3A-SP'02-EXAM#1_KEY - ECON 3ASP'02EXAM # 1 KEY P1 Econ 3A -...

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ECON 3A–SP'02–EXAM # 1 – KEY P1 Econ 3A - Financial Accounting - SP'02 Exam # 1 – 100 points ANSWER KEY ANSWER KEY PROBLEM 1 (30 points) a. Recent federal rules require that public accounting firms stop cross-selling some big- ticket consulting services to audit clients. Discuss how this rule can improve the audit function. (21) The primary function of an audit is to add credibility to the representations made by management in financial statements. Auditors must be independent of the company if the public is to believe the have confidence in the audit. Audit firms have also provided extensive consulting services such as information systems design, internal audit services, human resources, and the like, which have been of much concern because they may impair an audit firm’s independence. The recent rules prohibiting many of those kinds of services in an effort to ensure independence. b. A company's gross profit ratio was 35% and its profit margin ratio was 8%. Cost of goods sold were $325 million. Compute reported sales and net income. If gross profit is 35% of sales, then cost of goods sold are 65% of sales. Cost of goods sold of $325 million ÷ 65% = sales of $500 million. Net income = 8% of sales, or $40 million. c. As of year-end 1999, Amazon.com reported a deficit in retained earnings of over $800 million. Explain how this could have occurred. (44) A deficit in retained earnings means that Amazon.com has not been profitable on a
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3A-SP'02-EXAM#1_KEY - ECON 3ASP'02EXAM # 1 KEY P1 Econ 3A -...

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