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Unformatted text preview: I n tegrating Case 523
You are a new staff accountant with a large regional CPA fi rm, participating in your first
audit. You recall from your auditing class that CPAs often use ratios to test the
r easonableness of accounting numbers provided by the client. Since ratios reflect the
r elationships among various account balances, if i t is assumed that prior relation ships
s till hold, prior years’ ratios can be used to estimate what current balances should
approximate. However, you never actually performed this kind of analysis until now. The
CPA in charge of the audit of Covington Pike Corporation brings you the list of ratios shown
below and tells you these reflect the relationships maintained by Covington Pike in recent
years.
Profit margin on sales = 5%
Return on assets = 7.5%
G ross profit margin = 40%
I nventory turnover ratio = 6 times
Receivables turnover ratio = 25
Acidtest ratio = .9
Current ratio = 2 to 1
Return on shareholders’ equity = 10%
Debt to equity ratio = 1/3
T imes interest earned ratio = 12 t imes
Jotted in the margins are the following notes:
● Net income $15,000 ● Only one shortterm note ($5,000); all other current liabilities are t rade accounts ● Property, plant, and equipment are the only noncurrent assets ● Bonds payable are the only noncurrent liabili ties ● The effective interest rate on shortterm notes and bonds is 8% ● No investment securit ies ● Cash balance totals $15,000 Required: You are requested to approximate the current year’s balances in the form of a balance sheet
and income statement, to the extent the information allows. Accompany those financial
statements with the calculations you use to estimate each amount reported. ...
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This note was uploaded on 08/19/2011 for the course ACC 305 ACC 305 taught by Professor Stern during the Spring '11 term at Ashford University.
 Spring '11
 Stern

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