Exhibit BB.1
Brony’s Bikes, Inc., Comparative Income Statements, 20X0–20X9 (in thousands of d
20X9*
$335.000
20X8
$280.000
20X7
$272.000
Cost of Goods Sold
227.800
215.600
209.440
Gross Profit
107.200
64.400
62.560
Operating Expenses
45.770
42.330
41.400
Operating Income
Other Expenses
(net)
Net Income before
Taxes
and Extraordinary
Item
Income Taxes
Net Income before
61.430
22.070
21.160
15.668
8.960
8.700
45.762
13.110
12.460
13.729
32.033
4.542
8.568
4.150
8.310
0
$32.033
1.235
$9.803
0
$8.310
Sales
Extraordinary Item
Extraordinary Gain
(Loss)—Net of Tax
Net Income
*Unaudited
9 (in thousands of dollars)
20X6
$274.500
20X5
$266.800
20X4
$269.300
20X3
$268.700
211.365
205.436
188.510
188.090
63.135
61.364
80.790
80.610
42.000
40.680
39.997
40.100
21.135
20.684
40.793
40.510
8.240
8.150
7.890
7.940
12.895
12.534
32.903
32.570
3.869
9.026
3.760
8.774
9.871
23.032
9.771
22.799
-2.650
$11.676
0
$8.774
0
$23.032
-1.540
$24.339
20X2
$265.570
20X1
$263.440
20X0
$262.890
185.899
184.408
184.023
79.671
79.032
78.867
38.965
38.670
37.700
40.706
40.362
41.167
7.760
7.240
7.123
32.946
33.122
34.044
9.884
23.062
9.937
23.185
10.213
23.831
0
$23.062
3.400
$19.785
0
$23.831
Exhibit BB.2
Brony’s Bikes , Inc., Adjusted Trial Balance as of December 31, 20X9
Account Number
Bank Two Demand Deposit
1001
Dallas Dollar Bank Demand Deposit
1002
Dallas Dollar Bank Payroll Account
1008
Petty Cash
1012
Investments in Marketable Securities
1101
All for Decline in Market Value of Securities
1102
Accounts Receivable—Trade
1201
Notes Receivable—Trade
1202
Notes Receivable—Officers
1203
Allowance for Doubtful Accounts
1250
Raw Materials Inventory
1310
Derailleurs Inventory
1320
Purchased Parts Inventory
1330
Goods in Process—Grand Prix Touring Bike
1350
Goods in Process—Phoenix Touring Bike
1351
Goods in Process—Pike’s Peak Mountain Bike
1352
Goods in Process—Himalaya Mountain Bike
1361
Goods in Process—Waistliner Stationary Bike
1365
Finished Goods—Grand Prix Touring Bike
1371
Finished Goods—Phoenix Touring Bike
1372
Finished Goods—Pike’s Peak Mountain Bike
1373
Finished Goods—Himalaya Mountain Bike
1376
Finished Goods—Waistliner Stationary Bike
1379
Indirect Materials
1385
Repair Parts Inventory
1390
Prepaid Insurance
1410
Deferred Taxes—Warranty
1440
Land
1510
Factory Building
1520
Accumulated Depreciation—Building
1525
Warehouses and Sales Offices
1527
Accumulated Depreciation—Warehouses and Sales Offices
1529
Factory Equipment
1530
Accumulated Depreciation—Factory Equipment
1535
Office Building
1540
Accumulated Depreciation—Office Building
1545
Office Fixtures and Equipment
1550
Accumulated Depreciation—Office Fixtures and Equipment
1555
Autos and Trucks
1560
Accumulated Depreciation—Autos and Trucks
1565
Patents
1610
Copyrights
1620
Deposits
1710
Cost of Goods Sold—Grand Prix Touring Bike
5100
Cost of Goods Sold—Phoenix Touring Bike
5200
Cost of Goods Sold—Pike’s Peak Mountain Bike
5300
Cost of Goods Sold—Himalaya Mountain Bike
5400
Cost of Goods Sold—Waistliner Stationary Bike
5500
Direct Labor
6100
Direct Labor Applied
6200
Indirect Labor
7201
Depreciation—Factory Building
7205
Depreciation—Factory Equipment
