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Question: Arbortech, a designer, manufacturer, and marketer

Arbortech, a designer, manufacturer, and marketer of PC cards for computers, printers, telecommunications equipment, and equipment diagnostic systems, was the darling of Wall Street during Year 6. Its common stock price was the leading gainer for the year on the New York Stock Exchange. Its bubble burst during the third quarter of Year 7 when revelations about seriously misstated financial statements for prior years became known. This case seeks to identify signals of the financial shenanigans and to assess the likelihood of the firm’s future survival. Industry and Products Digital computing and processing have expanded now to include a broad array of mobile applications, including tablets, laptops, cell phones, digital cameras, and medical and automobile diagnostic equipment. A PC card is a rugged, lightweight, credit-card-sized device inserted into a dedicated slot in these products that provides programming, processing, and storage capabilities provided on hard drives in conventional desktop computers. The PC card has a high shock and vibration tolerance, low power consumption, a smaller size (relative to previous technologies), and a high access speed. At the time, the market for PC cards was one of the fastest growing segments of the electronics industry. Arbortech designs PC cards for four principal industries: (1) communications (routers, cell phones, and local-area networks), (2) transportation (vehicle diagnostics and navigation), (3) mobile computing (handheld data collection terminals and notebook computers), and (4) medical (blood gas analysis systems and defibrillators). The firm targets its engineering and product development, all of which it conducts in-house, to these four industry groups. It works closely with original equipment manufacturers (OEMs) to design PC cards that meet specific needs of products aimed at these four industries. Arbortech also conducts its manufacturing in-house, which allows it to respond quickly to changing requirements and schedules of these OEMs. The firm markets its products using its own salesforce. In Year 4, Arbortech was incorporated in Delaware. The firm made its initial public offering of common stock (1 million shares) on April 19, Year 4, at a price of $5.625 per share. Each common share issued included a redeemable common stock purchase warrant that permitted the holder to purchase one share of the firm’s common stock for $7.20. Prior to its initial public offering, Arbortech obtained a $550,000 bridge loan during Year 4, which it repaid with proceeds from the initial public offering. Holders of the stock purchase warrants exercised their options during Year 5 and Year 6. The firm obtained equity capital during Year 5 as a result of a private placement of its common stock at $5.83 a share. It issued additional shares to the public during Year 6 at $18 a share. Its stock price was $5.25 on June 30, Year 4; $22.625 on June 30, Year 5; $29.875 on June 30, Year 6; and $52 on December 31, Year 7. Arbortech maintained a line of credit throughout Year 4 to Year 6 with a major Boston bank to finance its accounts receivables and inventories. The borrowing was at the bank’s prime lending rate. Substantially all of the assets of the firm collateralized this borrowing. The firm’s chief executive officer, Daniel James, is also its major shareholder. The firm maintains an employment agreement with James under which it pays his compensation to a Swiss executive search firm, which then pays James. Beginning in Year 6, Arbortech made minority investments in five corporations engaged in technology development, four of which the firm accounts for using the cost method and one of which it accounts for using the equity method. Products developed by these companies could conceivably use PC cards. Arbortech also advanced amounts to some of these companies using interest-bearing notes. Exhibits 6.23 to 6.25 present Arbortech’s financial statements for the fiscal years ended June 30, Year 4, Year 5, and Year 6, based on the amounts originally reported for each year. Exhibit 6.26 presents selected financial statement ratios based on these reported amounts. Exhibits 6.23:
Arbortech, a designer, manufacturer, and marketer of PC cards for computers, printers, telecommunications equipment, and equipment diagnostic systems, was the darling of Wall Street during Year 6. Its common stock price was the leading gainer for the year on the New York Stock Exchange. Its bubble burst during the third quarter of Year 7 when revelations about seriously misstated financial statements for prior years became known. This case seeks to identify signals of the financial shenanigans and to assess the likelihood of the firm’s future survival. Industry and Products Digital computing and processing have expanded now to include a broad array of mobile applications, including tablets, laptops, cell phones, digital cameras, and medical and automobile diagnostic equipment. A PC card is a rugged, lightweight, credit-card-sized device inserted into a dedicated slot in these products that provides programming, processing, and storage capabilities provided on hard drives in conventional desktop computers. The PC card has a high shock and vibration tolerance, low power consumption, a smaller size (relative to previous technologies), and a high access speed. At the time, the market for PC cards was one of the fastest growing segments of the electronics industry. Arbortech designs PC cards for four principal industries: (1) communications (routers, cell phones, and local-area networks), (2) transportation (vehicle diagnostics and navigation), (3) mobile computing (handheld data collection terminals and notebook computers), and (4) medical (blood gas analysis systems and defibrillators). The firm targets its engineering and product development, all of which it conducts in-house, to these four industry groups. It works closely with original equipment manufacturers (OEMs) to design PC cards that meet specific needs of products aimed at these four industries. Arbortech also conducts its manufacturing in-house, which allows it to respond quickly to changing requirements and schedules of these OEMs. The firm markets its products using its own salesforce. In Year 4, Arbortech was incorporated in Delaware. The firm made its initial public offering of common stock (1 million shares) on April 19, Year 4, at a price of $5.625 per share. Each common share issued included a redeemable common stock purchase warrant that permitted the holder to purchase one share of the firm’s common stock for $7.20. Prior to its initial public offering, Arbortech obtained a $550,000 bridge loan during Year 4, which it repaid with proceeds from the initial public offering. Holders of the stock purchase warrants exercised their options during Year 5 and Year 6. The firm obtained equity capital during Year 5 as a result of a private placement of its common stock at $5.83 a share. It issued additional shares to the public during Year 6 at $18 a share. Its stock price was $5.25 on June 30, Year 4; $22.625 on June 30, Year 5; $29.875 on June 30, Year 6; and $52 on December 31, Year 7. Arbortech maintained a line of credit throughout Year 4 to Year 6 with a major Boston bank to finance its accounts receivables and inventories. The borrowing was at the bank’s prime lending rate. Substantially all of the assets of the firm collateralized this borrowing. The firm’s chief executive officer, Daniel James, is also its major shareholder. The firm maintains an employment agreement with James under which it pays his compensation to a Swiss executive search firm, which then pays James. Beginning in Year 6, Arbortech made minority investments in five corporations engaged in technology development, four of which the firm accounts for using the cost method and one of which it accounts for using the equity method. Products developed by these companies could conceivably use PC cards. Arbortech also advanced amounts to some of these companies using interest-bearing notes. Exhibits 6.23 to 6.25 present Arbortech’s financial statements for the fiscal years ended June 30, Year 4, Year 5, and Year 6, based on the amounts originally reported for each year. Exhibit 6.26 presents selected financial statement ratios based on these reported amounts. Exhibits 6.23: Exhibits 6.24: Exhibits 6.25: Exhibits 6.26: Financial Statement Irregularities On February 10, Year 7, after receiving information regarding various accounting and reporting irregularities, the board of directors fired James and relieved the chief financial officer of his duties. The board formed a special committee of outside directors to investigate the purported irregularities, obtaining the assistance of legal counsel and the firm’s independent accountants. On February 21, Year 7, the New York Stock Exchange announced the suspension of trading in the firm’s common stock. The stock was delisted on April 25, Year 7. On February 14, Year 7, the major Boston bank providing working capital financing notified the firm that the firm had defaulted on its line of credit agreement. Although this bank subsequently extended the line of credit through July 31, Year 7, it increased the interest rate significantly above prime. Arbortech decided to seek a new lender. The investigation by the board’s special committee revealed the following accounting and reporting irregularities: ● Recording of invalid sales transactions: The firm created fictitious purchase orders from regular customers using purchase order forms from legitimate purchase transactions. The firm then purportedly shipped empty PC card housings to these customers at bogus addresses. James apparently paid the accounts receivable underlying these sales with his personal funds. ● Recording of revenues from bill and hold transactions: The firm kept its books open beyond June 30 each year and recorded as sales of each year products that were shipped in July and should have been recorded as revenues of the next fiscal year. ● Manipulation of physical counts of inventory balances and inclusion of empty PC card housings in finished goods inventories. ● Failure to write down inventories adequately for product obsolescence. ● Inclusion of certain costs in property, plant, and equipment that the firm should have expensed in the period incurred. ● Inclusion in advances to other technology companies of amounts that represented prepaid license fees. The firm should have amortized these fees over the license period. n Failure to provide adequately for uncollectible amounts related to advances to other technology companies. ● Failure to write down or write off investments in other technology companies when their market value was less than the cost of the investment……

