Competency 981.1.1: Bachelor of Science in Accounting Program Capstone – The graduate integrates and synthesizes competencies from across the degree program and thereby demonstrates the ability to participate in and contribute value to the chosen professional field.
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Introduction:
For this task you will be analyzing various business transactions for a merchandising company called Yellow Leaf Fashion Inc. using the attached “Yellow Leaf Scenario.” You will prepare financial statements, including a balance sheet, income statement, and a statement of cash flows in accordance with GAAP. You will also assess the performance and financial position of the company.
Requirements:
Use the attached “Yellow Leaf Scenario,” “Yellow Leaf Workbook,” and “Yellow Leaf Approved Ratios” to complete this task for 2014 in accordance with GAAP.
A. Prepare the adjusted trial balance in the attached “Yellow Leaf Workbook,” including the schedule for the general journal adjusting entries.
B. Prepare the multistep income statement for Yellow Leaf Fashion in the attached “Yellow Leaf Workbook.”
1. Include the earnings-per-share computation in the multistep income statement for Yellow Leaf Fashion.
C. Prepare the classified balance sheet for Yellow Leaf Fashion in the attached “Yellow Leaf Workbook.”
D. Prepare the statement of cash flows for Yellow Leaf Fashion in the attached “Yellow Leaf Workbook.”
E. Prepare the statement of retained earnings for Yellow Leaf Fashion in the attached “Yellow Leaf Workbook.”
F. Prepare a vertical analysis of the balance sheet with total assets as a base in the attached “Yellow Leaf Workbook.”
G. Prepare a vertical analysis of the income statement with revenue as a base in the attached “Yellow Leaf Workbook.”
H. Prepare the schedule for income taxes in the attached “Yellow Leaf Workbook.”
I. Prepare a report (suggested length of 6–8 pages) that analyzes the financial position and performance of Yellow Leaf Fashion by doing the following:
1. Compute two relevant financial ratios from the attached “Yellow Leaf Approved Ratios” to assess liquidity.
a. Explain why the two ratios you chose for part I1 are relevant to the company’s financial position and performance.
2. Compute two relevant financial ratios from the attached “Yellow Leaf Fashion Approved Ratios List” to assess activity.
a. Explain why the two ratios you chose for part I2 are relevant to the company’s financial position and performance.
3. Compute two relevant financial ratios from the attached “Yellow Leaf Fashion Approved Ratios List” to assess profitability.
a. Explain why the two ratios you chose for part I3 are relevant to the company’s financial position and performance.
4. Compute two relevant financial ratios from the attached “Yellow Leaf Fashion Approved Ratios List” to assess coverage.
a. Explain why the two ratios you chose for part I4 are relevant to the company’s financial position and performance.
5. Evaluate the overall financial position and performance of the company, based on the analysis performed in parts I1–I4a.
6. Recommend two areas where the president and store managers should perform further analysis to improve future performance.
a. Justify your recommendations from part I6.
J. When you use sources, include all in-text citations and references in APA format.
Note: For definitions of terms commonly used in the rubric, see the Rubric Terms web link included in the Evaluation Procedures section.
Note: When using sources to support ideas and elements in an assessment, the submission MUST include APA formatted in-text citations with a corresponding reference list for any direct quotes or paraphrasing. It is not necessary to list sources that were consulted if they have not been quoted or paraphrased in the text of the assessment.
Note: No more than a combined total of 30% of a submission can be directly quoted or closely paraphrased from outside sources, even if cited correctly. For tips on using APA style, please refer to the APA Handout web link included in the APA Guidelines section.
Yellow Leaf Fashion Inc.
You are a newly hired accountant for Yellow Leaf Fashion Inc., a local women’s apparel retailing company. The current accounting system provides an unadjusted trial balance as of December 31, 2014, and additional information necessary to prepare the financial statements. The president of the company wants you to prepare a balance sheet, income statement, and statement of cash flows for the year, and a basic financial statement analysis that can facilitate the assessment of its performance and financial position at the store managers’ meeting.
Yellow LeafFashion Inc. was incorporated on December 31, 2011, with 100,000 shares of $1 par value common stock authorized. Eighty thousand shares were issued at $6 per share on December 31, 2011. An additional 8,000 common shares were issued at $8 per share on June 30, 2013. The company’s accounting period ends on December 31 of each year.
