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Question: Section 404 of the Sarbanes-Oxley Act (


Section 404 of the Sarbanes-Oxley Act (SOX) is designed to nip accounting problems in the bud, before they can blossom into fraud, by focusing on internal controls. Many companies, in complying with Section 404, have discovered—to their surprise—that reviewing internal controls can in fact result in benefits beyond unmasking accounting problems. For example, Pitney Bowes used the internal audit review process to consolidate four accounts receivable offices into one, saving more than $500,000 in one year alone. Cisco Systems, Inc., which spent $50 million and 240,000 hours complying with SOX, found opportunities to streamline steps for ordering products and services, making it easier for customers to do business with Cisco.
Despite reports suggesting that individual companies benefited by eliminating non-value-added costs as a result of SOX Section 404, many CFOs believe the costs are not worth the benefits to their individual companies.
a. Discuss with your classmates the cost–benefit outcomes of Section 404 of the Sarbanes-Oxley
Act. What types of society-wide benefits are being overlooked by CFOs?
b. Would those society-wide benefits ultimately provide benefits to each individual firm? How?


> Shown are selected financial data for Another World and Imports, Inc., at the end of the current year. Assume that the year-end balances shown for accounts receivable and for inventory approximate the average balances of these items throughout the year.

> Marshall Technology is considering two alternative proposals for modernizing its production facilities. To provide a basis for selection, the cost accounting department has developed the following data regarding the expected annual operating results for

> Smith & Sons Inc. is a sporting goods manufacturer. The firm uses a periodic inventory system. Smith & Sons shipped $30,000 of defective goods to a retailer. The retailer and Smith & Sons agreed that the retailer would keep the goods in exchange for a $3

> Pig Inc. is a clothing retailer and it has terms from one of its vendors of 1/10, n/30. Compute the equivalent annual rate of return that Pig earns by always paying its bills within the discount period. Should Pag, Inc. establish a consistent practice of

> Fun Land Inc. is a retailer of toys and games. Fun Land’s beginning inventory is $192,000 and its purchases during the year are $600,000. Its ending inventory is $72,000. Make the closing entries necessary given that Fun Land uses a periodic inventory sy

> Yang & Min Inc. is a retailer of contemporary furniture. You are told that Yang & Min’s ending inventory is $200,000 and its cost of goods sold is $500,000. Yang & Min had $100,000 of inventory at the beginning of the year. What was the dollar amount of

> Murphy Co. is a high-end retailer of fine fashions for men. Murphy’s inventory balance at the beginning of the year is $300,000, and Murphy purchases $600,000 of goods during the year. Its inventory balance at the end of the year is $250,000. What is the

> An executive of a large American steel company put the blame for lower net income for a recent fiscal period on the “shift in product mix to a higher proportion of export sales.” Sales for the period increased slightly while net income declined by 28 per

> Home Sweet Home Inc. is a retailer of home accessories. The company’s inventory balance at the beginning of the year was $720,000; Home Sweet Home purchased $600,000 of goods during January, and sales during January were $960,000. What is the balance tha

> Alberto & Sons, Inc., a retailer of antique figurines, engages in the following transactions during October of the current year.

> The accounts receivable subsidiary ledger for Ravalli’s Lawn Care has the following customer accounts and balances at the end of the current year. What should be the Accounts Receivable balance in the general ledger? [Hint: Customer acc

> Easy Money, Inc., has the following capital structure. The number of issued and outstanding shares of both preferred and common stock have been the same for the last two years. Dividends on preferred stock are 8 percent of par value and have been paid e

> You are the assistant controller for a public company. Wall Street stock analysts are projecting an earnings per share figure of $0.25 for your company. On December 29, a large customer returns a very large shipment of your goods that were defective. You

> Toying With Nature wants to take advantage of children’s fascination with dinosaurs by adding several scale-model dinosaurs to its existing product line. Annual sales of the dinosaurs are estimated at 80,000 units at a price of $6 per u

> List three special journals often used in accounting to facilitate the recording of repetitive transactions.

