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Spiceland_Inter_Accounting8e_Ch05

CHAPTER 5 Revenue Recognition and Profitability Analysis 301 representing a 14.0% return on shareholders’ equity. Performance was enhanced by the Company’s judicious use of financial leverage on a debt/equity ratio of 2 to 1.” Required: Use the information available to provide your client with an opinion as to whether the waste recycling firm invested in the new fuel creation process during the last quarter of the year. You are a new staff accountant with a large regional CPA firm, participating in your first audit. You recall from your auditing class that CPAs often use ratios to test the reasonableness of accounting numbers provided by the client. Since ratios reflect the relationships among various account balances, if it is assumed that prior relationships still hold, prior years’ ratios can be used to estimate what current balances should approximate. However, you never actually performed this kind of analysis until now. The CPA in charge of the audit of Covington Pike Corporation brings you the list of ratios shown below and tells you these reflect the relationships maintained by Covington Pike in recent years. Profit margin on sales 5 5% Return on assets 5 7.5% Gross profit margin 5 40% Inventory turnover ratio 5 6 times Receivables turnover ratio 5 25 times Acid-test ratio 5 .9 to one Current ratio 5 2 to 1 Return on shareholders’ equity 5 10% Debt to equity ratio 5 1/3 Times interest earned ratio 5 12 times Jotted in the margins are the following notes: ● Net income $15,000 ● Only one short-term note ($5,000); all other current liabilities are trade accounts ● Property, plant, and equipment are the only noncurrent assets ● Bonds payable are the only noncurrent liabilities ● The effective interest rate on short-term notes and bonds is 8% ● No investment securities ● Cash balance totals $15,000 Required: You are requested to approximate the current year’s balances in the form of a balance sheet and income statement, to the extent the information allows. Accompany those financial statements with the calculations you use to estimate each amount reported. Integrating Case 5–16 Using ratios to test reasonableness of data; Chapters 3 and 5 ● LO5–10 Air France–KLM Case Air France–KLM (AF), a Franco-Dutch company, prepares its financial statements according to International Financial Reporting Standards. AF’s financial statements and disclosure notes for the year ended December 31, 2013, are provided with all new textbooks. This material also is available at www.airfranceklm-finance.com . Required: 1. In note 4.6, AF indicates that “Sales related to air transportation are recognized when the transportation service is provided,” and “both passenger and cargo tickets are consequently recorded as ‘Deferred revenue on ticket sales’.” a. Examine AF’s balance sheet. What is the total amount of deferred revenue on ticket sales as of December 31, 2013? b. When transportation services are provided with respect to the deferred revenue on ticket sales, what journal entry would AF make to reduce deferred revenue? c. Does AF’s treatment of deferred revenue under IFRS appear consistent with how these transactions would be handled under U.S. GAAP? Explain. 2. AF has a frequent flyer program, “Flying Blue,” which allows members to acquire “miles” as they fly on Air France or partner airlines that are redeemable for free flights or other benefits. a. How does AF account for these miles? b. Does AF report any liability associated with these miles as of December 31, 2013? c. Although AF’s 2013 annual report was issued prior to the effective date of ASU No. 2014-09, consider whether the manner in which AF accounts for its frequent flier program appears consistent with the revenue recognition guidelines included in the ASU. ● LO5–2, LO5–4, LO5–5 IFRS


Spiceland_Inter_Accounting8e_Ch05
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