How To Construct A Model Of The Information Cues Used In Auditors?

When analysts question a firm’s earnings quality, it raises concerns regarding under or over aggressive accounting practices that may be allowing the firm to manipulate the earnings. Earnings quality is defined as the strength of the current earnings in being used to predict future earnings and cash flows. Since earning quality is indicative of future performance, analysts are more likely to address issues that have substantial impact on the earnings quality. An issue arises when the nature of the earnings is questioned. While permanent earnings are part of normal operations, any irregular, one time earnings can skew the earnings, making the firm look more profitable than it is. This is due to the inability to recreate similar one-time transactions that will give rise to such numbers. Investors prefer predictable

Such an intense focus has been placed on quarterly earnings as an indication of a company’s success by everyone from analysts to executives that ethics have for the most part been thrown out the window, sacrificed to the all important number, i.e. earnings per share. This is the theory in Alex Berenson’s book “The Number: How the Drive for Quarterly Earnings Corrupted Wall Street and Corporate America.” This number has become part of a game to be played, a figure to be manipulated – beat the number and Wall Street all but throws a parade, miss it and a company’s stock may be abandoned. Take into account the incentives that executives have to beat the number and one can find plenty of reasons to manage earnings.

After reviewing the Balance sheet I have a concern regarding the Current and short term liabilities. Creditors/ trade payable is payment yet to be made for goods already received, if this continues to rise then it will effect the business profit and less stock will have to be ordered so repayments can be made. Bank overdrafts also continued to rise and in the long-term the business will be paying greater interest, which will again eat into the profit. Both increased quite a great deal from the last year-end. If this continues then the business will get into bad debts and owe too much that it will end up having to sale its assets to survive. Finally I can see that due to the above issues and other issues the net current assets/ working capital has decreased so therefore the business is less value then it was a year ago. If the business is worth £1 million now, this could soon decrease within another year.

The decline of inventory turnover presents the incresed possibility of inventory obsolescence which is likely to be assessed as higher business risk. In debts to equity part, the ratio in current year is much higher than that of preceeding year, which means the extent of use of debt in financing company is much higher than before. Pinnacle has used most of its borrowing capacity and has little cushion for addional debt.This action brought high business risk to Pinnacle. In addition, Pinnacle puchase more inventory in current year that that of preceeding year, and net sales are increasing also compared previous year. However, the net income is decreased significantly. These changes show expenses (maybe direct or indirect) have increased dramaticly. The company uses more expensive materials and labors to manufacure and sell products.

The FASB Codification provides guidance on how to classify monetary and nonmonetary assets and liabilities. For typical circumstances it suggests using a classification table, and for non-typical circumstances Codification guides to refer to the definitions. To begin with, let us appeal to the definition of “inventory”. The term inventory embraces goods awaiting sale (the merchandise of a trading concern and the

2 , when do you first see signs of GM’s impending financial distress? 2. In referencing professional standards, what factors should auditors consider in evaluating potential going- concern uncertainties?

First, the inventory account increased from 35.47% of total assets in 1996 to 58.01% in 1998, which was uncharacteristically large. Second, the cash accounts and marketable securities decreased significantly. Finally, long term debt increased enormously over the three years. These items are major red flags for business operations.

Vertical Analysis- In conducting the vertical analysis of the financial statements provided, I have found a few rather unfavorable results. First, I can’t help but notice that in 2014 Smith Enterprises have a measly 19% total assets in cash, and 20% total assets in cash in 2015. This may be a negative result of the company’s confined inventory by 22% in 2014 and 30% for 2015. If inventory is not being moved, there is no opportunity for cash, therefore, the cash account is being negatively affected overall. Next, when reviewing Smith Enterprises total liability, for 2014 the company’s total assets to total liability equals 50% in 2014, and 46% percent in the year 2015. While the total liabilities decreased by a total of 4% between 2014 and 2015, the company’s total liabilities are extremely unfavorable. By this I am expressing that 46% and 50% of how Smith Enterprises pays for their assets is with debt through accounts such as accounts payable, salaries payable, and notes payable. If the company were moving out inventory at a faster rate, the higher debt percentage may be justified as the company could pay off this debt quickly, but when tied up inventory is visible this leads me to believe that the debt percentage will stay within a few

Moving onto the balance sheet, it is safe to assume that the cash position in the firm will increase the rate of the sales growth going forward. In actuality, cash has historically increased faster than the growth of revenue with 2004 being an exception. To calculate the assumption for accounts receivable, inventory, and accounts payable, we averaged the four years worth of data

Exhibit 6, 8, and 9 (figures in $ millions) provides selected balance sheet items for Ford, General Motors, and DaimlerChrylser. The given information indicates that Ford carries the highest amount of cash and marketable securities among the three companies. In 1999, Ford had $25,173 of cash and marketable securities while General Motors and Daimler-Chrylser have only $12,140 and $9,163. Comparing at an industry level, we as a team

The firm’s accounts receivable ratio increased from 68.71 in 2006 to 74.56 in 2010. This means that it is taking Abbott almost six days longer to collect from its customers today than it did five years ago. Furthermore, the firm’s accounts payable days has decreased from 43.72 in 2006 to 38.22 in 2010. This means that Abbott is paying its suppliers 5½ days earlier today than it did in 2006. A change in the inventory ratio from 8.01 in 2006 to 11.03 in 2010 indicates that it is taking the firm longer to sell finished goods than it used to. The increase in the accounts receivable and inventory ratios, combined with a decrease in the accounts payable ratio, indicates poor working capital management and helps to explain why the firm has increased its holdings of cash and short-term investments. To correct this, Abbott’s managers should focus on collecting cash from its customers faster and delaying payments to its suppliers. To maximize its cash position, the firm would be best served by paying its suppliers in the same amount of time as it collects payment from its customers.

The fear is that a going-concern opinion can hasten the demise of an already troubled company, reduce a loan officer’s willingness to grant a line of credit to that troubled company, or increase the point spread that would be charged if a company was granted a loan. Auditors are placed at the center of a moral and ethical dilemma: whether to issue a going-concern opinion and risk escalating the financial distress of their client, or not issue a going-concern opinion and risk not informing interested parties of the possible failure of the company. The hope is that issuing a going-concern opinion might promote timelier rescue activity.

You can make use of three different ratios to evaluate company and measure its financial strength. Two of the ratios viz. debt and debt-equity ratios are very common measurements. The third one, capitalization ratio, gives a proper insight in evaluating the company’s capital structure.

The inventory throughout the second quater each an every item is variable and it totals at about £4,009,800 and turns over every 3 months/90 days. Cash sales should amount to about £7,500,000 if the inventory of £4,009,800 valued at cost turns over once in 90 days and if the average mark-up is about £2004, 9000. This figure can be roughly checked by referring to the expenses on the income statement. A rough measure of the cash expenses can usually be obtained by using the operating expenses less any non-cash expenses such as depreciation. Overall this shows that it is very important for Doomy corporations to have cash budget planned for its business, because it can help them assess if they are over spending their money and if the money is going and where it is coming in.

The management of cash is essential to the survival of any organization. Managing an organization’s financial operation requires knowledge of the economy and ways to maximize revenue. For any organization to operate on a daily basis adequate cash flow is required. Without cash management the organization will be unable to function because there is no cash readily available in case of inconsistencies in the market. Cash is also needed to keep the cycle of the company’s operations going.