> Office today is an office supply store. Office Today’s revenue in the current year is $800 million and its cost of goods sold is $640 million. Compute Office Today’s gross profit and its gross profit percentage.

> The following revenue figures were taken from Rosemont Corporation’s adjusted trial balance at the end of the following months (adjusting entries are performed monthly whereas closing entries are performed annually, on December 31). Co

> Indicate whether each of the following accounts appears in the debit column or in the credit column of an after-closing trial balance. Use the symbols D for debit column, C for credit column, and N if the account does not appear in an after-closing trial

> The following account balances were taken from Long Tail Consulting’s year-end adjusted trial balance (assume these are the company’s only temporary accounts). Prepare the company’s necessary closing

> The following account balances were taken from Hendersonville Corporation’s year-end adjusted trial balance (assume these are the company’s only temporary accounts). Prepare the company’s necessary c

> What are three important criteria for successful business process management?

> Indicate whether a debit or credit is required to close each of the following accounts. Use the symbolls D if a debit is required, C if a credit is required, and N if the account is not closed at the end of the period. a. Salary Expense b. Unexpired In

> What is a rolling budget? Why do some companies choose to use rolling budgets?

> Indicate the effect of the following errors on each of the financial statement elements described in the column headings in the following table. Use the following symbols: O = overstated, U = understated, and NE = no effect.

> Indicate in which section of the balance sheet each of the following accounts is classified. Use the symbols CA for current assets, NCA for noncurrent assets, CL for current liabilities, LTL for long-term liabilities, and SHE for stockholders’ equity. a

> On November 1 of the current year, Sunbury Corporation invested 90,000 in a new delivery truck. The truck is being depreciated at a monthly rate of $625. During the year, the company issued additional stock for $200,000 and declared dividends of $50,000.

> In anticipation of declining inventory replacement costs, the management of Computer Products Co. elects to use the FIFO inventory method rather than LIFO. Explain how this decision should affect the company’s future. a. Rate of gross profit. b. Net ca

> During the current year, the total assets of Mifflinburg Corporation decreased by $60,000 and total liabilities decreased by $300,000. The company issued $100,000 of new stock, and its net income for the year was $250,000. No other changes to stockholder

> Accountants at Warner Co. use worksheets similar to the one shown in Exhibit 5–13. In the company’s most current year-end worksheet, the amounts transferred from the adjusted trial balance columns to the balance sheet

> Alexander’s unadjusted trial balance dated December 31, year 1, reports Income Taxes Expense of $100,000, and Income Taxes Payable of $25,000. The company’s accountant estimates that income taxes expense for the entire year ended December 31, year 1, is

> Cat Fancy, Inc., has provided the following information from its most current financial statements. a. Compute the company’s net income percentage in the current year. b. Compute the company’s return on equity in the

> On February 1, Williams Storage agreed to rent Haka Manufacturing warehouse space for $4,000 per month. Haka Manufacturing paid the first three months’ rent in advance. a. Prepare the necessary adjusting entry for Haka Manufacturing on February 28, assu

> Barth’s unadjusted trial balance reports Unearned Client Revenue of $9,000 and Client Revenue Earned of $45,000. An examination of client records reveals that $4,000 of previously unearned revenue has now been earned. a. Prepare the necessary adjusting

> Mastrolia Corporation’s Retained Earnings account balance was $25,000 on January 1. During January, the company recorded revenue of $80,000, expenses of $60,000, and dividends of $5,000. The company also collected a $9,000 account receivable and paid a $

> The year-end balance sheet of Columbus Products, Inc., includes the following stockholders’ equity section (with certain details omitted). From this information, compute answers to the following questions. a. How many shares of preferr

> Define margin of safety.

> On January 2, year 1, Hill Corporation purchased equipment costing $360,000. Hill performs adjusting entries monthly. a. Record this equipment’s depreciation expense on December 31, year 6, assuming its estimated life was fifteen years on January 2, yea

> On March 1, Cyber Corporation had office supplies on hand of $2,500. During the month, Cyber purchased additional supplies costing $4,500. Approximately $3,000 of unused office supplies remain on hand at the end of the month. Prepare the necessary adjust

> Marfar Industries produces metal stamping equipment. The company expanded vertically several years ago by acquiring Bent Press Company, one of its suppliers. Marfar decided to maintain Bent’s separate identity and therefore established

> Explain why the Dividends account is closed directly to the Retained Earnings account.