Additional Information for Adjusting Journal Entries:
1. The company uses the first in, first out method on a periodic basis. Physical counts are conducted at the end of the year to determine the quantity and value of merchandise inventory on hand and cost of goods sold. As the result of a physical count, year-end merchandise inventory was determined to be $546,300.
2. All store equipment was purchased at the beginning of 2012. Yellow Leaf Fashion Inc. expects that the equipment has an estimated useful life of six years, with a residual (salvage) value of $20,000. For financial reporting purposes, it uses the straight-line method for depreciation.
3. The company leased the store with an initial term of 10 years and afive-year extension term. Under the current lease contract, it pays a fixed annual rent of $60,000 and additional rent based on a percentage of sales over the designated level; when sales are over one million dollars, the company pays 5% of the excess sales as additional rent. Additional rent is paid three months after the fiscal year-end of the base year.
4. On September 30, 2013, the company borrowed $80,000 through a three-year note bearing interest at 6% annually. The interest is paid semi-annually.
5. The company purchased Webb Corporation’s stock at $1,008,075 on September 24, 2014, and classified the stock as available for sale. The fair market value of the stock on December 31, 2014, is $942,550.
6. The company uses the percentage of receivables method to estimate bad debt expense. At year-end the company estimates 4% of receivables will be uncollectible.
7. On January 1, 2014, the board of directors of the company authorized the grant of 10,000 stock options to its employees to supplement their salary. Each stock option permits the purchase of one share of common stock of the company at a price of $9 per share; the market price of the stock on January 1, 2014, was also $9 per share. The options vest, or become exercisable, beginning on January 1, 2017, and only if the employees stay with the company for the entire three years’ vesting period. The options expire on December 31, 2017. On December 31, 2014, the company estimated a grant value of $6 for each of the employee stock options using an option-pricing model.
8. On December 31, 2014, the company gathered the following information to recognize income tax expenses, income tax payable, and deferred tax assets and liabilities.
a. The salaries and wages expense for 2014 includes $3,200 of life insurance premium paid for store managers, and the beneficiary is Yellow Leaf Fashion, Inc.
b. For store equipment, depreciation deduction for tax reporting is as follows:
Year Depreciation tax deduction
2012 $110,000
2013 $90,000
2014 $70,000
2015 $60,000
2016 $20,000
2017 $10,000
Total $360,000
c. Additional rental expense is not tax deductible for the year in which the company recognizes it. It will be deductible for income tax when the company pays the accrued rent liability for the next year.
d. Stock-based compensation expense is also not tax deductible for the year in which the company recognizes it. It will be deductible for income tax when the stock option is exercised.
e. Assume that the federal enacted income tax rate is 35% in 2014 and all subsequent periods.
9. EPS computation: Although the company’s stock is not publicly traded in the market, assume that the stock price was available and the average stock price for 2014 was $12 for diluted EPS computation with stock options.
10. The balance sheet, income statement, and statement of cash flows for the two previous years (2012 and 2013) and unadjusted trial balance as of December 31, 2014, are provided.
Yellow Leaf Fashion, Inc.
Approved Ratios
Year Ended 12/31/14
Summary of Financial Ratios
I. Liquidity
• Current ratio – Current assets/current liabilities
• Quick or acid-test ratio – Cash + short-term Investments + net receivables/current liabilities
• Current cash debt coverage – Net cash provided by operating activities/average current liabilities
II. Activity
• Accounts receivable turnover – Netsales/average trade receivables (net)
• Inventory turnover – Cost of goods sold/average inventory
• Asset Turnover – Net sales/average total assets
III. Profitability
• Profit margin on sales – Net income/net sales
• Return on assets – Net income/average total assets
• Return on Common Stock Equity – Net income-preferred dividends/average common stockholder’s equity
• Earnings per share – Net income – preferred dividends/Weighted average number of sharesoutstanding
• Payout ratio – Cash dividends/net income
IV. Coverage
• Debt to assets ratio – Total liabilities/total assets
• Times-interest earned – Income before income taxes and interest expense/interest expense
• Cash debt coverage – Net cash provided by operating activities/average total liabilities
• Book value per share – Common stockholders’ equity/outstanding shares
ACCOUNTING CAPSTONE PART 2
Competency 981.1.1: Bachelor of Science in Accounting Program Capstone – The graduate integrates and synthesizes competencies from across the degree program and thereby demonstrates the ability to participate in and contribute value to the chosen professional field.
