12.10 Cases and Problems

Learning on the Web

1. Visit the website of one of the following major U.S. public accounting firms: Deloitte (http://www.deloitte.com), Ernst & Young (http://www.ey.com), KPMG (http://www.kpmg.com), PricewaterhouseCoopers (http://www.pwc.com), Grant Thornton (http://www.grantthornton.com), or BDO (http://www.bdo.com). Explore the site to learn the services the firm offers. What other types of resources does the firm have on its website? How well does the firm communicate via the website with existing and prospective clients? Summarize your findings in a brief report.
2. Do annual reports confuse you? Many websites can take the mystery out of this important document. See IBM’s Guide to Understanding Financials at https://www.ibm.com/investor/help/guide/ Moneychimp’s “How to Read an Annual Report” features an interactive diagram that provides a big-picture view of what the report’s financial information tells you: http://www.moneychimp.com. Which site was more helpful to you, and why?
3. Corporate reports filed with the SEC are now available on the web at the EDGAR (Electronic Data Gathering, Analysis, and Retrieval system) website, https://www.sec.gov/edgar. First, read about the EDGAR system; then go to the search page. To see the type of information that companies must file with the SEC, use the search feature to locate a recent filing by Microsoft. What types of reports did you find, and what was the purpose of each report?

Preparing for Tomorrow’s Workplace Skills

1. Your firm has been hired to help several small businesses with their year-end financial statements.
   1. Based on the following account balances, prepare the Marbella Design Enterprises balance sheet as of December 31, 2018:
      

      Cash	$30,250
      Accounts payable	28,500
      Fixtures and furnishings	85,000
      Notes payable	15,000
      Retained earnings	64,450
      Accounts receivable	24,050
      Inventory	15,600
      Equipment	42,750
      Accumulated depreciation on fixtures and furnishings	12,500
      Common shares (50,000 shares at $1)	50,000
      Long-term debt	25,000
      Accumulated depreciation on equipment	7,800
      Marketable securities	13,000
      Income taxes payable	7,500

   2. The following are the account balances for the revenues and expenses of the Windsor Gift Shop for the year ending December 31, 2018. Prepare the income statement for the shop. (Resources, Information)
      

      Rent	$ 15,000
      Salaries	23,500
      Cost of goods sold	98,000
      Utilities	8,000
      Supplies	3,500
      Sales	195,000
      Advertising	3,600
      Interest	3,000
      Taxes	12,120

2. During the year ended December 31, 2018, Lawrence Industries sold $2 million worth of merchandise on credit. A total of $1.4 million was collected during the year. The cost of this merchandise was $1.3 million. Of this amount, $1 million has been paid, and $300,000 is not yet due. Operating expenses and income taxes totaling $500,000 were paid in cash during the year. Assume that all accounts had a zero balance at the beginning of the year (January 1, 2018). Write a brief report for the company controller that includes calculation of the firm’s (a) net profit and (b) cash flow during the year. Explain why there is a difference between net profit and cash flow. (Information, Systems)
3. >A friend has been offered a sales position at Draper Media, Inc., a small publisher of computer-related publications, but wants to know more about the company. Because of your expertise in financial analysis, you offer to help analyze Draper’s financial health. Draper has provided the following selected financial information:
   

   Account balances on December 31, 2018:
   Inventory	$ 72,000
   Net sales	450,000
   Current assets	150,000
   Cost of goods sold	290,000
   Total liabilities	180,000
   Net profit	35,400
   Total assets	385,000
   Current liabilities	75,000
   Other information
   Number of common shares outstanding	25,000
   Inventory at January 1, 2018	48,000

   Calculate the following ratios for 2018: acid-test (quick) ratio, inventory turnover ratio, net profit margin, return on equity, debt-to-equity ratio, and earnings per share. Summarize your assessment of the company’s financial performance, based on these ratios, in a report for your friend. What other information would you like to have to complete your evaluation? (Information, Systems)

