from a restricted fund balance?

Restrictions cannot be changed or lifted without the consent of the resource providers.

Fund balance should be reported as restricted when constraints placed on the use of resources are either:

– Externally imposed by creditors (such as debt covenants), grantors, contributors, or laws or regulations of other governments; or

– Imposed by law through constitutional provisions (Charters) or enabling legislation.

 

• Enabling legislation, authorizes a government to assess, levy, charge, or otherwise mandate payment of resources (from external resource providers) and includes a legally enforceable requirement that those resources be used only for the specific purposes stipulated in the legislation.

• Legal enforceability means that a government can be compelled by an external party-such as citizens, public interest groups, or the judiciary-to use resources created by enabling legislation only for the purposes specified by the legislation. Legal enforcement exists upon receipt of resources.

 

Committed Fund Balance

• Amounts that can only be used for specific purposes pursuant to constraints imposed by formal action of the government’s highest level – council or board of trustees – of decision-making authority

• Constraints are imposed by the government separate from the authorization to raise the revenue

• Committed resources/amounts are not considered to be legally enforceable as with restricted.

• Committed fund balance also includes contractual obligations to the extent that existing resources in the fund have been specifically committed (encumbered) for use in satisfying those contractual requirements.

• Constraint can be removed or changed only by taking the same highest level action

• Action to constrain resources should occur prior to end of year, though the exact amount may be determined subsequently

• Ability to transfer resources by court order is not the same action of the governing body that created the constraint.

Committed resources are generally unrestricted revenues authorized by state statute, ordinance, or resolution for which the government may commit the use of the revenue for a specific purpose. Examples of committed fund balance/resources include:

– Membership or entrance fees to a swimming pool to be used for swimming pool operations

– Recreation program fees to be used to recreation program expenses

– Cemetery charges for grave openings, burials, foundations, etc. To be used for cemetery operations.

Court fines, forfeitures, and costs cannot be committed by governing board as those

revenues are directed to specific funds or the general fund by State statute.

 

http://www.auditor.state.oh.us/conferences/lgoc/2010PostConference/resources/Resources/New%20Fund%20Balance%20Reporting%20GASB%2054.pdf

 

DQ 2 Both notes to the financial statements and required supplementary information (RSI) must be included in a government’s CAFR. Does it matter if information is provided in notes as opposed to RSI?

As with business financial statements, notes are considered an integral part of the basic financial statements of governments. Voluminous though they may be, notes are too important to be ignored. Per Statement No. 34, and consistent with existing standards, notes should include explanations of the accounting principles used in preparing the financial statements, schedules of changes in capital assets and long-term liabilities, schedules of future debt service requirements, disclosures about contingent liabilities, and other information that might affect users’ interpretation of the amounts reported in the statements themselves.  Required supplementary information (RSI) is information that the GASB requires to be presented with, but not as part of, the basic financial statements. It includes management’s discussion and analysis (MD&A), which is presented before the basic financial statements, as well as information (such as budgetary comparisons and pension schedules) that is presented after the notes. RSI has much in common with notes. Both include GASB-mandated schedules and data. However, while notes are considered part of the basic financial statements, RSI is not. Therefore, RSI may be subject to a lower level of auditor scrutiny than notes.

Granof, M. H. & Wardlow, P. S. (2011). Core concepts of government and not-for-profit accounting (2nd ed.). New York, NY: Wiley & Sons.

 

 

 

 

 

LT DQ 3 What are the main reporting options available to government colleges and universities? Do they have to prepare fund statements? Explain.

Public colleges and universities must adhere to the same GASB pronouncements as other types of governments. In light of the similarity between government and not-for-profit colleges and universities and the differences between GASB and FASB standards.

 

Accounting and reporting by colleges and universities pose especially thorny issues to the

GASB, owing to several considerations, some of which are that

1. Public and private institutions have much in common, so comparability is clearly desirable.

2. Most colleges and universities have a long tradition of using an accounting and reporting model that had been endorsed by the AICPA in an industry audit guide. However, some institutions, most notably community colleges, have used the standard government model.

3. Colleges and universities differ from other governments in how they are funded and managed.

 

The GASB decided that colleges and universities should be subject to the same reporting requirements as other special-purpose governments—but with a loophole.  The loophole is that most public institutions satisfy the GASB’s criteria for entities engaging exclusively in business-type activities. Public colleges and universities have a choice: they may elect to report as special-purpose entities that are engaging (1) only in business-type activities, (2) only in governmental activities, or (3) in both.

 

A special-purpose government that is engaging only in business-type activities need prepare only a statement of net assets, a statement of revenues and expenses, and a statement of cash flows (direct method). It need not present detailed fund statements, but it should include an MD&A, notes, and RSI. The statement of net assets and statement of revenues and expenses, of course, have to be prepared on a full accrual basis. They must include capital assets and depreciation.

 

Granof, M. H. & Wardlow, P. S. (2011). Core concepts of government and not-for-profit accounting (2nd ed.). New York, NY: Wiley & Sons.