Real Estate Taxes
Personal Property Taxes
Manufacturing Supplies
FICA Tax Expense
State Unemployment Tax Expense
Federal Unemployment Tax Expense
Workers’ Compensation Premiums
Health Insurance Premiums—Factory
Employee Pension Expense
Repairs and Maintenance Expense
Utilities Expense
Miscellaneous Factory Expense
Manufacturing Overhead Applied
Sales Commissions
Sales Salaries
Bad Debts Expense
Product Warranty
Advertising
Miscellaneous Selling Expense
Administrative Salaries
Research and Development Costs
Patent Amortization
FICA Tax Expense
State Unemployment Tax Expense
Federal Unemployment Tax Expense
Workers’ Compensation Premiums
Health Insurance Premiums—Administrative
Employee Pension Expense
Employee Profit Sharing Expense
Depreciation—Office Building
Depreciation—Office Fixtures and Equipment
Depreciation—Autos and Trucks
Depreciation—Warehouses and Sales Offices
Accounting Fees
Legal Fees
Other Professional Services
Supplies Expense
Insurance Expense
Printing and Copying Expense
Postage Expense
Gain/Loss on Disposal of Plant Assets
Miscellaneous Administrative Expense
Interest Expense
Loss on Decline in Market Value of Securities
Federal Income Tax Expense
State Income Tax Expense
City Income Tax Expense
Notes Payable—Trade
Accounts Payable—Trade
Interest Payable
Sales Salaries Payable
Administrative Salaries Payable
Factory Wages Payable
FICA Payable
7206
7210
7211
7220
7230
7231
7232
7233
7234
7235
7236
7241
7242
7250
8310
8320
8325
8330
8340
8350
9410
9420
9425
9431
9432
9433
9434
9435
9436
9437
9440
9445
9447
9449
9450
9451
9452
9460
9470
9480
9481
9485
9490
9701
9702
9990
9991
9992
2010
2020
2030
2041
2042
2043
2051
State Income Taxes Withheld
2052
City Income Taxes Withheld
2053
Unemployment and Workers’ Compensation Premiums Payable
2054
Accrued Profit Sharing Payable
2055
Federal Income Taxes Payable
2061
State Income Taxes Payable
2062
City Income Taxes Payable
2063
Estimated Product Warranty Liability
2070
Accrued Commissions Payable
2080
Mortgage Note Payable (10%)
2110
Deferred Tax Liability—Depreciation
2120
12% Note Payable to Bank Two
2130
10% Preferred Stock
3110
Common Stock
3120
Additional Paid-in Capital
3130
Treasury Stock
3140
Retained Earnings
3150
Dividends
3160
Sales—Grand Prix Touring Bike
4100
Sales—Phoenix Touring Bike
4200
Sales—Pike’s Peak Touring Bike
4300
Sales—Himalaya Mountain Bike
4400
Sales—Waistliner Stationary Bike
4500
Interest Earned
4901
Dividends Earned
4902
Loss on Disposal of Investments
4903
as of December 31, 20X9
Debit
Credit
(in thousands of dollars)
$
10.200
2.100
57
5
7.000
2.800
11.920
80
0
220
6.200
5.500
15.100
800
700
1.500
1.200
300
1.616
2.300
5.800
4.600
1.200
800
2.600
600
400
4.000
50.000
14.140
200.000
105.000
360.000
144.660
20.000
8.000
10.000
6.150
1.000
620
4.000
2.000
340
34.448
32.903
89.584
22.075
48.790
35.600
35.600
5.500
2.000
42.060
4.400
1.600
15.042
3.980
1.120
880
550
2.860
3.810
1.222
16.100
2.200
103.324
16.500
1.200
500
1.139
3.311
420
7.550
1.050
700
856
224
120
100
500
100
345
800
1.875
320
10.000
320
430
20
200
450
235
285
4.000
220
12.890
2.800
10.329
1.923
1.477
3.660
10.200
3.400
30
870
1.290