4. Use the internet and business publications to research how companies and accounting firms are implementing the provisions of the Sarbanes-Oxley Act. What are the major concerns they face? What rules have other organizations issued that relate to Act compliance? Summarize your findings. (Information)
5. Team Activity Two years ago, Rebecca Mardon started a computer consulting business, Mardon Consulting Associates. Until now, she has been the only employee, but business has grown enough to support hiring an administrative assistant and another consultant this year. Before she adds staff, however, she wants to hire an accountant and computerize her financial recordkeeping. Divide the class into small groups, assigning one person to be Rebecca and the others to represent members of a medium-sized accounting firm. Rebecca should think about the type of financial information systems her firm requires and develop a list of questions for the firm. The accountants will prepare a presentation making recommendations to her as well as explaining why their firm should win the account. (Resources, Interpersonal)
6. One of the best ways to learn about financial statements is to prepare them. Put together your personal balance sheet and income statement, using Table 12.1 and Table 12.2 as samples. You will have to adjust the account categories to fit your needs. Here are some suggestions:
   • Current assets—cash on hand, balances in savings and checking accounts
   • Investments—stocks and bonds, retirement funds
   • Fixed assets—real estate, personal property (cars, furniture, jewelry, etc.)
   • Current liabilities—charge-card balances, loan payments due in one year
   • Long-term liabilities—auto loan balance, mortgage on real estate, other loan balances that will not come due until after one year
   • Income—employment income, investment income (interest, dividends)
   • Expenses—housing, utilities, food, transportation, medical, clothing, insurance, loan payments, taxes, personal care, recreation and entertainment, and miscellaneous expenses

   After you complete your personal financial statements, use them to see how well you are managing your finances. Consider the following questions:

   1. Should you be concerned about your debt ratio?
   2. Would a potential creditor conclude that it is safe or risky to lend you money?
   3. If you were a company, would people want to invest in you? Why or why not? What could you do to improve your financial condition? (Information)

Ethics Angle

As the controller of a medium-sized financial services company, you take pride in the accounting and internal control systems you have developed for the company. You and your staff have kept up with changes in the accounting industry and been diligent in updating the systems to meet new accounting standards. Your outside auditor, which has been reviewing the company’s books for 15 years, routinely complimented you on your thorough procedures.

The passage of the Sarbanes-Oxley Act, with its emphasis on testing internal control systems, initiated several changes. You have studied the law and made adjustments to ensure you comply with the regulations, even though it has created additional work. Your auditors, however, have chosen to interpret SOX very aggressively—too much so, in your opinion. The auditors have recommended that you make costly improvements to your systems and also enlarged the scope of the audit process, raising their fees. When you question the partner in charge, he explains that the complexity of the law means that it is open to interpretation and it is better to err on the side of caution than risk noncompliance. You are not pleased with this answer, as you believe that your company is in compliance with SOX, and consider changing auditors.

Using a web search tool, locate articles about this topic and then write responses to the following questions. Be sure to support your arguments and cite your sources.

Ethical Dilemma: Should you change auditors because your current one is too stringent in applying the Sarbanes-Oxley Act? What other steps could you take to resolve this situation?

Sources: Rodd Ahrenstorff , “The 4 Biggest Pros and Cons of the Sarbanes-Oxley Act,” https://ktconnections.com/blog/the-4-biggest-pros-and-cons-of-the-sarbanes-oxley-act June 8, 2017; Terry Sheridan, “Financial Services Spend More than $1M Annually on SOX,”  https://www.accountingweb.com/aa/law-and-enforcement/financial-services-spend-more-than-1m-annually-on-sox, August 2, 2016; “Sarbanes-Oxley Is Paying Off for Companies Despite Increased Costs and Hours, Protiviti Survey Finds,” https://www.prnewswire.com/news-releases/sarbanes-oxley-is-paying-off-for-companies-despite-increased-costs-and-hours-protiviti-survey-finds-300278511.html, June 2, 2016; Daniel Kim, “Top 3 Ways to Reduce SOX Compliance Costs,” https://www.auditboard.com/blog/top-3-ways-to-reduce-sox-compliance-costs/, December 14, 2015.

Creative Thinking Case

Accountingfly Changes How CPAs Get Hired

Filling accounting positions, especially at the CPA level, can be a challenge. Until a few years ago, businesses other than the Big 4 firms basically had two options: post openings on general job platforms such as Monster and Indeed, or go through a staffing agency that charged a hefty fee for finding just the right accounting professional.

