How JustAnswer Works:
  • Ask an Expert
    Experts are full of valuable knowledge and are ready to help with any question. Credentials confirmed by a Fortune 500 verification firm.
  • Get a Professional Answer
    Via email, text message, or notification as you wait on our site.
    Ask follow up questions if you need to.
  • 100% Satisfaction Guarantee
    Rate the answer you receive.
Ask SteveS Your Own Question
SteveS, MBA
Category: Homework
Satisfied Customers: 453
Experience:  MBA from Top 5 US Business School, Tutoring Experience for Over Two Years
Type Your Homework Question Here...
SteveS is online now
A new question is answered every 9 seconds

You are a new staff accountant with a large regional CPA firm,

This answer was rated:

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%

Return on assets = 7.5%

Gross profit margin = 40%

Inventory turnover ratio = 6 times

Receivables turnover ratio = 25

Acid-test ratio = .9

Current ratio = 2 to 1

Return on shareholders' equity = 10%

Debt to equity ratio = 1/3

Times interest earned ratio = 12 times

Jotted in the margins are the following notes:

1. Net income $15,000

2. Only one short-term note ($5,000); all other current liabilities are trade accounts

3. Property, plant, and equipment are the only noncurrent assets

4. Bonds payable are the only noncurrent liabilities

5. The effective interest rate on short-term notes and bonds is 8%

6. No investment securities

7. Cash balance totals $15,000


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.

You need to spend $3 to view this post. Add Funds to your account and buy credits.
SteveS and other Homework Specialists are ready to help you

Related Homework Questions