310
150
50
25
345
4.000
1.200
800
544
1.400
60.000
10.600
45.000
120.000
100.000
50.000
8.153
29.574
15.000
50.659
47.360
132.892
34.299
69.790
115
105
$
198
1.203.182
$
1.203.182
Exhibit BB.3
Brony’s Bikes , Inc., Income Statements for the Years Ended December 31, 20X9 an
Sales Revenue
Cost of Goods Sold:
Beginning inventories
$ 10.142
Cost of goods manufactured (Schedule 1)
233.174
Cost of goods available for sale
243.316
Ending inventories
15.516
Cost of Goods Sold
Gross Profit on Sales
Operating Expenses (Schedule 2)
Operating Income
Financial Income and Expense:
Interest expense
12.890
Interest and dividends earned
(220)
Loss (gain) on disposal of investments
198
Loss on decline in market value of securities
2.800
Net Financial Expense
Net Income before Taxes and Extraordinary Items
Income Taxes
Net Income before Extraordinary Items
Extraordinary Gain from Eminent Domain Sale (net of tax)
Net Income
SCHEDULE 1
COST OF GOODS MANUFACTURED (IN THOUSANDS OF DOLLARS)
Beginning Work-in-Process Inventories
Manufacturing Costs:
Direct Materials:
Beginning inventories of materials and purchased parts $ 16.150
Purchases
105.400
Available for production
121.550
Ending inventories of materials and purchased parts
26.800
Cost of Materials Used in Production
94.750
Direct Labor
35.600
Manufacturing Overhead (Schedule 1A)
103.324
Total manufacturing costs
Total Work in Process
Ending Work-in-Process Inventories
Cost of Goods Manufactured
SCHEDULE 1A
MANUFACTURING
OVERHEAD
Indirect Labor
Depreciation of Factory Building
Depreciation of Factory Equipment
Property Taxes
Manufacturing Supplies
Payroll Taxes and Fringe Benefits
Utilities
Repairs and Maintenance
Miscellaneous
SCHEDULE 2 OPERATING EXPENSES
(IN THOUSANDS OF DOLLARS)
Selling Expenses:
Sales Commissions
Sales Salaries
Bad Debts Expense
Product Warranty
Advertising
Miscellaneous Selling
General Expenses:
Administrative Salaries
Research and Development
Patent Amortization
Payroll Taxes and Fringe Benefits
Depreciation—Office Building
Depreciation—Office Fixtures and Equipment
Depreciation—Autos and Trucks
Depreciation—Warehouses
Accounting and Legal Fees
Other Professional Services
Supplies
Insurance
Printing and Postage
Gain/Loss on Disposal of Plant Assets
Miscellaneous Administrative
*Unaudited.
ded December 31, 20X9 and 20X8 (in thousands of dollars)
Year Ended
12/31/20X9
Year Ended
12/31/20X8
$335.000
$280.000
$ 6.690
219.052
225.742
10.142
227.800
107.200
45.770
61.430
215.600
64.400
42.330
22.070
9.680
(220)
(100)
(400)
15.668
45.762
13.729
32.033
0
$
32.033
$
Year Ended
12/31/20X9*
$
4.000
8.960
13.110
4.542
8.568
1.235
9.803
Year Ended
12/31/20X8
$
4.663
$ 15.320
86.200
101.520
16.150
85.370
31.300
101.719
233.674
237.674
4.500
$ 233.174
218.389
223.052
4.000
$ 219.052
*Year Ended
12/31/20X9
$
5.500
2.000
42.060
6.000
15.042
Year Ended
12/31/20X8
$
5.300
2.000
42.860
5.800
14.600
13.200
16.100
1.222
2.200
$ 103.324
12.400
15.600
1.159
2.000
$ 101.719
Year Ended*
12/31/20X9
Year Ended
12/31/20X8
$
$
$
16.500
1.200
500
1.139
3.311
420
23.070
$
7.550
1.050
700
2.245
800
1.875
320
10.000
750
20
200
450
520
(4.000)
200
22.700
$45.770