Arbortech, a designer, manufacturer, and marketer of PC cards for computers, printers, telecommunications equipment, and equipment diagnostic systems, was the darling of Wall Street during Year 6. Its common stock price was the leading gainer for the year on the New York Stock Exchange. Its bubble burst during the third quarter of Year 7 when revelations about seriously misstated financial statements for prior years became known. This case seeks to identify signals of the financial shenanigans and to assess the likelihood of the firm’s future survival. Industry and Products Digital computing and processing have expanded now to include a broad array of mobile applications, including tablets, laptops, cell phones, digital cameras, and medical and automobile diagnostic equipment. A PC card is a rugged, lightweight, credit-card-sized device inserted into a dedicated slot in these products that provides programming, processing, and storage capabilities provided on hard drives in conventional desktop computers. The PC card has a high shock and vibration tolerance, low power consumption, a smaller size (relative to previous technologies), and a high access speed. At the time, the market for PC cards was one of the fastest growing segments of the electronics industry. Arbortech designs PC cards for four principal industries: (1) communications (routers, cell phones, and local-area networks), (2) transportation (vehicle diagnostics and navigation), (3) mobile computing (handheld data collection terminals and notebook computers), and (4) medical (blood gas analysis systems and defibrillators). The firm targets its engineering and product development, all of which it conducts in-house, to these four industry groups. It works closely with original equipment manufacturers (OEMs) to design PC cards that meet specific needs of products aimed at these four industries. Arbortech also conducts its manufacturing in-house, which allows it to respond quickly to changing requirements and schedules of these OEMs. The firm markets its products using its own salesforce. In Year 4, Arbortech was incorporated in Delaware. The firm made its initial public offering of common stock (1 million shares) on April 19, Year 4, at a price of $5.625 per share. Each common share issued included a redeemable common stock purchase warrant that permitted the holder to purchase one share of the firm’s common stock for $7.20. Prior to its initial public offering, Arbortech obtained a $550,000 bridge loan during Year 4, which it repaid with proceeds from the initial public offering. Holders of the stock purchase warrants exercised their options during Year 5 and Year 6. The firm obtained equity capital during Year 5 as a result of a private placement of its common stock at $5.83 a share. It issued additional shares to the public during Year 6 at $18 a share. Its stock price was $5.25 on June 30, Year 4; $22.625 on June 30, Year 5; $29.875 on June 30, Year 6; and $52 on December 31, Year 7. Arbortech maintained a line of credit throughout Year 4 to Year 6 with a major Boston bank to finance its accounts receivables and inventories. The borrowing was at the bank’s prime lending rate. Substantially all of the assets of the firm collateralized this borrowing. The firm’s chief executive officer, Daniel James, is also its major shareholder. The firm maintains an employment agreement with James under which it pays his compensation to a Swiss executive search firm, which then pays James. Beginning in Year 6, Arbortech made minority investments in five corporations engaged in technology development, four of which the firm accounts for using the cost method and one of which it accounts for using the equity method. Products developed by these companies could conceivably use PC cards. Arbortech also advanced amounts to some of these companies using interest-bearing notes. Exhibits 6.23 to 6.25 present Arbortech’s financial statements for the fiscal years ended June 30, Year 4, Year 5, and Year 6, based on the amounts originally reported for each year. Exhibit 6.26 presents selected financial statement ratios based on these reported amounts. Exhibits 6.23: Exhibits 6.24: Exhibits 6.25: Exhibits 6.26: Financial Statement Irregularities On February 10, Year 7, after receiving information regarding various accounting and reporting irregularities, the board of directors fired James and relieved the chief financial officer of his duties. The board formed a special committee of outside directors to investigate the purported irregularities, obtaining the assistance of legal counsel and the firm’s independent accountants. On February 21, Year 7, the New York Stock Exchange announced the suspension of trading in the firm’s common stock. The stock was delisted on April 25, Year 7. On February 14, Year 7, the major Boston bank providing working capital financing notified the firm that the firm had defaulted on its line of credit agreement. Although this bank subsequently extended the line of credit through July 31, Year 7, it increased the interest rate significantly above prime. Arbortech decided to seek a new lender. The investigation by the board’s special committee revealed the following accounting and reporting irregularities: ● Recording of invalid sales transactions: The firm created fictitious purchase orders from regular customers using purchase order forms from legitimate purchase transactions. The firm then purportedly shipped empty PC card housings to these customers at bogus addresses. James apparently paid the accounts receivable underlying these sales with his personal funds. ● Recording of revenues from bill and hold transactions: The firm kept its books open beyond June 30 each year and recorded as sales of each year products that were shipped in July and should have been recorded as revenues of the next fiscal year. ● Manipulation of physical counts of inventory balances and inclusion of empty PC card housings in finished goods inventories. ● Failure to write down inventories adequately for product obsolescence. ● Inclusion of certain costs in property, plant, and equipment that the firm should have expensed in the period incurred. ● Inclusion in advances to other technology companies of amounts that represented prepaid license fees. The firm should have amortized these fees over the license period. n Failure to provide adequately for uncollectible amounts related to advances to other technology companies. ● Failure to write down or write off investments in other technology companies when their market value was less than the cost of the investment……
Exhibits 6.24:
Arbortech, a designer, manufacturer, and marketer of PC cards for computers, printers, telecommunications equipment, and equipment diagnostic systems, was the darling of Wall Street during Year 6. Its common stock price was the leading gainer for the year on the New York Stock Exchange. Its bubble burst during the third quarter of Year 7 when revelations about seriously misstated financial statements for prior years became known. This case seeks to identify signals of the financial shenanigans and to assess the likelihood of the firm’s future survival. Industry and Products Digital computing and processing have expanded now to include a broad array of mobile applications, including tablets, laptops, cell phones, digital cameras, and medical and automobile diagnostic equipment. A PC card is a rugged, lightweight, credit-card-sized device inserted into a dedicated slot in these products that provides programming, processing, and storage capabilities provided on hard drives in conventional desktop computers. The PC card has a high shock and vibration tolerance, low power consumption, a smaller size (relative to previous technologies), and a high access speed. At the time, the market for PC cards was one of the fastest growing segments of the electronics industry. Arbortech designs PC cards for four principal industries: (1) communications (routers, cell phones, and local-area networks), (2) transportation (vehicle diagnostics and navigation), (3) mobile computing (handheld data collection terminals and notebook computers), and (4) medical (blood gas analysis systems and defibrillators). The firm targets its engineering and product development, all of which it conducts in-house, to these four industry groups. It works closely with original equipment manufacturers (OEMs) to design PC cards that meet specific needs of products aimed at these four industries. Arbortech also conducts its manufacturing in-house, which allows it to respond quickly to changing requirements and schedules of these OEMs. The firm markets its products using its own salesforce. In Year 4, Arbortech was incorporated in Delaware. The firm made its initial public offering of common stock (1 million shares) on April 19, Year 4, at a price of $5.625 per share. Each common share issued included a redeemable common stock purchase warrant that permitted the holder to purchase one share of the firm’s common stock for $7.20. Prior to its initial public offering, Arbortech obtained a $550,000 bridge loan during Year 4, which it repaid with proceeds from the initial public offering. Holders of the stock purchase warrants exercised their options during Year 5 and Year 6. The firm obtained equity capital during Year 5 as a result of a private placement of its common stock at $5.83 a share. It issued additional shares to the public during Year 6 at $18 a share. Its stock price was $5.25 on June 30, Year 4; $22.625 on June 30, Year 5; $29.875 on June 30, Year 6; and $52 on December 31, Year 7. Arbortech maintained a line of credit throughout Year 4 to Year 6 with a major Boston bank to finance its accounts receivables and inventories. The borrowing was at the bank’s prime lending rate. Substantially all of the assets of the firm collateralized this borrowing. The firm’s chief executive officer, Daniel