Mastering Accounting: Your Assignment Savior Awaits!
payroll tests even though the payments are usually made from general cash disbursements. The withholdings of concern in these tests include taxes, 401(K) and other retirement savings, union dues, insurance, and payroll savings. Auditors must first determine the client’s requirements for submitting the payments, which can be determined by referencing such sources as tax laws, union contracts, and agreements with employees. Once auditors know the requirements, they can easily deter - mine whether the client has made timely payments at correct amounts by comparing the subsequent cash disbursement with the payroll records. Auditors often extend their payroll audit procedures if payroll significantly affects the valuation of inventory, or when the auditor is concerned about the possibility of material fraudulent payroll transactions, such as nonexistent employees or fraudu - lent hours. Relationship Between Payroll and Inventory Valuation When payroll is a sig - nificant portion of inventory, which is common for manufacturing and construction companies, the improper account classification of payroll can materially affect asset valuation for accounts such as work in process, finished goods, or construction in process. For example, the overhead charged to inventory at the balance sheet date can be overstated if the salaries of administrative personnel are inadvertently or inten - tionally charged to indirect manufacturing overhead. Similarly, the valuation of inventory is affected if the direct labor cost of individual employees is incorrectly charged to the wrong job or process. When jobs are billed on a cost-plus basis, revenue and the valuation of inventory are both affected by charging labor to incorrect jobs. When labor is a material part of inventory valuation, auditors should emphasize testing internal controls over proper classification of payroll transactions. Con sistency from period to period is essential for classification and can be tested by tracing job tickets or other evidence of an employee having worked on a job or process to the account ing records that affect inventory valuation. For example, if employees must account for all of their time each week by assigning it to individual jobs, a useful test is to trace the recorded hours of several employees to the related job-cost records to make sure each has been correctly recorded. It may also be desirable to trace from the job-cost records to time cards as a test for nonexistent payroll charges being included in inventory. Tests for Nonexistent Employees Issuing payroll disbursements to individuals who do not work for the company (nonexistent employees) often results from the con - tinuance of an employee on payroll after employment was terminated. Usually, the person committing this type of embezzlement is a payroll clerk, foreman, fellow employee, or perhaps the former employee. Under some systems, a foreman can clock in daily for an employee and approve the time card at the end of the time period. If the foreman also distributes paychecks or if payroll is deposited directly into employees’ accounts, considerable opportunity exists for embezzlement. To detect embezzlement, auditors may compare the names on cancelled checks or the account into which payroll has been deposited with time cards and other records for authorized signatures and reasonableness of the endorsements. It is also common to scan endorsements on cancelled checks for unusual or recurring second endorsements as an indication of a possible fraudulent check. Examining checks that are recorded as voided is also desirable to make sure that they have not been fraudulently used. To test for nonexistent employees, auditors can trace selected transactions recorded in the payroll journal to the human resources department to determine whether the employees were actually employed during the payroll period. If paid by check, the endorsement on the cancelled check written out to an employee can be compared with the authorized signature on the employee’s withholding authorization forms. A procedure that tests for proper handling of terminated employees is to select several files from the human resource records for employees who were terminated in the current year to determine whether each received termination pay consistent with company policy. Continuing payments to terminated employees can be tested by examining payroll records in the subsequent period to verify that the employee is no longer being paid. Naturally, this procedure is not effective if the human resources department is not informed of terminations. In some cases, the auditor may request a surprise payroll payoff. This is a pro - cedure in which all employees must pick up and sign their check or direct deposit payroll record in the presence of a supervisor and the auditor. Any checks that have not been claimed must be subject to an extensive investigation to determine whether an unclaimed check is fraudulent. Surprise payoff is often expensive but it may be the only likely means of detecting an embezzlement. Tests for Fraudulent Hours Fraudulent hours occur when an employee reports more time than was actually worked. Because of the lack of available evidence, it is usually difficult for an auditor to discover fraudulent hours. One procedure is to reconcile the total hours paid according to the payroll records with an inde pendent record of the hours worked, such as those often maintained by production control. Similarly, it may be possible to observe an employee clocking in more than one time card under a buddy