$
$
13.800
1.180
900
1.078
2.522
146
19.626
6.677
2.200
700
2.200
800
2.260
300
10.000
720
18
280
240
115
(3.850)
44
22.704
$42.330
Exhibit BB.4
ASSETS
Current Assets
Cash on hand and in banks
Investments in marketable securities
Accounts and notes receivable—trade
Less allowance for doubtful accounts
Brony’s Bikes , Inc., Balance Sheets as of Dece
Year Ended*
12/31/20X9
$12.362
4.200
12.000
(220)
13.200
(800)
11.780
Inventories
Materials and purchased parts
Goods in process
Finished goods
Indirect materials and repair parts
Prepaid Expenses
Deferred Tax Asset—warranty
Total current assets
Property, Plant, and Equipment
Land
Factory building
Less accumulated depreciation
26.800
4.500
15.516
3.400
16.150
4.000
10.142
3.200
50.216
600
400
79.558
4.000
50.000
(14.140)
50.000
(12.140)
35.860
Warehouses and sales offices
Less accumulated depreciation
200.000
(105.000)
Factory equipment
Less accumulated depreciation
360.000
(144.660)
Office building
Less accumulated depreciation
20.000
(8.000)
Office fixtures and equipment
Less accumulated depreciation
10.000
(6.150)
Autos and trucks
Less accumulated depreciation
1.000
(620)
200.000
(95.000)
95.000
320.000
(147.460)
215.340
20.000
(7.200)
12.000
9.000
(5.075)
3.850
380
366.430
Total Property, Plant, and Equipment
Patents and Copyrights
(net of accumulated amortization)
Deposits
Total investments and other assets
TOTAL ASSETS
LIABILITIES
Current Liabilities
Notes payable
Accounts payable
Interest payable
Salaries and wages payable
Payroll withholdings
Taxes and fringe benefits payable
Income taxes payable
Estimated product warranty liability
Accrued commissions payable
900
(300)
6.000
340
6.700
340
6.340
$452.328
3.660
10.200
3.400
2.190
510
370
6.000
544
1.400
14.890
18.600
2.200
2.018
490
345
1.800
860
1.200
Total current liabilities
Long-Term Liabilities
Mortgage note payable (10%)
60.000
Deferred tax liability—depreciation
10.600
12% note payable to Bank Two
45.000
Total long-term liabilities
TOTAL LIABILITIES
STOCKHOLDER’S EQUITY
Invested Capital
Preferred stock—$100 par value, 10%
120.000
cumulative, 10,000,000 shares authorized
Common stock, $10 par value, 90,000,000
100.000
shares authorized, 10,000,000 shares issued,
of which 220,000 shares are in the treasury
Paid-in capital in excess of par value of common stock
50.000
Total invested capital
Retained earnings
Total
Less cost of 220,000 shares of treasury stock
TOTAL STOCKHOLDERS’ EQUITY
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
*Unaudited
28.274
60.000
9.800
0
115.600
143.874
120.000
100.000
50.000
270.000
46.607
316.607
(8.153)
308.454
$ 452.328
ance Sheets as of December 31, 20X9 and 20X8 (in thousands of dollars)
Year Ended
12/31/20X8
15.800
5.300
12.400
33.492
560
460
68.012
4.000
37.860
105.000
172.540
12.800
3.925
600
336.725
7.040
$411.777
42.403
69.800
112.203
$
270.000
29.574
299.574
299.574
411.777
Exhibit BB.5
Brony’s Bikes , Inc., Statement of Retained Earnings for the Years Ended Decembe
(in thousands of dollars)
Year Ended
Year Ended
12/31/20X9
12/31/20X8
Retained Earnings—beginning of year
Net Income
Dividends
Retained Earnings—end of year
*Unaudited.
