EXHIBIT 4.56.1 Dunder-Mifflin Inc. Prior Year Current Year (audited) Forecast (unaudited) Revenue and Expense: $ 9,000,000 6,296,000 $ 9,720,000 Sales (net) Cost of goods sold $9,900,000 6,926,000 7,000,000 Gross margin General expense 2,704,000 2,974,000 2,720,000 2,044,000 300,000 2,000,000 2,003,000 Depreciation 334,000 334,000 Operating income Interest expense 360,000 640,000 383,000 60,000 120,000 180,000 110,000 75,000 Income taxes (40%) 212,000 123,200 Net income 318,000 184,800 Assets: Cash 600,000 880,000 690,800 Accounts receivable 500,000 600,000 900,000 (40,000) 1,500,000 Allowance for doubtful accounts (48,000) 1,500,000 2,932,000 (90,000) Inventory 1,350,000 Total current assets 2,560,000 2,850,800 3,000,000 (1,500,000) $ 4,060,000 4,700,000 (1,834,000) $5,798,000 Fixed assets 4,500,000 (1,834,000) $ 5,516,800 Accumulated depreciation Total assets Liabilities and Equity: $ 330,000 1,750,000 $ 450,000 $ 450,000 1,750,000 Accounts payable Bank loans, 8% 60,000 40,000 40,000 32,000 $ 2,152,000 Accrued interest Accruals and other 50,000 60,000 $ 560,000 $2,300,000 400,000 $2,700,000 Total current liabilities 600,000 $ 1,160,000 2,000,000 900,000 $ 4,060,000 400,000 $ 2,552,000 2,000,000 964,800 $ 5,516,800 Long-term debt, 10% Total liabilities Capital stock Retained earnings 2,000,000 1,098,000 $5,798,000 Total liabilities and equity
Depreciation Methods
The word "depreciation" is defined as an accounting method wherein the cost of tangible assets is spread over its useful life and it usually denotes how much of the assets value has been used up. The depreciation is usually considered as an operating expense. The main reason behind depreciation includes wear and tear of the assets, obsolescence etc.
Depreciation Accounting
In terms of accounting, with the passage of time the value of a fixed asset (like machinery, plants, furniture etc.) goes down over a specific period of time is known as depreciation. Now, the question comes in your mind, why the value of the fixed asset reduces over time.
Dunder-Mifflin Inc. wanted to expand its manufacturing and sales facilities. The company applied for a loan from First Bank, presenting the prior-year audited financial statements and the
Exhibit 4.56.1. (Dunder-Mifflin Inc.’s fiscal year-end is December 31.) The bank was impressed with the business prospects and granted a $1,750,000 loan at 8 percent interest to finance
The auditors’ interviews with Dunder-Mifflin Inc. management near the end of the current year produced the following information: The facilities did not cost as much as previously anticipated. However, sales were slow and the company granted more liberal return privilege terms than in the prior year. Officers wanted to generate significant income to impress First Bank and to preserve the company dividend ($120,000 paid in the prior year).
The production managers had targeted inventory levels for a 4.0 turnover ratio and were largely successful even though prices of materials and supplies had risen about 2 percent relative to sales dollar volume. The new facilities were
Dunder-Mifflin Inc. has now produced the current-year financial statements (Exhibit 4.56.1, Current Year column) for the auditors’ work on the current audit.
Check the below image for Exhibit 4.56.1
Required:
Perform preliminary analytical procedures on the current-year unaudited financial statements for the purpose of identifying accounts that could contain errors or frauds. Use your knowledge of Dunder-Mifflin Inc. and the forecast in Exhibit 4.56.1. Calculate comparative and common-size financial statements as well as relevant ratios. (Assume that the market
value of the equity for the company is $3 million.) Once your calculations are complete, identify the accounts that could be misstated. (Note: This assignment is available in the student section of the textbook website in Excel format.)
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