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ACC 331 Lecture Notes - Lecture 9: Cash Cash, Deferred Income, Deferral

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School
Elon University
Department
Accounting
Course
ACC 331
Professor
Linda Poulson

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Document Summary

Long term success: external users look at risk. Short term loan: external users can just look at your balance sheet and make a decision. All of the accounts are separated into more speci c categories. Current assets: assets that are expected to be used, consumed, or converted to cash within 1 year or the operating cycle, whichever is longer. Operating cycle: the time it takes to go from cash to cash. Cash equivalents: highly liquid investment which can be quickly converted into cash. It is common practice to classify investments that have a maturity date of three months or less from the date of purchase as cash equivalents. Most companies draw a distinction between investments classi ed as cash equivalents and he next category or short term investments according to the maturity of the investments. Commercial paper: short term loan between businesses,

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Related Questions

Cermco produces and sells specialty customer relationship management (CRM) solutions to small and medium-size businesses in the United States and Canada. The company is more than 20 years old and has a steady, loyal customer base.

A major reason for Cermco’s success lies in the ability of its product to easily integrate with various accounting and ERP systems. As a result, even when clients upgrade their entire accounting systems to expensive ERP solutions, they continue to use Cermco’s CRM because of its superior features.

Annual revenues for Cermco’s three most recent years are about $11 million (20X3), $7 million (20X4), and $3 million (20X5), respectively. Overall interest expenses and operating margins have remained a relatively constant percentage of revenues.

Cermco attributes the decline in revenues to declines in market share as a result of natural client turnover and the entrance of many other small competing software companies into the market. Nevertheless, Cermco’s CRM product continues to enjoy the highest industry ratings and a loyal customer base.

Cermco’s balance sheets for the most recent three years follow:

CERMCO Balance Sheet December 31
20X5 20X4 20X3
Assets
Current assets
Cash and cash equivalents $390 $1,386 $2,603
Short-term investments — — —
Net receivables 720 664 1,225
Inventory — — —
Other current assets 412 469 892
Total current assets $1,522 $2,519 $4,720
Long-term investments 1,215 — —
Property, plant, and equipment 76 258 454
Goodwill 545 1,757 2,194
Intangible assets 999 1,844 3,644
Accumulated amortization — — —
Other assets — — —
Deferred long-term asset charges — — —
Total assets $4,357 $6,378 $11,012
Liabilities
Current liabilities
Accounts payable $469 $1,174 $1,436
Short/Current long-term debt — — 600
Other current liabilities 1,227 1,358 1,496
Total current liabilities $1,696 $2,532 $3,532
Long-term debt — — —
Other liabilities — — —
Deferred long-term liability charges — — —
Minority Interest — — —
Negative goodwill — — —
Total liabilities 1,696 2,532 3,532
Stockholders' equity
Misc. stock option warrants — — —
Redeemable preferred stock — — —
Preferred stock 3,014 3,211 2,333
Common stock 16 16 13
Retained earnings –25,513 –23,814 –19,165
Treasury stock — — —
Capital surplus 25,168 25,564 25,862
Other stockholders’ equity –24 –1,131 –1,563
Total stockholders’ equity $2,661 $3,846 $7,480

Produce a valuation estimate for Cermco for December 31, 20X5. Use whatever valuation method you think best but justify your choice. Note that you can estimate the annual income from year-to-year changes in the balance sheet.

Cermco produces and sells specialty customer relationshipmanagement (CRM) solutions to small and medium-size businesses inthe United States and Canada. The company is more than 20 years oldand has a steady, loyal customer base.

A major reason for Cermco’s success lies in the ability of itsproduct to easily integrate with various accounting and ERPsystems. As a result, even when clients upgrade their entireaccounting systems to expensive ERP solutions, they continue to useCermco’s CRM because of its superior features.

Annual revenues for Cermco’s three most recent years are about$11 million (20X3), $7 million (20X4), and $3 million (20X5),respectively. Overall interest expenses and operating margins haveremained a relatively constant percentage of revenues.

Cermco attributes the decline in revenues to declines in marketshare as a result of natural client turnover and the entrance ofmany other small competing software companies into the market.Nevertheless, Cermco’s CRM product continues to enjoy the highestindustry ratings and a loyal customer base.