James, is also its major shareholder. The firm maintains an employment agreement with James under which it pays his compensation to a Swiss executive search firm, which then pays James. Beginning in Year 6, Arbortech made minority investments in five corporations engaged in technology development, four of which the firm accounts for using the cost method and one of which it accounts for using the equity method. Products developed by these companies could conceivably use PC cards. Arbortech also advanced amounts to some of these companies using interest-bearing notes. Exhibits 6.23 to 6.25 present Arbortech’s financial statements for the fiscal years ended June 30, Year 4, Year 5, and Year 6, based on the amounts originally reported for each year. Exhibit 6.26 presents selected financial statement ratios based on these reported amounts. Exhibits 6.23: Exhibits 6.24: Exhibits 6.25: Exhibits 6.26: Financial Statement Irregularities On February 10, Year 7, after receiving information regarding various accounting and reporting irregularities, the board of directors fired James and relieved the chief financial officer of his duties. The board formed a special committee of outside directors to investigate the purported irregularities, obtaining the assistance of legal counsel and the firm’s independent accountants. On February 21, Year 7, the New York Stock Exchange announced the suspension of trading in the firm’s common stock. The stock was delisted on April 25, Year 7. On February 14, Year 7, the major Boston bank providing working capital financing notified the firm that the firm had defaulted on its line of credit agreement. Although this bank subsequently extended the line of credit through July 31, Year 7, it increased the interest rate significantly above prime. Arbortech decided to seek a new lender. The investigation by the board’s special committee revealed the following accounting and reporting irregularities: ● Recording of invalid sales transactions: The firm created fictitious purchase orders from regular customers using purchase order forms from legitimate purchase transactions. The firm then purportedly shipped empty PC card housings to these customers at bogus addresses. James apparently paid the accounts receivable underlying these sales with his personal funds. ● Recording of revenues from bill and hold transactions: The firm kept its books open beyond June 30 each year and recorded as sales of each year products that were shipped in July and should have been recorded as revenues of the next fiscal year. ● Manipulation of physical counts of inventory balances and inclusion of empty PC card housings in finished goods inventories. ● Failure to write down inventories adequately for product obsolescence. ● Inclusion of certain costs in property, plant, and equipment that the firm should have expensed in the period incurred. ● Inclusion in advances to other technology companies of amounts that represented prepaid license fees. The firm should have amortized these fees over the license period. n Failure to provide adequately for uncollectible amounts related to advances to other technology companies. ● Failure to write down or write off investments in other technology companies when their market value was less than the cost of the investment……
Exhibits 6.25:
Arbortech, a designer, manufacturer, and marketer of PC cards for computers, printers, telecommunications equipment, and equipment diagnostic systems, was the darling of Wall Street during Year 6. Its common stock price was the leading gainer for the year on the New York Stock Exchange. Its bubble burst during the third quarter of Year 7 when revelations about seriously misstated financial statements for prior years became known. This case seeks to identify signals of the financial shenanigans and to assess the likelihood of the firm’s future survival. Industry and Products Digital computing and processing have expanded now to include a broad array of mobile applications, including tablets, laptops, cell phones, digital cameras, and medical and automobile diagnostic equipment. A PC card is a rugged, lightweight, credit-card-sized device inserted into a dedicated slot in these products that provides programming, processing, and storage capabilities provided on hard drives in conventional desktop computers. The PC card has a high shock and vibration tolerance, low power consumption, a smaller size (relative to previous technologies), and a high access speed. At the time, the market for PC cards was one of the fastest growing segments of the electronics industry. Arbortech designs PC cards for four principal industries: (1) communications (routers, cell phones, and local-area networks), (2) transportation (vehicle diagnostics and navigation), (3) mobile computing (handheld data collection terminals and notebook computers), and (4) medical (blood gas analysis systems and defibrillators). The firm targets its engineering and product development, all of which it conducts in-house, to these four industry groups. It works closely with original equipment manufacturers (OEMs) to design PC cards that meet specific needs of products aimed at these four industries. Arbortech also conducts its manufacturing in-house, which allows it to respond quickly to changing requirements and schedules of these OEMs. The firm markets its products using its own salesforce. In Year 4, Arbortech was incorporated in Delaware. The firm made its initial public offering of common stock (1 million shares) on April 19, Year 4, at a price of $5.625 per share. Each common share issued included a redeemable common stock purchase warrant that permitted the holder to purchase one share of the firm’s common stock for $7.20. Prior to its initial public offering, Arbortech obtained a $550,000 bridge loan during Year 4, which it repaid with proceeds from the initial public offering. Holders of the stock purchase warrants exercised their options during Year 5 and Year 6. The firm obtained equity capital during Year 5 as a result of a private placement of its common stock at $5.83 a share. It issued additional shares to the public during Year 6 at $18 a share. Its stock price was $5.25 on June 30, Year 4; $22.625 on June 30, Year 5; $29.875 on June 30, Year 6; and $52 on December 31, Year 7. Arbortech maintained a line of credit throughout Year 4 to Year 6 with a major Boston bank to finance its accounts receivables and inventories. The borrowing was at the bank’s prime lending rate. Substantially all of the assets of the firm collateralized this borrowing. The firm’s chief executive officer, Daniel James, is also its major shareholder. The firm maintains an employment agreement with James under which it pays his compensation to a Swiss executive search firm, which then pays James. Beginning in Year 6, Arbortech made minority investments in five corporations engaged in technology development, four of which the firm accounts for using the cost method and one of which it accounts for using the equity method. Products developed by these companies could conceivably use PC cards. Arbortech also advanced amounts to some of these companies using interest-bearing notes. Exhibits 6.23 to 6.25 present Arbortech’s financial statements for the fiscal years ended June 30, Year 4, Year 5, and Year 6, based on the amounts originally reported for each year. Exhibit 6.26 presents selected financial statement ratios based on these reported amounts. Exhibits 6.23: Exhibits 6.24: Exhibits 6.25: Exhibits 6.26: Financial Statement Irregularities On February 10, Year 7, after receiving information regarding various accounting and reporting irregularities, the board of directors fired James and relieved the chief financial officer of his duties. The board formed a special committee of outside directors to investigate the purported irregularities, obtaining the assistance of legal counsel and the firm’s independent accountants. On February 21, Year 7, the New York Stock Exchange announced the suspension of trading in the firm’s common stock. The stock was delisted on April 25, Year 7. On February 14, Year 7, the major Boston bank providing working capital financing notified the firm that the firm had defaulted on its line of credit agreement. Although this bank subsequently extended the line of credit through July 31, Year 7, it increased the interest rate significantly above prime. Arbortech decided to seek a new lender. The investigation by the board’s special committee revealed the following accounting and reporting irregularities: ● Recording of invalid sales transactions: The firm created fictitious purchase orders from regular customers using purchase order forms from legitimate purchase transactions. The firm then purportedly shipped empty PC card housings to these customers at bogus addresses. James apparently paid the accounts receivable underlying these sales with his personal funds. ● Recording of revenues from bill and hold transactions: The firm kept its books open beyond June 30 each year and recorded as sales of each year products that were shipped in July and should have been recorded as revenues of the next fiscal year. ● Manipulation of physical counts of inventory balances and inclusion of empty PC card housings in finished goods inventories. ● Failure to write down inventories adequately for product obsolescence. ● Inclusion of certain costs in property, plant, and equipment that the firm should have expensed in the period incurred. ● Inclusion in advances to other technology companies of amounts that represented prepaid license fees. The firm should have amortized these fees over the license period. n Failure to provide adequately for uncollectible amounts related to advances to other technology companies. ● Failure to write down or write off investments in other technology companies when their market value was less than the cost of the investment……