approach. However, it is ordinarily easier for the client to prevent this type of embezzlement by adequate controls than for the auditor to detect it. 9. Altex Inc. manufactures two products: car wheels and truck wheels Altex Inc. manufactures two products: car wheels and truck wheels. To determine the amount of overhead to assign to each product line, the controller, Robert Hermann, has developed the following information. Car Truck Estimated wheels produced 40,000 10,000 Direct labor hours per wheel 1 3 Total estimated overhead costs for the two product lines are $770,000. Instructions (a) Compute the overhead cost assigned to the car wheels and truck wheels, assuming that direct labor hours is used to allocate overhead costs. (b) Hermann is not satisfied with the traditional method of allocating overhead because he believes that most of the over he costs relate to the truck wheel product line because of its complexity. He therefore develops the following three activity cost pools and related cost drivers to better understand these costs. Expected Use of Estimated Overhead Activity Cost Pools Cost Drivers Costs Setting up machines 1,000 setups $220,000 Assembling 70,000 labor hours 280,000 Inspection 1,200 inspections 270,000 Compute the activity-based overhead rates for these three cost pools. (c) Compute the cost that is assigned to the car wheels and truck wheels product lines using an activity-based costing system, given the following information. Expected Use of Cost Drivers per Product Car Truck Number of setups 200 800 Direct labor hours 40,000 30,000 Number of inspections 100 1,100 (d) What do you believe Hermann should do? 10. Imagine you have been asked to produce a prototype for the diary system discussed in the worked... Imagine you have been asked to produce a prototype for the diary system discussed in the worked exercise in Section 7.2.3. What would be an appropriate prototyping approach to enable you to test the design using the usability metrics specified, and why? 11. Journalize Vopat"s admission to the firm of Vopat and Sigma. Suzy Vopat has owned and operated a proprietorship for several years. On January 1, she decides to terminate this business and become a partner in the firm of Vopat and Sigma. Vopat"s investment in the partnership consists of $12,000 in cash, and the following assets of the proprietorship: accounts receivable $14,000 less allowance for doubtful accounts of $2,000, and equipment $30,000 less accumulated depreciation of $4,000. It is agreed that the allowance for doubtful accounts should be $3,000 for the partnership. The fair value of the equipment is $23,500. Instructions Journalize Vopat"s admission to the firm of Vopat and Sigma. 12. Hatch Company has two classes of capital stock Hatch Company has two classes of capital stock outstanding: 8%, $20 par preferred and $5 par common. At December 31, 2012, the following accounts were included in stockholders’ equity. Preferred Stock, 150,000 shares …………………………..$ 3,000,000 Common Stock, 2,000,000 shares …………………………10,000,000 Paid-in Capital in Excess of Par—Preferred Stock …………...200,000 Paid-in Capital in Excess of Par—Common Stock ………..27,000,000 Retained Earnings …………………………………………..4,500,000 The following transactions affected stockholders’ equity during 2013. Jan. 1 30,000 shares of preferred stock issued at $22 per share. Feb. 1 50,000 shares of common stock issued at $20 per share. June 1 2-for-1 stock split (par value reduced to $2.50). July 1 30,000 shares of common treasury stock purchased at $10 per share. Hatch uses the cost method. Sept. 15 10,000 shares of treasury stock reissued at $11 per share. Dec. 31 The preferred dividend is declared, and a common dividend of 50?c per share is declared. Dec. 31 Net income is $2,100,000. Instructions Prepare the stockholders’ equity section for Hatch Company at December 31, 2013. Show all supporting computations. 13. Yerke Company makes jungle gyms and tree houses for children. For jungle gyms, the price is $120... Yerke Company makes jungle gyms and tree houses for children. For jungle gyms, the price is $120 and variable expenses are $90 per unit. For tree houses, the price is $200 and variable expenses are $100. Total fixed expenses are $253,750. Last year, Yerke sold 12,000 gyms and 4,000 tree houses. onepixel.gif Refer to Figure 4-4. Now suppose that Yerke expects tree house demand to increase from 4,000 to 8,000 units. What is the sales revenue at break-even? a. $411,250 b. $665,000 c. $253,700 d. $140,000 e. $1,076,250 14. The Andrea S. Fault Seismometer Company is an all-equity-financed firm. It earns monthly, after... The Andrea S. Fault Seismometer Company is an all-equity-financed firm. It earns monthly, after taxes, $24,000 on sales of $880,000. The tax rate of the company is 40 percent. The company’s only product, “The Desktop Seismometer,” sells for $200, of which $150 is variable cost. a. What is the company’s monthly fixed operating cost? b. What is the monthly operating break-even point in units? In dollars? c. Compute and plot the degree of operating leverage (DOL) versus quantity produced and sold for the following possible monthly sales levels: 4,000 units; 4,400 units; 4,800 units; 5,200 units; 5,600 units; and 6,000 units. d. What does the graph that you drew (see Part (c)) – and especially the company’s DOL at its current sales figure – tell you about the sensitivity of the company’s operating profit to changes in sales? 