> What type of accounts are referred to as permanent or real accounts? What is meant by these terms?

> Discuss the relationship among the income statement, the statement of retained earnings, and the balance sheet.

> Explain the need for subsidiary ledgers in accounting for merchandising activities.

> Discuss the relationship among the income statement, the statement of retained earnings, and the balance sheet.

> Some people think that a company’s retained earnings represent cash reserved for the payment of dividends. Are they correct? Explain.

> A portion of the stockholders’ equity section from the balance sheet of Wall and Corporation appears as follows. Notice that the company has two classes of preferred stock with different features, in addition to common stock. Assume th

> Explain briefly the items generally included in a company’s annual report. (You may use the financial statements appearing in Appendix A to support your answer.)v

> List two items often encountered in reconciling a bank statement that may cause cash per the bank statement to be larger than the balance of cash shown in the depositor’s accounting records.

> A statement of stockholders’ equity sometimes is described as an “expanded” statement of retained earnings. Why?

> In the following list, assume each transaction is independent of the others. Each of these transactions occurs in a single division of Hope stat Incorporated, a multidivision company. Each transaction may impact capital turnover, ROI, and/or residual inc

> Why are cash balances in excess of those needed to finance business operations viewed as relatively nonproductive assets? Suggest several ways in which these excess cash balances may be utilized effectively.

> What are lines of credit? From the viewpoint of a shortterm creditor, why do lines of credit increase a company’s liquidity? How are the unused portions of these lines presented in financial statements?

> What are cash equivalents? Provide two examples. Why are these items often combined with cash for the purpose of balance sheet presentation?

> Different categories of financial assets are valued differently in the balance sheet. These different valuation methods have one common goal. Explain

> What is the formula for computing interest on a note receivable, and what does each term mean?

> When Resistor Systems, Inc., was formed, the company was authorized to issue 5,000 shares of $100 par value, 8 percent cumulative preferred stock, and 100,000 shares of $2 stated value common stock. Half of the preferred stock was issued at a price of $1

> Explain how each of the following is presented in a multiple-step income statement. a. Sale of marketable securities at a loss. b. Adjusting entry to create (or increase) the allowance for doubtful accounts. c. Entry to write off an uncollectible acco

> What are the advantages to a retailer of making credit sales only to customers who use nationally recognized credit cards?

> Must companies use the same method of accounting for uncollectible accounts receivable in their financial statements and in their income tax returns? Explain

> In making the annual adjusting entry for uncollectible accounts, a company may utilize a balance sheet approach to make the estimate, or it may use an income statement approach. Explain these two alternative approaches.

> Explain the relationship between the matching principle and the need to estimate uncollectible accounts receivable.

> Hinkley Corporation recently filed the following information with the SEC regarding its executive compensation. Base Salaries: We provide competitive base salaries that allow us to attract and retain a high performing leadership team. Annual Bonus: All e

> Why is it important for management to understand cost volume-profit relationships?

> Briefly describe the flow of cash among receivables, cash, and marketable securities.

> How does a balance arise in the Purchase Discounts Lost account? Why would management be interested in monitoring the activity in this account?

> Explain the distinguishing characteristics of (a) a general journal and (b) a special journal.

> Listed are 12 technical accounting terms discussed in this chapter. Each of the following statements may (or may not) describe one of these technical terms. For each statement, indicate the term described, or answer “Noneâ€&

> Briefly contrast the accounting procedures in perpetual and periodic inventory systems.

> Briefly contrast the accounting procedures in perpetual and periodic inventory systems.

> Define the term inventory shrinkage. How is the amount of inventory shrinkage determined in a business using a perpetual inventory system, and how is this shrinkage recorded in the accounting records?

> During the current year, Green Bay Company earned a gross profit of $350,000, whereas New England Company earned a gross profit of only $280,000. Both companies had net sales of $900,000. Does this mean that Green Bay is more profitable than New England?