Arbortech, a designer, manufacturer, and marketer of PC cards for computers, printers, telecommunications equipment, and equipment diagnostic systems, was the darling of Wall Street during Year 6. Its common stock price was the leading gainer for the year on the New York Stock Exchange. Its bubble burst during the third quarter of Year 7 when revelations about seriously misstated financial statements for prior years became known. This case seeks to identify signals of the financial shenanigans and to assess the likelihood of the firm’s future survival. Industry and Products Digital computing and processing have expanded now to include a broad array of mobile applications, including tablets, laptops, cell phones, digital cameras, and medical and automobile diagnostic equipment. A PC card is a rugged, lightweight, credit-card-sized device inserted into a dedicated slot in these products that provides programming, processing, and storage capabilities provided on hard drives in conventional desktop computers. The PC card has a high shock and vibration tolerance, low power consumption, a smaller size (relative to previous technologies), and a high access speed. At the time, the market for PC cards was one of the fastest growing segments of the electronics industry. Arbortech designs PC cards for four principal industries: (1) communications (routers, cell phones, and local-area networks), (2) transportation (vehicle diagnostics and navigation), (3) mobile computing (handheld data collection terminals and notebook computers), and (4) medical (blood gas analysis systems and defibrillators). The firm targets its engineering and product development, all of which it conducts in-house, to these four industry groups. It works closely with original equipment manufacturers (OEMs) to design PC cards that meet specific needs of products aimed at these four industries. Arbortech also conducts its manufacturing in-house, which allows it to respond quickly to changing requirements and schedules of these OEMs. The firm markets its products using its own salesforce. In Year 4, Arbortech was incorporated in Delaware. The firm made its initial public offering of common stock (1 million shares) on April 19, Year 4, at a price of $5.625 per share. Each common share issued included a redeemable common stock purchase warrant that permitted the holder to purchase one share of the firm’s common stock for $7.20. Prior to its initial public offering, Arbortech obtained a $550,000 bridge loan during Year 4, which it repaid with proceeds from the initial public offering. Holders of the stock purchase warrants exercised their options during Year 5 and Year 6. The firm obtained equity capital during Year 5 as a result of a private placement of its common stock at $5.83 a share. It issued additional shares to the public during Year 6 at $18 a share. Its stock price was $5.25 on June 30, Year 4; $22.625 on June 30, Year 5; $29.875 on June 30, Year 6; and $52 on December 31, Year 7. Arbortech maintained a line of credit throughout Year 4 to Year 6 with a major Boston bank to finance its accounts receivables and inventories. The borrowing was at the bank’s prime lending rate. Substantially all of the assets of the firm collateralized this borrowing. The firm’s chief executive officer, Daniel James, is also its major shareholder. The firm maintains an employment agreement with James under which it pays his compensation to a Swiss executive search firm, which then pays James. Beginning in Year 6, Arbortech made minority investments in five corporations engaged in technology development, four of which the firm accounts for using the cost method and one of which it accounts for using the equity method. Products developed by these companies could conceivably use PC cards. Arbortech also advanced amounts to some of these companies using interest-bearing notes. Exhibits 6.23 to 6.25 present Arbortech’s financial statements for the fiscal years ended June 30, Year 4, Year 5, and Year 6, based on the amounts originally reported for each year. Exhibit 6.26 presents selected financial statement ratios based on these reported amounts. Exhibits 6.23: Exhibits 6.24: Exhibits 6.25: Exhibits 6.26: Financial Statement Irregularities On February 10, Year 7, after receiving information regarding various accounting and reporting irregularities, the board of directors fired James and relieved the chief financial officer of his duties. The board formed a special committee of outside directors to investigate the purported irregularities, obtaining the assistance of legal counsel and the firm’s independent accountants. On February 21, Year 7, the New York Stock Exchange announced the suspension of trading in the firm’s common stock. The stock was delisted on April 25, Year 7. On February 14, Year 7, the major Boston bank providing working capital financing notified the firm that the firm had defaulted on its line of credit agreement. Although this bank subsequently extended the line of credit through July 31, Year 7, it increased the interest rate significantly above prime. Arbortech decided to seek a new lender. The investigation by the board’s special committee revealed the following accounting and reporting irregularities: ● Recording of invalid sales transactions: The firm created fictitious purchase orders from regular customers using purchase order forms from legitimate purchase transactions. The firm then purportedly shipped empty PC card housings to these customers at bogus addresses. James apparently paid the accounts receivable underlying these sales with his personal funds. ● Recording of revenues from bill and hold transactions: The firm kept its books open beyond June 30 each year and recorded as sales of each year products that were shipped in July and should have been recorded as revenues of the next fiscal year. ● Manipulation of physical counts of inventory balances and inclusion of empty PC card housings in finished goods inventories. ● Failure to write down inventories adequately for product obsolescence. ● Inclusion of certain costs in property, plant, and equipment that the firm should have expensed in the period incurred. ● Inclusion in advances to other technology companies of amounts that represented prepaid license fees. The firm should have amortized these fees over the license period. n Failure to provide adequately for uncollectible amounts related to advances to other technology companies. ● Failure to write down or write off investments in other technology companies when their market value was less than the cost of the investment……
Exhibits 6.26:
