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a.
b.
CASE 2.3
30 Minutes, Medium
Bankers considering a loan application are particularly interested in the ability of the company to
pay its debts. They want to make loans that will be repaid promptly and in full at the agreed
maturity date, plus interest. Therefore, they give close attention to the amount of cash and other
assets (such as accounts receivable) that will soon become cash. They compare these assets with
Certainly Moon Corporation would appear to have greater debt-paying ability in the near future.
A banker is also interested in the amount of owners’ equity, since this ownership capital serves
as a protecting buffer between the banker and any losses that may befall the business. Although
Star Corporation has greater owners’ equity than Moon Corporation, the difference is relatively
small. Relating the owners’ equity of the businesses to their total liabilities shows that Moon
loan.
USING A BALANCE SHEE
T
As an investor, you would probably be willing to pay a higher price to buy the capital stock of
Star Corporation. Since both companies are newly organized and the cost of assets shown on the
balance sheet approximates fair market value, we can assume in this case that total stockholders’
equity is a reasonable indication of the fair market value of the capital stock. The total
stockholders’ equity you would acquire by buying the capital stock of Star Corporation is
a.
b.
Look at the underlying details of financial statements, not just the final figures or bottom line.
negative cash flows signal that the company is reducing its debt (possibly but less likely its
c.
One possibility is that Walker Company ran out of financing in 2015. We do not know the source
General recommendations to John should include the following:
John’s preliminary evaluation is focusing too much on the “bottom line” and not looking at the
details of the cash flow information. The most important difference between the cash flows of the
30 Minutes, Medium
USING STATEMENTS OF CASH FLO
W
CASE 2.
4
1.
2.
3.
4.
ETHICS AND WINDOW DRESSIN
G
CASE 2.
5
35 Minutes, Medium
Postponing the cash purchase of WordMaster would indeed leave Omega Software with an
additional $8 million in cash at year-end, which would make the company appear more liquid.
The deliberate omission of liabilities from the balance sheet is unethical and illegal. This action
would be in direct violation of the federal securities laws, and the responsible officers would
There is nothing unethical or illegal about renegotiating the due date of a liability. In fact, as
Omega needs to borrow money anyway, extending this obligation to Delta at a 10% interest rate
The intentional violation of generally accepted accounting principles with the intent to mislead
financial statement users is both unethical and illegal. According to generally accepted accounting
principles, corporations prepare their financial statements in conformity with those principles
which do not permit the valuation of assets such as land at market values above cost.* Also, the
auditors would take exception to this valuation.
a.
b.
Harris
c.
CASE 2.
6
30 Minutes, Easy
The mission of the PCAOB is stated as follows: The PCAOB is a private-sector non-profit corporation
created by Congress to oversee the audits of public companies and to protect the interests of investors
and further the public interest in the preparation of informative, accurate, and independent audit
reports."
ETHICS
,
FRAUD & CORPORATE GOVERNANC
E
PUBLIC COMPANY ACCOUNTING OVERSIGHT BOAR
D
practice standards for registered public accounting firms to follow in the preparation and issuance of
audit reports.
Lewis H. Ferguson
The enforcement authority of the PCAOB is a broad investigative and disciplinary authority over
registered public accounting firms and persons associated with such firms for noncompliance with the
The members of the PCAOB are:
San Jose, CA 95134
INTERNE
T
GATHERING FINANCIAL INFORMATIO
N
Note: We cannot supply quantitative answers to parts b through e, because they vary from quarter to quarter.
Our answers indicate only where the data are found in Cisco System’s latest financial statements.
CASE 2.7
25 Minutes, Easy
a. The business address of Cisco Systems is:
170 West Tasman Drive