$ 29.574
32.033
(15.000)
$ 46.607
$ 29.771
9.803
(10.000)
$ 29.574
the Years Ended December 31, 20X9 and 20X8
Exhibit BB.6
Brony’s Bikes , Inc., Statement of Cash Flows for the Year Ended December 31, 20
CASH PROVIDED BY OPERATING ACTIVITIES
Net Income
Add (deduct)
Increase in inventories
Decrease in accounts and notes receivable
Increase in prepaid expenses
Increase in deferred tax liability
Decrease in deferred tax asset
Decrease in accounts payable
Increase in interest payable
Increase in salaries and wages payable
Increase in payroll withholdings
Increase in taxes and fringe benefits payable
Increase in income taxes payable
Decrease in product warranty liability
Increase in accrued commissions payable
Depreciation and amortization
Loss on sale of investments
Gain on disposal of plant assets
Loss on decline in market value of securities
Total Cash Provided by Operating Activities
CASH PROVIDED BY FINANCING ACTIVITIES
Issuance of 12% Note Payable to Bank Two
Payment of Dividends
Payment of Mortgage Note Installment
Payment of Notes Payable
Total Cash Provided by Investing Activities
Office fixtures and equipment
Autos and trucks
Sale of Marketable Securities
Purchase of Marketable Securities
Purchase of Treasury Stock
Total Cash Used in Investing Activities
INCREASE (DECREASE) IN CASH
Cash Beginning Balance
Cash Ending Balance
$ 32.033
(16.724)
620
(40)
800
60
(8.400)
1.200
172
20
25
4.200
(316)
200
57.755
198
(4.000)
2.800
$ 70.603
45.000
(15.000)
(10.000)
(1.230)
18.770
(2.000)
(100)
1.102
(3.000)
(8.153)
(92.811)
(3.438)
15.800
$ 12.362
Ended December 31, 20X9 unaudited
WP
A. 1
BRONY' S BI KES
Anal y t i c Rev i ew Pr oc edur es - Pl anni ng
Dec ember 31, 20X5 - 20X9
Compar at i v e I nc ome St at ement s
( i n t hous ands of dol l ar s )
20X9
20X8
$
Sal es
Cos t of
Goods Sol d
Gr os s Pr of i t
Oper at i ng Ex pens es
Oper at i ng I nc ome
Ot her Ex pens es ( net )
Net I nc ome bef or e Tax es
and Ex t r aor di nar y I t ems
I nc ome Tax es
Net I nc ome bef or e
Ex t r aor di nar y I t ems
Ex t r aor di nar y Gai n( Los s ) Net of Tax
Net
I nc ome
%
20X7
$
%
$280, 000
$215, 600
------------$64, 400
$42, 330
------------$22, 070
$8, 960
-------------
100. 00%
77. 00%
$45, 762
$13, 729
--------------
$13, 110
$4, 542
-------------
4. 68%
1. 62%
$32, 033
$8, 568
$1, 235
------------$9, 803
=============
20X6
$
$335, 000
$227, 800
-------------$107, 200
$45, 770
-------------$61, 430
$15, 668
--------------
$0
-------------$32, 033
==============
Pr epar ed by :
Dat e:
Rev i ewed by :
Dat e:
$272, 000
$209, 440
------------23. 00%
$62, 560
15. 12%
$41, 400
------------7. 88%
$21, 160
3. 20%
$8, 700
-------------
3. 06%
0. 44%
3. 50%
$12, 460
$4, 150
------------$8, 310
$0
------------$8, 310
=============
%
20X5
$
100. 00%
77. 00%
$274, 500
$211, 365
---------23. 00%
$63, 135
15. 22%
$42, 000
---------7. 78%
$21, 135
3. 20%
$8, 240
---------4. 58%
1. 53%
3. 06%
3. 06%
$12, 895
$3, 869
---------$9, 026
( $2, 650)
---------$6, 376
==========
%
$
100. 00% $266, 800
77. 00% $205, 436
--------23. 00%
$61, 364
15. 30%
$40, 680
--------7. 70%
$20, 684
3. 00%
$8, 150
--------4. 70%
1. 41%
3. 29%
- 0. 97%
2. 32%
%
100. 00%
77. 00%
23. 00%
15. 25%
7. 75%
3. 05%
$12, 534
$3, 760
---------
4. 70%
1. 41%
$8, 774
3. 29%
$0
--------$8, 774
=========
0. 00%
3. 29%
WP A.2
BRONY'S BIKES
SALES AND COST OF GOODS SOLD BY PRODUCT LINE
For the Years Ended December 31, 20X9 and 20X8
Analytic Review - Planning
20X9
--------------- ------------- -------------
Total
Grand Prix
Touring
$335,000,036
675454
$75
------------$50,659,050
Units
Selling Price per Unit
Total Sales Revenue
Cost per Unit:
Materials
Labor