Jeff Phillips, a professional recruiter who previously worked for Monster.com, saw the opportunity to create a job site that caters strictly to accounting and bookkeeping jobs and started Accountingfly.com with brothers John and James Hosman. After studying various industries, the founders decided to focus on accounting because of the “massive imbalance” when it came to recruiting for private and public accountants. In their research, the trio found that most of the talent was snapped up by Big 4 accounting firms, leaving other accounting businesses struggling to find the right experienced people to fill key positions.

Despite the record number of students currently majoring in accounting, Phillips discovered the number of graduates taking the CPA exam was declining rapidly, signaling to him that people were losing interest in public accounting jobs. He sees Accountingfly as a way to alert job seekers (and companies) about the good jobs available for new and experienced CPAs outside of the four major players in the accounting field.

As the accounting talent pool evolves, millennials are looking to make their mark in the industry and tend to look for new jobs with organizations that pay competitive salaries, encourage job flexibility, and offer multiple career opportunities for the long haul. Accountingfly attracts both experienced CPAs and college students to its website by providing job boards, webinars, and virtual career fairs. There are more than one million job seekers and 200,000 user profiles on the website. Recently Accountingfly acquired Going Concern, a leading accounting news website that features original content and an insider’s perspective on the people, firms, and culture that shape the accounting profession in this country. According to Phillips, Going Concern has a large, well-informed, highly engaged audience of early-career accountants who could benefit from connecting with accounting firms seeking exceptional talent.

Critical Thinking Questions

1. How does the company’s focus on recruiting accountants and related services give Accountingfly a competitive advantage?
2. Do you think Accountingfly’s approach can compete with the Big 4’s expensive and comprehensive recruiting efforts for new accountants? Explain your reasoning.
3. How can Accountingfly use its recent acquisition of Going Concern as a recruiting tool for experienced CPAs who desire a different career track? Provide some examples to support your answer.

Sources:  Ian Welham, “How Accountingfly Is Revolutionizing the Way CPAs Are Hired,” http://cpatrendlines.com, August 5, 2017; “Millennial Businesses to Accounting Firms: Diversify Services, Go Digital and Embrace the Cloud,” https://www.bill.com/about-us/press-release/millennial-businesses-accounting-firms-diversify-services-go-digital-and/, May 30, 2017; Carlos Gieseken, “Accountingfly Gains Influence in Industry,” https://www.pnj.com/story/news/2015/10/05/accountingfly-gains-influence-industry/73425300/, October 5, 2015; Sherman G. Mohr, Jr., “Meet Jeff Phillips, CEO of Accountingfly. Tech Is Thriving in the Florida Panhandle,” LinkedIn, https://www.linkedin.com/pulse/meet-jeff-phillips-ceo-accountingfly-tech-thriving-florida-mohr?articleId=8187726058898655727, August 24, 2015; “Accountingfly Acquires Going Concern, a Leading Accounting News Publication,” https://www.prweb.com/releases/2015/08/prweb12909471.htm , August 20, 2015.

Hot Links Address Book

1. What issues is the FASB working on now? Check it out at http://www.fasb.org.
2. Two good sites to learn about the latest news in the accounting industry are Accounting Today, http://www.accountingtoday.com, and AccountingWEB, http://www.accountingweb.com.
3. To become more familiar with annual reports and key financial statements, head for IBM’s Guide to Financial Statements. The material offers a good overview of financial reporting and shows you what to look for when you read these documents: https://www.ibm.com/investor/help/guide.
4. To find free information about business statistics and financial ratios, go to the BizStats website at http://www.bizstats.com. There you will find industry financial ratios for corporations in more than 200 different industries.
5. To find out more about the accounting profession and becoming a CPA, visit the American Institute of CPAs’ website at http://www.aicpa.org, and click on the Career tab to explore various career paths in the accounting industry.
6. Forensic accountants combine their accounting knowledge with investigative skills in various legal and investigative settings, looking for fraud in various accounting transactions. To learn more about this accounting specialty, go to the website of the Association of Certified Fraud Examiners at http://www.acfe.com.
7. A comprehensive site with information about careers in accounting, certification programs, internships, and links to many related websites can be found at http://accountingmajors.com.
8. At their websites, you can learn about the types of services the Big Four accounting firms are now offering their clients: http://www.deloitte.com, http://www.kpmg.com, http://www.ey.com, and https://www.pwc.com/us/en.html.