Cermco’s balance sheets for the most recent three yearsfollow:

CERMCO

Balance Sheet

December 31

20X5

20X4

20X3

Assets

Current assets

Cash and cash equivalents

$390

$1,386

$2,603

Short-term investments

—

—

—

Net receivables

720

664

1,225

Inventory

—

—

—

Other current assets

412

469

892

Total current assets

$1,522

$2,519

$4,720

Long-term investments

1,215

—

—

Property, plant, and equipment

76

258

454

Goodwill

545

1,757

2,194

Intangible assets

999

1,844

3,644

Accumulated amortization

—

—

—

Other assets

—

—

—

Deferred long-term asset charges

—

—

—

Total assets

$4,357

$6,378

$11,012

Liabilities

Current liabilities

Accounts payable

$469

$1,174

$1,436

Short/Current long-term debt

—

—

600

Other current liabilities

1,227

1,358

1,496

Total current liabilities

$1,696

$2,532

$3,532

Long-term debt

—

—

—

Other liabilities

—

—

—

Deferred long-term liability charges

—

—

—

Minority Interest

—

—

—

Negative goodwill

—

—

—

Total liabilities

1,696

2,532

3,532

Stockholders' equity

Misc. stock option warrants

—

—

—

Redeemable preferred stock

—

—

—

Preferred stock

3,014

3,211

2,333

Common stock

16

16

13

Retained earnings

–25,513

–23,814

–19,165

Treasury stock

—

—

—

Capital surplus

25,168

25,564

25,862

Other stockholders’ equity

–24

–1,131

–1,563

Total stockholders’ equity

$2,661

$3,846

$7,480

Produce a valuation estimate for Cermco for December 31, 20X5.Use whatever valuation method you think best but justify yourchoice. Note that you can estimate the annual income fromyear-to-year changes in the balance sheet.

The independent auditor is allowed to use a specialist for evaluating a complicated financial transaction provided the specialist is

knowledgeable and independent of the audit client.
approved by the client's board of directors.
all of the above.
acceptable to the PCAOB.

Inappropriately dating transfers of funds between bank accounts to cover shortages of cash is properly referred to as

lapping.
reconciling.
kiting.
embezzling.

Cash equivalents

represent current assets that can be converted to cash within a year or an operating cycle, whichever is shorter.
include only cash and highly liquid investments that are virtually free of risk.
should be reported as investments and not be included as cash on the balance sheet.
typically exclude money market funds and treasury bills.

A cut-off bank statement primarily is used to

determine whether reconciling items on the year-end bank reconciliation have cleared the bank.
prepare a year-end bank reconciliation.
test for kiting.
confirm the year-end balance of cash.

An imprest cash account

typically is used for many large miscellaneous disbursements.
typically earns large amounts of interest.
is another name for the general cash account of an organization.
is an account containing a stipulated amount of money to be used for a specific purpose.

An auditor may estimate the appropriate amount of interest expense to be recorded by an audit client by multiplying the average debt by the average interest rate. If the auditor's estimate is considerably larger than the client's recorded interest expense this would be evidence of a potential

failure of the client to accrue interest expense at year end.
the violation of significant loan covenants.
overstatement of recorded interest expense.
understatement of long-term debt.

Internal controls over fixed assets in a smaller entity

usually include authorization by the board of directors.
typically will be very similar to internal controls over other assets within the entity.
must be the same as in larger entities.
are of little importance since fixed assets are not subject to theft or misuse.

A change in depreciation methods employed by an audit client resulting in a material change in depreciation expense

is not necessarily a violation of generally accepted accounting principles.
requires disclosure by the audit client in the footnotes to the financial statements.
must be noted in the audit opinion due to lack of consistency.
is properly described by all of the listed statements.

Auditors typically assess inherent risk for material accounts requiring significant estimates as

low.
high.
zero.
moderate.

Which of the following loans from an audit client, which is a financial institution, made in accordance with the normal lending practices of the financial institution would impair the CPA's independence?

A loan fully secured by certificates of deposit from the same financial institution.
A credit card loan in which the balance carried forward each month does not exceed $9,000.
An automobile loan secured by the automobile.
A home loan equal to less than 50% of the home's value and collateralized by the home.

A CPA has obtained some original records from a client during the course of an audit engagement. At the completion of her audit according to the proper professional standards the client fired the CPA and demanded that the CPA return all of his original records immediately. Under these circumstances which of the following statements is most correct according to the AICPA Code of Professional Conduct?

The CPA may hold the original records she obtained until the client pays for the services she has completed.
The CPA must return only the original records of the client upon demand regardless of the circumstances.
The CPA must return all original records and all copies of original records of the client upon demand regardless of the circumstances.
This is a matter of state law and not a matter covered by the AICPA Code of Professional Conduct.