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Introduction:
For this task, you will analyze the annual report, the 10-K, other company SEC filings, and industry data for a selected publicly-held company. You will prepare a broad audit plan for one of the following companies:
• Home Depot Inc.
• Gap Inc.
• Darden Restaurants Inc.
The broad-based audit plan should identify control risks and areas of focus for the audit. You will provide recommendations for which accounts should be audited using analytical procedures and which accounts should be tested using substantive tests of detail. Additionally, you will address going-concern considerations, the prior year’s audit opinion, and audit locations.
Use the SEC Edgar and Reuters websites to find the information you need.
Requirements:
Complete an analysis and prepare a broad-based audit plan (suggested length of 10–15 pages, excluding the appendix) for your chosen company (i.e., Home Depot Inc., Gap Inc., or Darden Restaurants Inc.) by completing the requirements below in accordance with GAAS. Your analysis and audit plan should be based upon the information obtained in the 2013 annual report, the 10-K, and other 2013 SEC filings, along with industry data:
A. Complete the attached “Company Information Template” for your chosen company based on the 2013 10-K and the 2013 annual report by doing the following:
1. Identify the company’s basic information, including each of the following:
• the company’s name
• the company’s date of formation
• the industry in which the company operates
• the company’s size in terms of annual sales
• the company’s size in terms of total assets
• the company’s size in terms of employees (all full- and part-time)
• the company’s size in terms of total market value
• the location of company headquarters, including the states and countries in which it operates
2. Identify the company’s top three customers and/or suppliers.
3. Identify the company’s sources of financing (e.g., bonds, stocks, loans, etc.).
4. Identify the company’s related parties (if any), including people and other companies.
5. Identify the current stage in the company’s life cycle.
6. Identify three risks associated with this business and/or industry.
7. Identify two key economic factors that affect the company and how it stands with respect to these factors.
8. Describe one unique accounting consideration for companies in this industry.
9. Describe one of each of the following matters that are relevant to your chosen company:
• a legal matter
• a regulatory matter
• social matter
10. Recommend two additional questions you would ask a company representative in an interview setting.
a. Justify your question recommendations from part A10.
b. Identify the individuals within the company to whom you would ask each question identified in part A10.
B. Analyze the data compiled in Part A and, based upon your analysis, discuss the three primary audit concerns.
C. Perform preliminary analytical procedures by doing the following:
1. Prepare a vertical analysis of the financial statements for 2011 through 2013.
2. Evaluate whether your chosen company is growing or declining.
a. Identify any major increases or decreases in accounts.
i. Justify your identifications made in part C2a.
3. Determine how the stock price of your chosen company has moved since the issuance of the last annual report and 10-k.
4. Choose two financial strengths for your chosen company during the year and do the following:
a. Discusseach financial strength in comparison to prior periods.
b. Discusseach financial strength in comparison to the strength of the industry.
D. Prepare a broad-based audit plan for 2013 based upon your findings in parts A–C by doing the following:
1. Determine the impact of the prior year’s audit opinion for the current year’s audit plan.
2. Recommend whether the control risk of your chosen company should be assessed at the maximum level or below.
a. Justify your recommendation made in part D2.
3. Discuss the control risk assessment identified in D2 and what impact it will have on the audit procedures to be performed. Include in your discussion each of the following:
• nature
• timing
• extent
4. Identify areas of focus for the upcoming audit, including specific balance sheet and income statement accounts based upon the significance of those accounts and their related risks.
5. Recommend which accounts identified in part D4 should be tested using analytical procedures and which accounts should be tested through substantive tests of detail.
a. Justify your recommendation made in part D5.
6. Discuss whether or not there is a going-concern consideration.
7. Recommend whether the audit should be conducted at one main location or if the audit team should be dispersed to other locations.
a. Justify your recommendation made in part D7.
8. Describe the five main steps the audit team will perform.
E. Include all in-text citations and references in APA format.
Note: For definitions of terms commonly used in the rubric, see the Rubric Terms web link included in the Evaluation Procedures section.
Note: When using sources to support ideas and elements in an assessment, the submission MUST include APA formatted in-text citations with a corresponding reference list for any direct quotes or paraphrasing. It is not necessary to list sources that were consulted if they have not been quoted or paraphrased in the text of the assessment.
Note: No more than a combined total of 30% of a submission can be directly quoted or closely paraphrased from outside sources, even if cited correctly. For tips on using APA style, please refer to the APA Handout web link included in the APA Guidelines section.