Arbortech, a designer, manufacturer, and marketer of PC cards for computers, printers, telecommunications equipment, and equipment diagnostic systems, was the darling of Wall Street during Year 6. Its common stock price was the leading gainer for the year on the New York Stock Exchange. Its bubble burst during the third quarter of Year 7 when revelations about seriously misstated financial statements for prior years became known. This case seeks to identify signals of the financial shenanigans and to assess the likelihood of the firm’s future survival. Industry and Products Digital computing and processing have expanded now to include a broad array of mobile applications, including tablets, laptops, cell phones, digital cameras, and medical and automobile diagnostic equipment. A PC card is a rugged, lightweight, credit-card-sized device inserted into a dedicated slot in these products that provides programming, processing, and storage capabilities provided on hard drives in conventional desktop computers. The PC card has a high shock and vibration tolerance, low power consumption, a smaller size (relative to previous technologies), and a high access speed. At the time, the market for PC cards was one of the fastest growing segments of the electronics industry. Arbortech designs PC cards for four principal industries: (1) communications (routers, cell phones, and local-area networks), (2) transportation (vehicle diagnostics and navigation), (3) mobile computing (handheld data collection terminals and notebook computers), and (4) medical (blood gas analysis systems and defibrillators). The firm targets its engineering and product development, all of which it conducts in-house, to these four industry groups. It works closely with original equipment manufacturers (OEMs) to design PC cards that meet specific needs of products aimed at these four industries. Arbortech also conducts its manufacturing in-house, which allows it to respond quickly to changing requirements and schedules of these OEMs. The firm markets its products using its own salesforce. In Year 4, Arbortech was incorporated in Delaware. The firm made its initial public offering of common stock (1 million shares) on April 19, Year 4, at a price of $5.625 per share. Each common share issued included a redeemable common stock purchase warrant that permitted the holder to purchase one share of the firm’s common stock for $7.20. Prior to its initial public offering, Arbortech obtained a $550,000 bridge loan during Year 4, which it repaid with proceeds from the initial public offering. Holders of the stock purchase warrants exercised their options during Year 5 and Year 6. The firm obtained equity capital during Year 5 as a result of a private placement of its common stock at $5.83 a share. It issued additional shares to the public during Year 6 at $18 a share. Its stock price was $5.25 on June 30, Year 4; $22.625 on June 30, Year 5; $29.875 on June 30, Year 6; and $52 on December 31, Year 7. Arbortech maintained a line of credit throughout Year 4 to Year 6 with a major Boston bank to finance its accounts receivables and inventories. The borrowing was at the bank’s prime lending rate. Substantially all of the assets of the firm collateralized this borrowing. The firm’s chief executive officer, Daniel James, is also its major shareholder. The firm maintains an employment agreement with James under which it pays his compensation to a Swiss executive search firm, which then pays James. Beginning in Year 6, Arbortech made minority investments in five corporations engaged in technology development, four of which the firm accounts for using the cost method and one of which it accounts for using the equity method. Products developed by these companies could conceivably use PC cards. Arbortech also advanced amounts to some of these companies using interest-bearing notes. Exhibits 6.23 to 6.25 present Arbortech’s financial statements for the fiscal years ended June 30, Year 4, Year 5, and Year 6, based on the amounts originally reported for each year. Exhibit 6.26 presents selected financial statement ratios based on these reported amounts. Exhibits 6.23: Exhibits 6.24: Exhibits 6.25: Exhibits 6.26: Financial Statement Irregularities On February 10, Year 7, after receiving information regarding various accounting and reporting irregularities, the board of directors fired James and relieved the chief financial officer of his duties. The board formed a special committee of outside directors to investigate the purported irregularities, obtaining the assistance of legal counsel and the firm’s independent accountants. On February 21, Year 7, the New York Stock Exchange announced the suspension of trading in the firm’s common stock. The stock was delisted on April 25, Year 7. On February 14, Year 7, the major Boston bank providing working capital financing notified the firm that the firm had defaulted on its line of credit agreement. Although this bank subsequently extended the line of credit through July 31, Year 7, it increased the interest rate significantly above prime. Arbortech decided to seek a new lender. The investigation by the board’s special committee revealed the following accounting and reporting irregularities: ● Recording of invalid sales transactions: The firm created fictitious purchase orders from regular customers using purchase order forms from legitimate purchase transactions. The firm then purportedly shipped empty PC card housings to these customers at bogus addresses. James apparently paid the accounts receivable underlying these sales with his personal funds. ● Recording of revenues from bill and hold transactions: The firm kept its books open beyond June 30 each year and recorded as sales of each year products that were shipped in July and should have been recorded as revenues of the next fiscal year. ● Manipulation of physical counts of inventory balances and inclusion of empty PC card housings in finished goods inventories. ● Failure to write down inventories adequately for product obsolescence. ● Inclusion of certain costs in property, plant, and equipment that the firm should have expensed in the period incurred. ● Inclusion in advances to other technology companies of amounts that represented prepaid license fees. The firm should have amortized these fees over the license period. n Failure to provide adequately for uncollectible amounts related to advances to other technology companies. ● Failure to write down or write off investments in other technology companies when their market value was less than the cost of the investment……

