You are a new staff accountant with a large regional CPA firm, participating in your first audit. You recall fromyour auditing class that CPAs often use ratios to test the reasonableness of accounting numbers provided by theclient. Since ratios reflect the relationships among various account balances, if it is assumed that prior relationships still 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 PikeCorporation brings you the list of ratios shown below and tells you these reflect the relationships maintained byCovington Pike in recent years.Profit margin on sales = 5%Return on assets = 7.5%Gross profit margin = 40%Inventory turnover ratio = 6 timesReceivables turnover ratio = 25 timesAcid-test ratio = 0.9 to oneCurrent ratio = 2 to 1Return on shareholders’ equity = 10%Debt to equity ratio = 1/3Times interest earned ratio = 12 timesJotted in the margins are the following notes:• Net income $15,000.• Only one short-term note ($5,000); all other current liabilities are trade accounts.• Property, plant, and equipment are the only noncurrent assets.• Bonds payable are the only noncurrent liabilities.• The effective interest rate on short-term notes and bonds is 8%.• No investment securities.• 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 toestimate each amount reported

FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
icon
Related questions
Question

You are a new staff accountant with a large regional CPA firm, participating in your first audit. You recall from
your auditing class that CPAs often use ratios to test the reasonableness of accounting numbers provided by the
client. Since ratios reflect the relationships among various account balances, if it is assumed that prior relationships still 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%
Gross profit margin = 40%
Inventory turnover ratio = 6 times
Receivables turnover ratio = 25 times
Acid-test ratio = 0.9 to one
Current ratio = 2 to 1
Return on shareholders’ equity = 10%
Debt to equity ratio = 1/3
Times interest earned ratio = 12 times
Jotted in the margins are the following notes:
• Net income $15,000.
• Only one short-term note ($5,000); all other current liabilities are trade accounts.
• Property, plant, and equipment are the only noncurrent assets.
• Bonds payable are the only noncurrent liabilities.
• The effective interest rate on short-term notes and bonds is 8%.
• No investment securities.
• 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

Expert Solution
trending now

Trending now

This is a popular solution!

steps

Step by step

Solved in 9 steps with 19 images

Blurred answer
Knowledge Booster
Risk Assessment
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, accounting and related others by exploring similar questions and additional content below.
Similar questions
Recommended textbooks for you
FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
Accounting
ISBN:
9781259964947
Author:
Libby
Publisher:
MCG
Accounting
Accounting
Accounting
ISBN:
9781337272094
Author:
WARREN, Carl S., Reeve, James M., Duchac, Jonathan E.
Publisher:
Cengage Learning,
Accounting Information Systems
Accounting Information Systems
Accounting
ISBN:
9781337619202
Author:
Hall, James A.
Publisher:
Cengage Learning,
Horngren's Cost Accounting: A Managerial Emphasis…
Horngren's Cost Accounting: A Managerial Emphasis…
Accounting
ISBN:
9780134475585
Author:
Srikant M. Datar, Madhav V. Rajan
Publisher:
PEARSON
Intermediate Accounting
Intermediate Accounting
Accounting
ISBN:
9781259722660
Author:
J. David Spiceland, Mark W. Nelson, Wayne M Thomas
Publisher:
McGraw-Hill Education
Financial and Managerial Accounting
Financial and Managerial Accounting
Accounting
ISBN:
9781259726705
Author:
John J Wild, Ken W. Shaw, Barbara Chiappetta Fundamental Accounting Principles
Publisher:
McGraw-Hill Education