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Unformatted text preview: Econ 3AW'02Exam # 1 ANSWER KEY p 1 Econ 3A - Financial Accounting - W'02 Exam # 1 - 100 points ANSWER KEY ANSWER KEY PROBLEM 1 (30 points) a. What is the role of the outside auditor in financial reporting? What key characteristic renders the auditor's report believable? Who pays the auditor's fee? What incentives do auditors have to not cave into the desires of management to misstate financial information? The auditor's role is to add credibility to the financial statements, which are the representations of management. Auditor's must be independent of the companythat is, free from financial and managerial interestsin order for users to believe the auditors. The client company pays the auditors fee. It's hard to bite the hand that feeds you, but auditors have a reputation to protect (their most important asset, and they can get sued and lose big dollars, most often far greater than the fees they earned. b. A company reported sales of $10 billion dollars for the year 2001. Its gross profit ratio was 40% and its profit margin ratio was 10%. How much did the company report for cost of goods sold? The profit margin ratio is irrelevant. If the gross profit ratio was 40%, then cost of goods sold must have been 60%. Multiplying 60% times sales of $10 billion, gives cost of goods sold of $6 billion....
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This test prep was uploaded on 04/19/2008 for the course ECON 3A taught by Professor Loster during the Winter '07 term at UCSB.
- Winter '07