Arbortech, a designer, manufacturer, and marketer of PC cards for computers, printers, telecommunications equipment, and equipment diagnostic systems, was the darling of Wall Street during Year 6. Its common stock price was the leading gainer for the year on the New York Stock Exchange. Its bubble burst during the third quarter of Year 7 when revelations about seriously misstated financial statements for prior years became known. This case seeks to identify signals of the financial shenanigans and to assess the likelihood of the firm’s future survival. Industry and Products Digital computing and processing have expanded now to include a broad array of mobile applications, including tablets, laptops, cell phones, digital cameras, and medical and automobile diagnostic equipment. A PC card is a rugged, lightweight, credit-card-sized device inserted into a dedicated slot in these products that provides programming, processing, and storage capabilities provided on hard drives in conventional desktop computers. The PC card has a high shock and vibration tolerance, low power consumption, a smaller size (relative to previous technologies), and a high access speed. At the time, the market for PC cards was one of the fastest growing segments of the electronics industry. Arbortech designs PC cards for four principal industries: (1) communications (routers, cell phones, and local-area networks), (2) transportation (vehicle diagnostics and navigation), (3) mobile computing (handheld data collection terminals and notebook computers), and (4) medical (blood gas analysis systems and defibrillators). The firm targets its engineering and product development, all of which it conducts in-house, to these four industry groups. It works closely with original equipment manufacturers (OEMs) to design PC cards that meet specific needs of products aimed at these four industries. Arbortech also conducts its manufacturing in-house, which allows it to respond quickly to changing requirements and schedules of these OEMs. The firm markets its products using its own salesforce. In Year 4, Arbortech was incorporated in Delaware. The firm made its initial public offering of common stock (1 million shares) on April 19, Year 4, at a price of $5.625 per share. Each common share issued included a redeemable common stock purchase warrant that permitted the holder to purchase one share of the firm’s common stock for $7.20. Prior to its initial public offering, Arbortech obtained a $550,000 bridge loan during Year 4, which it repaid with proceeds from the initial public offering. Holders of the stock purchase warrants exercised their options during Year 5 and Year 6. The firm obtained equity capital during Year 5 as a result of a private placement of its common stock at $5.83 a share. It issued additional shares to the public during Year 6 at $18 a share. Its stock price was $5.25 on June 30, Year 4; $22.625 on June 30, Year 5; $29.875 on June 30, Year 6; and $52 on December 31, Year 7. Arbortech maintained a line of credit throughout Year 4 to Year 6 with a major Boston bank to finance its accounts receivables and inventories. The borrowing was at the bank’s prime lending rate. Substantially all of the assets of the firm collateralized this borrowing. The firm’s chief executive officer, Daniel James, is also its major shareholder. The firm maintains an employment agreement with James under which it pays his compensation to a Swiss executive search firm, which then pays James. Beginning in Year 6, Arbortech made minority investments in five corporations engaged in technology development, four of which the firm accounts for using the cost method and one of which it accounts for using the equity method. Products developed by these companies could conceivably use PC cards. Arbortech also advanced amounts to some of these companies using interest-bearing notes. Exhibits 6.23 to 6.25 present Arbortech’s financial statements for the fiscal years ended June 30, Year 4, Year 5, and Year 6, based on the amounts originally reported for each year. Exhibit 6.26 presents selected financial statement ratios based on these reported amounts. Exhibits 6.23: Exhibits 6.24: Exhibits 6.25: Exhibits 6.26: Financial Statement Irregularities On February 10, Year 7, after receiving information regarding various accounting and reporting irregularities, the board of directors fired James and relieved the chief financial officer of his duties. The board formed a special committee of outside directors to investigate the purported irregularities, obtaining the assistance of legal counsel and the firm’s independent accountants. On February 21, Year 7, the New York Stock Exchange announced the suspension of trading in the firm’s common stock. The stock was delisted on April 25, Year 7. On February 14, Year 7, the major Boston bank providing working capital financing notified the firm that the firm had defaulted on its line of credit agreement. Although this bank subsequently extended the line of credit through July 31, Year 7, it increased the interest rate significantly above prime. Arbortech decided to seek a new lender. The investigation by the board’s special committee revealed the following accounting and reporting irregularities: ● Recording of invalid sales transactions: The firm created fictitious purchase orders from regular customers using purchase order forms from legitimate purchase transactions. The firm then purportedly shipped empty PC card housings to these customers at bogus addresses. James apparently paid the accounts receivable underlying these sales with his personal funds. ● Recording of revenues from bill and hold transactions: The firm kept its books open beyond June 30 each year and recorded as sales of each year products that were shipped in July and should have been recorded as revenues of the next fiscal year. ● Manipulation of physical counts of inventory balances and inclusion of empty PC card housings in finished goods inventories. ● Failure to write down inventories adequately for product obsolescence. ● Inclusion of certain costs in property, plant, and equipment that the firm should have expensed in the period incurred. ● Inclusion in advances to other technology companies of amounts that represented prepaid license fees. The firm should have amortized these fees over the license period. n Failure to provide adequately for uncollectible amounts related to advances to other technology companies. ● Failure to write down or write off investments in other technology companies when their market value was less than the cost of the investment……
Financial Statement Irregularities On February 10, Year 7, after receiving information regarding various accounting and reporting irregularities, the board of directors fired James and relieved the chief financial officer of his duties. The board formed a special committee of outside directors to investigate the purported irregularities, obtaining the assistance of legal counsel and the firm’s independent accountants. On February 21, Year 7, the New York Stock Exchange announced the suspension of trading in the firm’s common stock. The stock was delisted on April 25, Year 7. On February 14, Year 7, the major Boston bank providing working capital financing notified the firm that the firm had defaulted on its line of credit agreement. Although this bank subsequently extended the line of credit through July 31, Year 7, it increased the interest rate significantly above prime. Arbortech decided to seek a new lender. The investigation by the board’s special committee revealed the following accounting and reporting irregularities: ● Recording of invalid sales transactions: The firm created fictitious purchase orders from regular customers using purchase order forms from legitimate purchase transactions. The firm then purportedly shipped empty PC card housings to these customers at bogus addresses. James apparently paid the accounts receivable underlying these sales with his personal funds. ● Recording of revenues from bill and hold transactions: The firm kept its books open beyond June 30 each year and recorded as sales of each year products that were shipped in July and should have been recorded as revenues of the next fiscal year. ● Manipulation of physical counts of inventory balances and inclusion of empty PC card housings in finished goods inventories. ● Failure to write down inventories adequately for product obsolescence. ● Inclusion of certain costs in property, plant, and equipment that the firm should have expensed in the period incurred. ● Inclusion in advances to other technology companies of amounts that represented prepaid license fees. The firm should have amortized these fees over the license period. n Failure to provide adequately for uncollectible amounts related to advances to other technology companies. ● Failure to write down or write off investments in other technology companies when their market value was less than the cost of the investment……





