1) The following items were taken from the financial statements of Rug, Inc., over a
four-year period:
Item 2016 2015 2014 2013
Net Sales$900,000$650,000$600,000$500,000
Cost of Goods Sold 580,000 460,000 420,000 400,000
Gross Profit$320,000$190,000$180,000$100,000
Instructions
Using horizontal analysis and 2013 as the base year, compute the trend percentages for
net sales, cost of goods sold, and gross profit. Explain whether the trends are favorable
or unfavorable for each item.
2) Many companies use ____________________________ budgets by dropping the
month just ending and adding a future month.
3) In a decision on whether an order should be accepted at a special price when there is
plant capacity available, a major consideration is whether the special price exceeds
__________________.
4) ___________________ is added to direct labor and manufacturing overhead to get
total manufacturing costs for the current period.
5) A flexible budget graph for the Grindinb Department shows the following:
1>At zero direct labor hours, the total budgeted cost line intersects the vertical axis at
$120,000.
2>At normal capacity of 100,000 direct labor hours, the line drawn from the total
budgeted cost line intersects the vertical axis at $420,000.
Instructions
Develop the budgeted cost formula for the Grindinb Department and identify the fixed
and variable costs.
6) On September 30, after all monthly postings had been completed, the Accounts
Receivable control account in the general ledger had a debit balance of $250,000; the
Accounts Payable control account had a credit balance of $105,000.
The October transactions recorded in the special journals are presented below.
Special JournalsOctober Transactions
Sales journalTotal sales$180,000
Purchases journalTotal purchases72,000
Cash receipts journalAccounts receivable column total120,000
Cash payments journalAccounts payable column total41,000
Instructions
Compute the balances of the (1) Accounts Receivable and (2) Accounts Payable control
accounts after the monthly postings on October 31 .
7) The use of a cash register for cash receipts is an example of the internal control
principle of
segregation of duties
documentation procedures
c.physical, mechanical, and electronic controls
d.independent internal verification
8) Physician Reference Service (PRS) provides services to physicians including
research assistance, diagnosis coding and medical practice software including an
advanced medical record cross-referencing system. PRS is aggressive in monitoring
other firms’ offerings and ensuring that its services are comparable to all others.
Because of its need to stay abreast of new product offerings, PRS spends a lot of money
sending professionals to trade shows. In addition, PRS has agreements with several
clients whereby the client requests a presentation of a competitor’s services. A PRS
employee poses as an employee of the client’s office and attends the presentation,
obtaining as much data and sample information as possible. The cost of the travel and
attending presentations is charged to Product Development and expensed during the
current year.
In April of this year, PRS began selling a software product substitute before the
competitor’s software was released. The competitor, Compu-Med, sued for copyright
infringement and won. PRS had to withdraw its product from the market and pay $1.5
million in damages. PRS immediately negotiated an agreement with Compu-Med to sell
Compu-Med’s product (since it was prohibited from offering its own version for five
years.) This agreement cost an additional $1.3 million, but it allowed PRS to continue
to offer a full line of services.
PRS’s accountant, Jill Linsey, initially recorded the cash payments as “Loss from
Lawsuit” and “Product Development,” respectively. However, Jack Meyer, the
controller, instructed Jill to create an intangible asset, named “Goodwill” and charge
both costs to this account. “We’re protected from another lawsuit as long as this
agreement is in effect,” he says. “It’s about as close to goodwill as we’ll ever get from
our competitors. We might as well amortize the cost rather than take the full hit to
income, anyway.”
Required:
1>What are the ethical issues?
2>What should Jill do?