15. In three years, assuming the competitive environment remains unchanged, how many units of Cent wi... In three years, assuming the competitive environment remains unchanged, how many units of Cent will Chester be selling in the Nano market segment? Select: 1 603 764 464 687 C59559 Annual Report Chester 2016 Income Statement (Product Name Cure Camp Cent Clack Na Na Sales $34,528 $41,382 $21,680 $21,154 $0 $0 Variable Costs: Direct Labor $4,864 $10,585 $4,405 $4,323 $0 $0 Direct Materia $12,077 $18,054 $9,173 $8,431 $0 $0 Inventory Carr $26 $25 $377 $341 $0 $0 Total Variable $16,967 $28,664 $13,954 $13,094 $0 $0 Contribution $17,561 $12,717 $7,726 $8,060 $0 $0 Margin Period Costs: $2,800 $2,607 $1,500 $1,387 Depreciation $0 $0 $928 $988 SG&A R&D $1,000 $857 $0 $0 $950 Promotions $950 $950 $950 $0 $0 Sales $1,000 $1,000 $600 $1,300 $0 $0 Admin $521 $625 $327 $319 $0 $0 $6,271 $6,109 $4,365 $4,813 Total Period $0 $0 $11,290 $6,608 $3,36 $3,247 Net Margin $0 $0 Na $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 Round: 0 Dec. 31, 2016 2016 Common Na Total Size $0 $118,744 100.0% $0 $24,177 20.4% $0 $47,734 40.2% $0 $769 0.6% $0 $72,680 61.2% $0 $46,064 38.8% $0 $8,293 7.0% $0 $3,772 3.2% $0 $3,800 3.2% $0 $3,900 3.3% $0 $1,793 1.5% $0 $21,558 18.2% $0 $24,506 20.6% 16. Garden Sales, Inc., sells garden supplies. Management is planning its cash needs for the second quar Garden Sales, Inc., sells garden supplies. Management is planning its cash needs for the second quarter. The company usually has to borrow money during this quarter to support peak sales of lawn care equipment, which occur during May. The following information has been assembled to assist in preparing a cash budget for the quarter: a. Budgeted monthly absorption costing income statements for AprilAc€?oJuly are: April May June July Sales $ 810,000 $ 950,000 $ 650,000 $ 560,000 Cost of goods sold 567,000 665,000 455,000 392,000 Gross margin 243,000 285,000 195,000 168,000 Selling and administrative expenses: Selling expense 95,000 114,000 76,000 56,000 Administrative expense 52,500 74,200 47,000 53,000 Total selling and administrative expenses 147,500 188,200 123,000 109,000 Net operating income $ 95,500 $ 96,800 $ 72,000 $ 59,000 Includes $37,000 of depreciation each month. b. Sales are 20% for cash and 80% on account. c. Sales on account are collected over a three-month period with 10% collected in the month of sale; 70% collected in the first month following the month of sale; and the remaining 20% collected in the second month following the month of sale. FebruaryAc€?cs sales totaled $305,000, and MarchAc€?cs sales totaled $320,000. d. Inventory purchases are paid for within 15 days. Therefore, 50% of a monthAc€?cs inventory purchases are paid for in the month of purchase. The remaining 50% is paid in the following month. Accounts payable at March 31 for inventory purchases during March total $146,300. e. Each monthAc€?cs ending inventory must equal 20% of the cost of the merchandise to be sold in the following month. The merchandise inventory at March 31 is $113,400. f. Dividends of $44,000 will be declared and paid in April. g. Land costing $56,000 will be purchased for cash in May. h. The cash balance at March 31 is $66,000; the company must maintain a cash balance of atleast $40,000 at the end of each month. i. The company has an agreement with a local bank that allows the company to borrow in increments of $1,000 at the beginning of each month, up to a total loan balance of $200,000. The interest rate on these loans is 1% per month and for simplicity we will assume that interest is not compounded. The company would, as far as it is able, repay the loan plus accumulated interest at the end of the quarter. Required: 1. Prepare a schedule of expected cash collections for April, May, and June, and for the quarter in total. 2. Prepare the following for merchandise inventory: a. A merchandise purchases budget for April, May, and June. b. A schedule of expected cash disbursements for merchandise purchases for April, May, and June, and for the quarter in total. 3. Prepare a cash budget for April, May, and June as well as in total for the quarter. (Cash deficiency, repayments and interest should be indicated by a minus sign.) 17. Theory of constraints, throughput margin, relevant costs. The Ma Theory of constraints, throughput margin, relevant costs. The Mayfield Corporation manufactures filing cabinets in two operations: machining and finishing. It provides the following information: Each cabinet sells for $72 and has direct material costs of $32 incurred at the start of the machining operation. Mayfield has no other variable costs. Mayfield can sell whatever output it produces. The following requirements refer only to the preceding data. There is no connection between the requirements. Required 1. Mayfield is considering using some modern jigs and tools in the finishing operation that would increase annual finishing output by 1,000 units. The annual cost of these jigs and tools is $30,000. Should Mayfield acquire these tools? Show your calculations. 2. The production manager of the machining department has submitted a proposal to do faster setups that would increase the annual capacity of the machining department by 10,000 units and would cost $5,000 per year. Should Mayfield implement the change? Show your calculations. 3. An outside contractor offers to do the finishing operation for 12,000 units at $10 per unit, double the $5 per unit that it costs Mayfield to do the finishing in-house. Should Mayfield accept the subcontractor’s offer? Show your calculations. 4. The Hunt Corporation offers to machine 4,000 units at $4 per unit, half the $8 per unit that it costs Mayfield to do the machining in-house. Should Mayfield accept Hunt’s offer? Show your calculations.