Assignment Questions

In computing earnings per share for a simple capital structure, if the preferred stock is cumulative, the amount that should be deducted as an adjustment to the numerator (earnings) is the

a. preferred dividends in arrears times (one minus the income tax rate).

b. annual preferred dividend times (one minus the income tax rate).

c. preferred dividends in arrears.

d. annual preferred dividend.

P2-3 Recording Transactions in T-Accounts, Preparing the Balance Sheet from a Trial Balance, and Evaluating the Current Ratio LO2-2, 2-4, 2-5

[The following information applies to the questions displayed below.]

Cougar Plastics Company has been operating for three years. At December 31 of last year, the accounting records reflected the following:

During the current year, the company had the following summarized activities:

Purchased short-term investments for $7,300 cash.

Lent $5,400 to a supplier who signed a two-year note.

Purchased equipment that cost $25,000; paid $4,300 cash and signed a one-year note for the balance.

Hired a new president at the end of the year. The contract was for $84,000 per year plus options to purchase company stock at a set price based on company performance.

Issued an additional 2,500 shares of $0.50 par value common stock for $16,000 cash.

Borrowed $11,000 cash from a local bank, payable in three months.

Purchased a patent (an intangible asset) for $1,600 cash.

Built an addition to the factory for $25,000; paid $8,700 in cash and signed a three-year note for the balance.

Returned defective equipment to the manufacturer, receiving a cash refund of $1,800.

Ivanhoe Company began operations in 2015 and for simplicity reasons, adopted weighted-average pricing for inventory. In 2017, in accordance with other companies in its industry, Ivanhoe changed its inventory pricing to FIFO. The pretax income data is reported below.

Year    Weighted-Average FIFO

2015    $384,700    $399,100

2016    $398,400    $422,600

2017    $426,600    $467,100

What is Ivanhoe’s net income in 2017? Assume a 35% tax rate in all years.

1–33. Match the following defi nitions (or partial defi nitions) of the various types of services to the
appropriate service. Each service may be used once or not at all.
LO 1-1, 2, 6
Defi nition (or Partial Defi nition) Service
a. An attest engagement in which the CPAs agree to perform
procedures for a specifi ed party and issue a report that is
restricted to use by that party.
b. An engagement designed to express limited assurance
relating to subject matter or an assertion.
c. An engagement in which the CPAs issue an examination,
a review, or an agreed-upon procedures report on subject
matter or an assertion about subject matter that is the
responsibility of another party (e.g., management).
d. An examination designed to provide an opinion that is the
CPA’s highest level of assurance that the fi nancial statements
follow generally accepted accounting principles, or
another acceptable basis of accounting.
e. As required by the Sarbanes-Oxley Act and the Public Company
Accounting Oversight Board, an audit that includes
providing assurance on both the fi nancial statements and
internal control over fi nancial reporting.
f. Professional services that enhance the quality of information,
or its context, for decision makers.
g. An attest engagement designed to provide the highest
level of assurance that CPAs provide on an assertion.

1. Agreed-upon
procedures engagement
2. Assurance services
3. Attest engagement
4. Audit of fi nancial
statements
5. Compliance audit
6. Examination
7. Integrated audit
8. Operational audit
9. Review

1–28. Multiple Choice Questions
Select the best answer for each of the following items and give reasons for your choice.
a. Which of the following best describes the relationship between assurance services and
attest services?
(1) While attest services involve fi nancial data, assurance services involve nonfi nancial data.
(2) While attest services require objectivity, assurance services do not require objectivity.
(3) Both attest and assurance services require independence.
(4) Attest and assurance services are different terms referring to the same types of services.
b. Which of the following has primary responsibility for the fairness of the representations
made in fi nancial statements?
(1) Client’s management.
(2) Independent auditor.
(3) Audit committee.
(4) AICPA.
c. The most important benefi t of having an annual audit by a public accounting fi rm is to:
(1) Provide assurance to investors and other outsiders that the fi nancial statements are reliable.
(2) Enable offi cers and directors to avoid personal responsibility for any misstatements in
the fi nancial statements.
(3) Meet the requirements of government agencies.
(4) Provide assurance that illegal acts, if any exist, will be brought to light.
d. The Sarbanes-Oxley Act created the Public Company Accounting Oversight Board
(PCAOB). Which of the following is not one of the responsibilities of that board?
(1) Establish independence standards for auditors of public companies.
(2) Review fi nancial reports fi led with the SEC.
(3) Establish auditing standards for audits of public companies.
(4) Sanction registered audit fi rms.
e. Which of these organizations has the responsibility to perform inspections of auditors of
public companies?
(1) American Institute of Certifi ed Public Accountants.
(2) Securities and Exchange Commission.
(3) Financial Accounting Standards Board.
(4) Public Company Accounting Oversight Board.
f. Governmental auditing, in addition to including audits of fi nancial statements, often
includes audits of effi ciency, effectiveness, and:
(1) Adequacy.
(2) Evaluation.
(3) Accuracy.
(4) Compliance.
g. In general, internal auditors’ independence will be greatest when they report directly to the:
(1) Financial vice president.
(2) Corporate controller.
(3) Audit committee of the board of directors.
(4) Chief executive offi cer.
h. Which of the following did not precipitate the passage of the Sarbanes-Oxley Act of 2002
to regulate public accounting fi rms:
(1) Disclosures related to accounting irregularities at Enron and WorldCom.
(2) Restatements of fi nancial statements by a number of public companies.

(3) Conviction of the accounting fi rm of Arthur Andersen LLP.
(4) Ethical scandals at the AICPA.
i. Which of the following organizations establishes accounting standards for U.S. government
agencies?
(1) The Financial Accounting Standards Board.
(2) The Governmental Accounting Standards Board.
(3) The Federal Accounting Standards Advisory Board.
(4) The Public Company Accounting Oversight Board.
j. Which of the following is correct about forensic audits?
(1) All audit engagements are forensic in nature.
(2) Forensic audits are performed by law fi rms; they are not performed by CPA fi rms.
(3) Forensic audits are equivalent to compliance audits.
(4) Forensic audits are usually performed in situations in which fraud has been found or is
suspected.
k. What best describes the purpose of the auditors’ consideration of internal control in a
fi nancial statement audit for a nonpublic company?
(1) To determine the nature, timing, and extent of audit testing.
(2) To make recommendations to the client regarding improvements in internal control.
(3) To train new auditors on accounting and control systems.
(4) To identify opportunities for fraud within the client’s operations.
l. Which of the following is an example of a compliance audit?
(1) An audit of fi nancial statements.
(2) An audit of a company’s policies and procedures for adhering to environmental laws
and regulations.
(3) An audit of a company’s internal control over fi nancial reporting.
(4) An audit of the effi ciency and effectiveness of a company’s legal department.

prepare a form 1040EZ.
What are her average tax rate and effective tax rate?
If the government announced an increasing $5000 of tax deductions, what is her marginal tax rate on these deduction

Question 56