Additional Perspective 4-1
Requirement 1
Suzie should make deposits more often than once per month, such as each day or each time a major deposit is needed. Suzie should also reconcile the bank statement more than once every six months, such as once per month.
Requirement 2
Great Adventures, Inc. Bank Reconciliation
December 31, 2015
Bank’s Cash Balance Company’s Cash Balance
Per bank statement $50,500 Per general ledger $64,200
Deposits outstanding +20,000 Interest earned + 500
Checks outstanding − 6,000 Service fee − 200
Bank balance per
reconciliation $64,500
Company balance per
reconciliation $64,500
Dec. 31, 2015 Debit Credit
Cash 500
Interest Revenue 500
(Record interest earned)
Dec. 31, 2015
Service Fee Expense 200
Cash 200
(Record bank service fee)
Requirement 3
Failure to record the interest revenue would cause assets and revenues to be
understated by $500. Failure to record the service charge fee causes expenses to be understated and assets to be overstated by $200. The net effect of both transactions is (retained earnings) and net income by $300.
Additional Perspective 4-2
Requirement 1
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company’s internal control over financial reporting as of February 2, 2013 based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 12, 2013 expressed an unqualified opinion thereon.
Requirement 2
The Company considers all highly liquid investments purchased with a maturity of three months or less to be cash equivalents.
Requirement 3
The amount of cash reported in the current year is $509,119 thousand, and the amount of cash reported in the previous year is $719,545 thousand. This is an decrease of $210,426.
Requirement 4
The amounts reported for operating, investing, and financing cash flows are
$499,671, ($190,650), and ($494,555) thousand, respectively. Total cash flows are $210,426 thousand, including a cash flow of $504 thousand for exchange rates effects and ($25,396) for discontinued operations.
Requirement 5
The amounts in requirement 3 and requirement 4 are equal.
Requirement 6
Net income for the past three years is $232,108, $151,705, and $140,647 thousand. Free cash flows (operating cash flows plus investing cash flows) equal $309,021, $201,436, and $374,446 thousand. The past trends in net income and free cash flows are in the same direction (upward), which is generally an informative signal about the company’s near-term future earnings trend.
Additional Perspective 4-3
Requirement 1
In our opinion, the Company maintained effective internal control over financial
reporting as of February 2, 2013, based on the criteria established in Internal Control
– Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission and our report dated April 3, 2013 expressed an unqualified opinion on the Company’s internal control over financial reporting.
Requirement 2
The Company considers all highly liquid debt instruments with an original maturity of three months or less when purchased to be cash equivalents.
Requirement 3
The amount of cash reported in the current year is $117,608 thousand, and the amount of cash reported in the previous year is $166,511 thousand. This is a decrease of
$48,903.
Requirement 4
The amounts reported for operating, investing, and financing cash flows are $220,941, ($21,666), and ($248,178). Total cash flows are ($48,903).
Requirement 5
The amounts in requirement 3 and requirement 4 are equal.
Requirement 6
Net income for the past three years is $164,305, $151,456, and $134,682 thousand. Free cash flows (operating cash flows plus investing cash flows) equal $199,275, $191,700, and $130,279 thousand. The past trends in net income and free cash flows are in the same direction (upward), which is generally an informative signal about the company’s near-term future earnings trend.
Additional Perspective 4-4
Requirement 1
American Eagle’s ratio of cash to total assets is 28.99% (= $509,119 / $1,756,053). Buckle’s ratio of cash to total assets is 24.61% (= $117,608 / $477,974). A higher ratio of cash to total assets for American Eagle could mean that management sees no opportunities for growth and therefore the company has excess cash. On the other hand, it could mean that American Eagle has relatively more cash immediately available to take advantage of good investment opportunities before its competitors.
