Concept explainers
Case 4-70 CONTINUING PROBLEM: FRONT ROW ENTERTAINMENT
Over the next 2 months, Front Row Entertainment continued to enjoy success in signing artists and promoting their events. However, the increased business has put considerable stress on keeping timely and up-to-date financial records. In particular, both Cam and Anna are concerned with the
The tour promotion industry is a cash-intensive industry, normally requiring large prepayments to secure venues and arrange advertising. When the number of artists under contract were small, Cam and Anna developed a simple system to manage the company’s cash. Normally, any cash received was put in a file cabinet in the company’s office. If the amount appeared to be getting large, a deposit was made. Similarly, if a large check needed to be written, either Cam or Anna would check the balance in the checkbook. If cash was not sufficient to cover the check, they'd get cash from the file cabinet and deposit the amount necessary to cover the check.
However, with the increasing business, they would often forget to make deposits, causing several checks to be returned for non-sufficient funds. In addition, they were in the process of hiring additional office staff who would start work on May l. They knew that leaving cash in a file cabinet would not be a good idea.
In order to obtain a better understanding of their cash position, Anna decides to perform a bank reconciliation-something she had failed to do since the company was started. According to the accounting records, the cash balance at April 30 was $7,495. Anna obtained the following information from Front Row’s April bank statement and an analysis of canceled checks and deposits:
Balance per bank at April 30 $3,250
Deposits in transit at April 30 4,370
Outstanding checks as of April 30 1,160
Debit memo for April utilities 845
Bank service charge for April 50
Interest earned during April 450
NSF check from customer 590
Required:
- CONCEPTUAL CONNECTION Discuss the purpose Of an internal
control System . How would the development of an internal control system benefit Front Row Entertainment? In your answer, be sure to highlight any problems that you noted with Front Row Entertainment’s current system of accounting for cash.
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Cornerstones of Financial Accounting
- 7arrow_forward#6 Issue: Reed Kohler is in his final year of employment as controller for Quality Sales Corporation; he hopes to retire next year. As a member of top management, Kohler participates in an attractive company bonus plan. The overall size of the bonus is a function of the firm’s net income before bonus and income taxes—the larger the net income, the larger the bonus. Due to a slowdown in the economy, Quality Sales Corporation has encountered difficulties in managing its cash flow. To improve its cash flow by reducing cash payments for income taxes, the firm’s auditors have recommended that the company change its inventory costing method from FIFO to LIFO. This change would cause a significant increase in the cost of goods sold for the year. Kohler believes the firm should not switch to LIFO this year because its inventory quantities are too large. He believes that the firm should work to reduce its inventory quantities and then switch to LIFO (the switch could be made in a year or…arrow_forwardGlencoe First National Bank operated for years under the assumption that profitability can be increased by increasing dollar volumes. Historically, First Nationals efforts were directed toward increasing total dollars of sales and total dollars of account balances. In recent years, however, First Nationals profits have been eroding. Increased competition, particularly from savings and loan institutions, was the cause of the difficulties. As key managers discussed the banks problems, it became apparent that they had no idea what their products were costing. Upon reflection, they realized that they had often made decisions to offer a new product which promised to increase dollar balances without any consideration of what it cost to provide the service. After some discussion, the bank decided to hire a consultant to compute the costs of three products: checking accounts, personal loans, and the gold VISA. The consultant identified the following activities, costs, and activity drivers (annual data): The following annual information on the three products was also made available: In light of the new cost information, Larry Roberts, the bank president, wanted to know whether a decision made two years ago to modify the banks checking account product was sound. At that time, the service charge was eliminated on accounts with an average annual balance greater than 1,000. Based on increases in the total dollars in checking, Larry was pleased with the new product. The checking account product is described as follows: (1) checking account balances greater than 500 earn interest of 2 percent per year, and (2) a service charge of 5 per month is charged for balances less than 1,000. The bank earns 4 percent on checking account deposits. Fifty percent of the accounts are less than 500 and have an average balance of 400 per account. Ten percent of the accounts are between 500 and 1,000 and average 750 per account. Twenty-five percent of the accounts are between 1,000 and 2,767; the average balance is 2,000. The remaining accounts carry a balance greater than 2,767. The average balance for these accounts is 5,000. Research indicates that the 2,000 category was by far the greatest contributor to the increase in dollar volume when the checking account product was modified two years ago. Required: 1. Calculate rates for each activity. 2. Using the rates computed in Requirement 1, calculate the cost of each product. 3. Evaluate the checking account product. Are all accounts profitable? Compute the average annual profitability per account for the four categories of accounts described in the problem. What recommendations would you make to increase the profitability of the checking account product? (Break-even analysis for the unprofitable categories may be helpful.)arrow_forward
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