> What is meant by the statement that revenue has been recognized?

> Under a perpetual inventory system, a company should know the quantity and price of its inventory at any time. Given this, why do companies that use a perpetual inventory system still take a physical count of their merchandise inventory at least once a y

> Joyce Biginskor manages the assembly department at Valance Autoparts, a parts supplier to large auto companies. Valance has recently adopted a balanced scorecard for the entire company. As a result, the plant manager for each production facility has a se

> Shown as follows is selected information from the financial statements of Dickson, Inc., a retail furniture store. Instructions: a. Explain how the interest expense shown in the income statement could be $84,000, when the interest payment appearing in t

> Define the term gross profit margin. Explain several ways in which management might improve a company’s overall profit margin.

> In discussing stock dividends and stock splits in an investments class you are taking, one of the students says, “The definition of stock splits and stock dividends is exactly the same distributions of a company’s stock to existing owners without payment

> The financial statements of Home Depot, Inc., appear in Appendix A of this text. These statements contain information describing the details of the company’s stockholders’ equity. a. What is the par value of the company’s common stock? Did the common st

> A seller generally records sales at the full invoice price, but the buyer often records purchases at net cost. Explain the logic of the buyer and seller recording the transaction at different amounts.

> Tarec is a retail store in a state that imposes a 6 percent sales tax. Would you expect to find sales tax expense and sales tax payable in TireCo’s financial statements? Explain.

> Outback Sporting Goods purchases merchandise on terms of 4/10, n/60. The company has a line of credit that enables it to borrow money as needed from Northern Bank at an annual interest rate of 13 percent. Should Outback pay its suppliers within the 10-da

> European Imports pays substantial freight charges to obtain inbound shipments of purchased merchandise. Should these freight charges be added to the company’s Delivery Expense account? Explain.

> The income statement of a merchandising company includes a major type of cost that does not appear in the income statement of a service-type business. Identify this cost and explain what it represents.

> Under which type of inventory system is an inventory subsidiary ledger maintained?

> Explain several purposes that may be served by preparing a worksheet (or using computer software that achieves the goals of a worksheet).*

> Explain the significance of measuring a company’s return on equity.

> Bob Banker is the manager of one location of the Fastwhere Inc. chain, which is a delivery service. Banker’s location is currently earning an ROI of 14 percent on existing average capital of $750,000. The minimum required return for Fas

> Explain the need for closing entries and describe the process by which temporary owners’ equity accounts are closed at year-end

> Twin Towns, Inc., was authorized to issue 300,000 shares of common stock and originally issued 100,000 shares of $10 par value stock at $18 per share. Subsequently, 25,000 shares were repurchased at $20, of which 10,000 were subsequently resold at $23. A

> How does depreciation expense differ from other operating expenses?

> Explain why speeding up the collection of accounts receivable provides only a one-time increase in cash receipts.

> Explain the accounting principle of adequate disclosure.

> What are interim financial statements? Do accounts that appear in a company’s interim balance sheet require any special computations to be reported correctly? Explain.

> Can a company be profitable but not liquid? Explain.

> Which accounts appear in a company’s after-closing trial balance? How do these accounts differ from those reported in an adjusted trial balance?

> A particular investment proposal has a payback period that exceeds the investment’s expected life. The investment has no salvage value. Will this proposal’s net present value be positive or negative? Explain your answer.

> What factors might a company consider in establishing a minimum required return on an investment proposal?

> The present value of an investment depends on the timing of its future cash flows. Explain what this statement means by giving a specific example of two investments that have significant timing differences and discussing the implications of those timing

> Tootsie Roll Industries has two business segments, one for operations in the United States and one for operations in Mexico and Canada. The following information (in thousands) comes from a recent annual report. Find the ROI for each segment for each yea

> Minor Company is authorized to sell 1,200,000 shares of $10 par value common stock and 60,000 shares of $100 par value 6 percent preferred stock. As of the end of the current year, the company has actually sold 550,000 shares of common stock at $12 per s

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