Requirement 2
American Eagle’s net income for the past three years is $232,108, $151,705, and $140,647 thousand, while the company’s free cash flows (operating cash flows plus investing cash flows) equal $309,021, $201,436, and $374,446 thousand. The past trends in net income and free cash flows are in the same direction (upward), which is generally an informative signal about the company’s near-term future earnings trend. Buckle’s net income for the past three years is $164,305, $151,456, and $134,682 thousand, while the company’s free cash flows (operating cash flows plus investing cash flows) equal $199,275, $191,700, and $130,279 thousand. The past trends in net income and free cash flows are in the same direction (upward), which is generally an informative signal about the company’s near-term future earnings trend.
Based on this analysis alone, one might predict Buckle to have the greater percentage change in net income in the following year. Keep in mind, though, that many factors are important in predicting a company’s change in net income, and the trend in net income relative to free cash flows is just one.
Additional Perspective 4-5
What is the issue?
The rules explicitly state that friends and family are not allowed to watch free movies, and full price is to be paid for all concession items. By violating these rules, an
employee knowingly engages in unethical behavior. In effect, the employee is stealing from the company. However, when everyone else, including upper
management, is breaking those rules, do those actions replace written policy, now making such behavior ethical?
Who are the parties involved?
Jack could believe that because many workers, including upper management, are violating policies in the employee handbook, it is less unethical to allow friends and family to see free movies and have free popcorn and beverages. Plus, Jack needs to save for college. Unethical actions seem to be easier to justify if one of the outcomes is achieving something positive, like a college education.
Managers should consider the tone they are setting for the company. By violating the policies themselves, managers are not establishing a good control environment for an overall ethical tone by employees with respect to internal controls.
What factors should Jack consider in making his decision?
Jack needs to remember that just because others are violating policies, it doesn’t make it right for him. Upon employment, Jack agreed to the rules of employment. Even though allowing friends and family to watch free movies doesn’t directly steal cash from the theatre, it does prevent the company from potentially earning additional revenue. And even though beverages and popcorn are relatively low-cost items, not paying for them is stealing.
By not engaging in these unethical actions, Jack also portrays a sense of ethical responsibility and trustworthiness among his peers and management. In the long- term, these characteristics could lead to Jack being promoted to higher positions because of management trust, receiving additional compensation, obtaining positive reference letters from management for college and scholarship applications, and other benefits.
Additional Perspective 4-6
Requirement 1
To calculate free cash flows, add operating cash flows and investing cash flows ($ in thousands).
Operating Investing Free Cash Flow
December 31, 2012 16,619,000 + (13,056,000) = (3,563,000)
December 31, 2011 14,565,000 + (19,041,000) = (4,476,000)
December 31, 2010 11,081,000 + (10,680,000) = 401,000
Requirement 2
To calculate free cash flows, add operating cash flows and investing cash flows ($ in thousands).
Operating Investing Free Cash Flow
December 31, 2012 19,586,000 + (9,004,000) = 10,582,000
December 31, 2011 19,846,000 + (4,396,000) = 15,450,000
December 31, 2010 19,549,000 + (8,507,000) = 11,042,000
Requirement 3
Google’s trend is downward, unlike IBM’s. For the most part, companies like to see an upward trend in free cash flows because it indicates increased profitability from operating activities. However, for Google, the downward trend does not appear to be caused by lower profitability because operating cash flows are trending upward. Instead, the company has significant investments in the most recent year. This could mean that the company made significant investments that will lead to higher
profitability in the future.
Requirement 4
In general, the company that has the more positive trend in free cash flows will have the more positive trend in stock price.
Additional Perspective 4-7
Some of the internal control weaknesses include: 1.
- The employee who authorizes payment should not also be the employee who disburses cash.
- The employee responsible for making cash disbursements should not also be the employee in charge of the cash receipts.
- The fund balance should be verified by two or more employees. 2.
- The employee who authorizes payment should not also be the employee who prepares the check.
- The employee who authorizes the payment should not also be the employee who records the payment.
- The employee who records the payment should not also be the employee who reconciles the bank statement.
3.
- The employee who opens the mail should not also be the employee that makes a list of checks and cash received.
- The employee who opens the mail should not also be the employee that makes the deposit at the bank.
- The employee who makes deposits at the bank should not also be the employee that maintains a record of cash receipts.