Transcribed Image Text:

Exhibit 6.23 Arbortech Balance Sheets as Originally Reported (amounts in thousands) (Case 6.3) Year 6 Year 5 Year 4 Year 3 ASSETS Cash $ 6,182 $ 970 $ 981 Marketable securities 4,932 - Accounts receivable 12,592 3,932 1,662 730 Inventories 18,229 8,609 3,371 2,257 234 Other current assets 6,256 1,932 306 Total current assets $48,191 $15,443 $6,320 $3,221 Investments in securities 2,472 Property, plant, and equipment, net 4,698 1,323 669 208 Other assets 421 1,433 601 666 Total Assets $55,782 $18,199 $7,590 $4,095 LIABILITIES AND SHAREHOLDERS' EQUITY $ 3,494 $ 3,571 $ 616 Accounts payable Notes payable Current portion of long-term debt $1,590 4,684 1,153 980 336 103 Other current liabilities 614 765 516 457 Total current liabilities $ 9,128 $ 5,592 $1,132 $3,027 Exhibit 6.23 (Continued) Long-term debt Deferred tax liability 367 162 242 $ 9,737 39 24 Total Liabilities $ 5,754 $1,171 $3,051 Common stock 165 %24 110 $ 90 $ 60 Additional paid-in capital Retained earnings Total Shareholders' EQUITY Total Liabilities and Shareholders' EQUITY 38,802 10,159 2,176 5,027 146 7,078 1,302 838 $46,045 $12,445 $6,419 $1,044 $55,782 $18,199 $7,590 $4,095 Exhibit 6.24 Arbortech Income Statements as Originally Reported (amounts in thousands) (Case 6.3) Year 6 Year 5 Year 4 Sales $ 37,848 $12,445 $ 8,213 Other revenues 353 10 9 Cost of goods sold Selling and administrative Research and development (23,636) (4,591) (1,434) (370) (3,268) $ 4,902 (6,833) (3,366) (752) (74) (4,523) (1,889) (567) (495)* (284) $ 464 Interest Income taxes (556) net Income 874 "Includes the cost of factoring receivables and interest on bridge financing obtained and repaid during the year. Exhibit 6.25 Arbortech Statements of Cash Flows as Originally Reported (amounts in thousands) (Case 6.3) Year 6 Year 5 Year 4 OPERATIONS net income $ 4,902 $ 874 $ 464 Depreciation 645 337 193 Other addbacks and subtractions, net Working capital provided by operations 219 gyright 2018 Cqngage Learning. All Rights Reserved. May not byco anned, or duplic, iole or in part. WGrozo203 $ 876 1,159 (5) S6,706 $ 1,206 Exhibit 6.25 (Continued) (Increase) Decrease in accounts receivables (Increase) Decrease in inventories (Increase) Decrease in other current assets Increase (Decrease) in accounts payable Increase (Decrease) in other current liabilities Cash Flow from Operations (8,940) (2,433) (5,238) (2,406) 2,955 (981) (1,115) (71) (974) (9,620) (836) (76) (152) 251 87 S(12,918) $(5,665) $(2,178) INVESTING $ 3,981 (3,899) (11,186) Sale of investments Acquisition of fixed assets Acquisitions of investments Other investing transactions Cash Flow from Investing (862) (525) (2,800) S(13,904) $ (862) $ (525) FINANCING $ 1,153 $ 550 Increase in short-term borrowing Increase in long-term borrowing $ 3,531 691 320 Increase in common stock 28,064 5,099 4,663 Decrease in short-term borrowing Decrease in long-term borrowing Cash Flow from Financing (1,529) (252) $ 32,034 $ 5,212 (56) $ 6,516 $ (11) $ 3,684 net Change in Cash Cash-Beginning of year $ 981 970 981 Cash-End of Year $ 6,182 $970 $ 981 Exhibit 6.26 Arbortech Financial Ratios Based on Originally Reported Amounts (Case 6.3) Year 6 Year 5 Year 4 Profit margin for ROA 13.6% 7.4% 9.6% Assets turnover 1.0 1.0 1.4 ROA 13.9% 7.2% 13.5% Profit margin for ROCE Capital structure leverage 13.0% 7.0% 5.6% 1.3 1.4 1.6 ROCE 16.8% 9.3% 12.4% Cost of goods sold/Sales Selling and administrative/Sales Research and development/Sales Income tax expense (excluding tax effects of interest expense)/Sales All Rights Reserved. May not be copled, scanne9.0%plicated, in whole or4:7% WCN 02-200-203 5.5% 62.4% 54.9% 55.1% 12.1% 27.0% 23.0% 3.8% 6.0% 6.9% Exhibit 6.26 (Continued) Accounts receivable turnover 4.6 4.4 6.9 Inventory turnover Fixed assets turnover 1.8 1.1 1.6 12.6 12.5 18.7 Current ratio 5.3 2.8 5.6 Quick ratio 2.6 0.9 2.3 Days accounts payable Operating cash flow to current liabilities ratio Long-term debt to long-term capital ratio 39 63 71 (1.755) (1.685) (1.047) 0.008 0.013 Liabilities to assets ratio 0.175 0.316 0.154 (1.636) Operating cash flow to total liabilities ratio Interest coverage ratio (1.668) (1.032) 23.1 20.3 2.5

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> Assume that on December 31, 2017, The Coca-Cola Company borrows money from a consortium of banks by issuing a $900 million promissory note. The note matures in four years on December 31, 2021, and pays 3% interest once a year on December 31. The consorti

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> Checkpoint Systems, a leading provider of source tagging, handheld labeling systems, retail merchandising systems, and bar-code labeling systems, stated the following in a press release: GAAP reported net loss for the fourth quarter of 2004 was $29.3 mil

> Rock of Ages, Inc., a large North American integrated granite quarrier, manufacturer, and retailer of finished granite memorials, reported a net loss for 2004 of $3.2 million. In 2004, the firm reported a pretax litigation settlement loss of $6.5 million

> Valero Energy, a petroleum company, reported net income (amounts in millions) of $1,803.8 on revenues of $54,618.6 for Year 4. Interest expense totaled $359.7, and preferred dividends totaled $12.5. Average total assets for Year 4 were $17,527.9. The inc

> Exhibits 1.26–1.28 of Integrative Case 1.1 (Chapter 1) present the financial statements for Walmart for 2012 to 2015. In addition, the website for this text contains Walmart’s December 31, 2015, Form 10-K. You should r

> Firms often provide supplemental disclosures that report and discuss income figures that do not necessarily equal bottom-line net income from the income statement. For example, in Twitter’s initial public offering filings with the SEC, the company report

> iRobot designs and manufactures robots for consumer, commercial, and military use. For the fiscal year ended January 2, 2016, the company reported the following on its balance sheet and income statement (amounts in thousands): ● Accounts receivable, net

> ‘‘The ordering of the three sections of the statement of cash flows is ‘backwards’ for start-up firms, but it is more appropriate for businesses once they are up and running.’’ Explain.

> The chapter demonstrates how to prepare a statement of cash flows from information on the balance sheet and income statement. If this is possible, why are managers required to provide a statement of cash flows?

> A firm’s income tax return shows income taxes for 2017 of $35,000. The firm reports deferred tax assets before any valuation allowance of $24,600 at the beginning of 2017 and $27,200 at the end of 2017. It reports deferred tax liabilities of $18,900 at t

> A firm’s income tax return shows $50,000 of income taxes owed for 2017. For financial reporting, the firm reports deferred tax assets of $42,900 at the beginning of 2017 and $38,700 at the end of 2017. It reports deferred tax liabilities of $28,600 at th

> Apply the economic attributes framework discussed in the chapter to the specialty retailing apparel industry, which includes such firms as Gap, Limited Brands, and Abercrombie & Fitch.

> Aer Lingus is an international airline based in Ireland. Exhibit 3.24 provides the statement of cash flows for Year 1 and Year 2, which includes a footnote from the financial statements. Year 2 was characterized by weakening consumer demand for air trave

> The Apollo Group is one of the largest providers of private education and runs numerous programs and services, including the University of Phoenix. Exhibit 3.23 provides statements of cash flows for 2010 through 2012. REQUIRED: Discuss the relations bet

> Montgomery Ward operates a retail department store chain. It filed for bankruptcy during the first quarter of Year 12. Exhibit 3.22 presents a statement of cash flows for Montgomery Ward for Year 7 to Year 11. Exhibit 3.22: The firm acquired Lechmere,

> Douglas C. Mather, founder, chair, and chief executive of Fly-by-Night International Group (FBN), lived the fast-paced, risk-seeking life that he tried to inject into his company. Flying the company’s Learjets, he logged 28 world speed

> The first case at the end of this chapter and numerous subsequent chapters is a series of integrative cases involving Wal-Mart Stores, Inc. (Walmart). The series of cases applies the concepts and analytical tools discussed in each chapter to Walmart&acir

> Jeff, a single individual, receives $5,000 interest income from Treasury bills and $18,000 in Social Security benefits. What is Jeff’s gross income?

> Julie wins $15 million in the lottery payable over 30 years. In years 1 through 4, she receives annual installments of $500,000. At the beginning of year 5, Julie sells her right to receive the remaining 26 payments to a third party for a lump-sum paymen

> The Board of Directors of CYZ Corporation votes to issue two shares of stock for each share held as a stock dividend to shareholders. Just prior to the dividend, Cheryl owns 100 shares of CYZ Corporation stock that she purchased for $10 per share. She re

> Carl paid $40,000 to the City of Hollywood for general revenue bonds. During the current year, he received $2,300 interest income from the bonds. Market interest rates drop, causing the value of the bonds to increase so Carl sells the bonds for $43,000.

> Jose (SSN 150-45-6789) and Rosanna (SSN 123-45-7890) Martinez are a married couple who reside at 1234 University Drive in Coral Gables, FL 33146. They have two children: Carmen, age 19 (SSN 234-65-4321), and Greg, age 10 (SSN 234-65-5432). Carmen is a fu

> Janice Morgan is 17 and in her senior year of high school. She lives with her parents at 7829 Dowry Lane, Boston, MA 02112, and they are her primary source of support and claim her as a dependent on their tax return. She is covered under their health ins

> Go to the IRS Web site (www.irs.gov) and print Form 1040 and Schedule A. Using the information in problem 70, complete these forms to the extent possible.

> George owns 1,000 shares of ABC common stock and 3,000 shares of Brightstar mutual fund. George elects to participate in Brightstar’s dividend reinvestment plan, reinvesting his annual dividends and capital gains distributions in additional Brightstar sh

> Go to the IRS Web site (www.irs.gov) and print Form 1040 and Schedule A. Using the information in problem 69, complete these forms to the extent possible.

> In January, Susan’s employer transferred her from Chicago to Houston (where she continues to work for the remainder of the year). Her expenses were: Transportation for household goods………….$2,300 Airfare from Chicago to Houston……………………200 Pre-move house-h

> Go to the IRS Web site (www.irs.gov) and print Schedule A: Itemized Deductions. Using the following information, complete this form for Simon and Ellen, both age 48 and married filing jointly, who have adjusted gross income of $60,000. They paid the foll

> Go to www.irs.gov (the IRS Web site) and click on Careers under Work at IRS. Look under Resources, then under Job Descriptions, and finally look under Accounting, Budget & Finance to learn more about Internal Revenue Agent positions. a. If you are a rec

> Go to the IRS Web site (www.irs.gov). Print the first page of Form 1040 and compute Pierre Lappin’s adjusted gross income by entering the following information: $60,000 salary, $5,000 qualified dividend income, $3,000 interest income from corporate bonds

> Go to the IRS Web site (www.irs.gov) and print Form 2106: Employee Business Expenses. Use the following information to complete this form. Carl is an employee of Intelligent Devices, Inc. in San Jose. In a typical week, Carl spends the majority of his

> Jordan (SSN 150-66-7788) and Diana (SSN 15067-4321) Diego are a married couple who reside at 111 Coral Drive in Miami, FL 33156. They have one dependent daughter, Emily (SSN 155-88-4321), age 18, who lives at home. Jordan is a manager at Big Box Corpor

> Go to the IRS Web site (www.irs.gov) and print Schedule C: Profit or Loss for Business (Sole Proprietorship), Schedule SE: Self-Employment Tax, and Form 8829: Expenses for Business Use of Your Home. Use the information in problem 47 to complete these for

> Go to the IRS Web site (www.irs.gov) and print the page of Form 1120: U.S. Corporate Income Tax Return that includes Schedule M-1. Use the information in example 6.42 to complete Schedule M-1.

4.99

See Answer


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