Overhead
Total Cost of Goods Sold
Percent
100.00%
$15
$11
$25
------------$51
$227,788,333
$34,448,154
--------------- ------------$107,211,703
$16,210,896
=============== =============
20X8
--------------- ------------- -------------
Total
Grand Prix
Touring
$280,000,104
524759
$72
------------$37,782,648
Units
Selling Price per Unit
Total Sales Revenue
Cost per Unit:
Materials
Labor
Overhead
Total Cost of Goods Sold
Percent
100.00%
$18
25.00%
$9
12.50%
$28
38.89%
------------- ------------$55
76.39%
$215,573,504
$28,861,745
--------------- ------------$64,426,600
$8,920,903
=============== =============
Prepared by:
Date:
Reviewed by:
Date:
-------------- ------------- -------------- ---------- ------------- ---------Phoenix
Touring
Percent
Pike's Peak
Mountain
Percent
Himalaya
Mountain
498524
$95
-------------$47,359,780
984386
100.00%
$135
-------------$132,892,110
182441
100.00%
$188
------------$34,298,908
$20
$14
$32
-------------$66
$32,902,584
-------------$14,457,196
==============
$25
$19
$47
-------------$91
$89,579,126
-------------$43,312,984
==============
$39
$18
$64
------------$121
$22,075,361
------------$12,223,547
=============
Percent
100.00%
-------------- ------------- -------------- ---------- ------------- ---------Phoenix
Touring
423112
$92
-------------$38,926,304
Percent
100.00%
Pike's Peak
Mountain
878009
$131
-------------$115,019,179
Percent
100.00%
Himalaya
Mountain
158437
$183
------------$28,993,971
Percent
100.00%
$21
22.83%
$30
22.90%
$42
22.95%
$15
16.30%
$20
15.27%
$25
13.66%
$35
38.04%
$51
38.93%
$71
38.80%
-------------- ------------- -------------- ---------- ------------- ---------$71
77.17%
$101
77.10%
$138
75.41%
$30,040,952
$88,678,909
$21,864,306
--------------------------------------$8,885,352
$26,340,270
$7,129,665
==============
==============
=============
------------- ------Waistliner
Stationary
Percent
233412
$299 100.00%
------------$69,790,188
$57
$40
$112
------------$209
$48,783,108
------------$21,007,080
=============
------------- ------Waistliner
Stationary
Percent
202314
$293 100.00%
------------$59,278,002
$66
22.53%
$47
16.04%
$115
39.25%
------------- ------$228
77.82%
$46,127,592
------------$13,150,410
=============
WP A.3
BRONY'S BIKES
COMPARATIVE SCHEDULES OF MANUFACTURING OVERHEAD AND OPERATING EXPENSES
For the Years Ended December 31, 20X9 and 20X8
MANUFACTURING OVERHEAD
Indirect Labor
Depreciation of Factory Building
Depreciation of Factory Equipment
Property Taxes
Manufacturing Supplies
Payroll Taxes and Fringe Benefits
Utilities
Repairs and Maintenance
Miscellaneous
(in thousands of dollars)
Year Ended
Percent
Year Ended
12/31/20X9
of Sales
12/31/20X8
--------------------------$5,500
$5,300
$2,000
$2,000
$42,060
$42,860
$6,000
$5,800
$15,042
$14,600
$13,200
$12,400
$16,100
$15,600
$1,222
$1,159
$2,200
$2,000
--------------- ------------- ------------$103,324
0.00%
$101,719
===============
=============
OPERATING EXPENSES
Selling Expenses:
Sales commissions
Sales salaries
Bad debts expense
Product warranty
Advertising
Miscellaneous selling
$16,500
$13,800
$1,200
$1,180
$500
$900
$1,139
$1,078
$3,311
$2,522
$420
$146
--------------- ------------- ------------$23,070
0.00%
$19,626
---------------------------
General Expenses:
Administrative salaries
$7,550
$6,677
Research and development
$1,050
$2,200
Patent amortization
$700
$700
Payroll taxes and fringe benefits
$2,245
$2,200
Depreciation-office building
$800
$800
Depreciation-office fixtures
and equipment
$1,875
$2,260
Depreciation-autos and trucks
$320
$300
Depreciation-warehouses
$10,000
$10,000
Accounting and legal fees
$750
$720
Other professional services
$20
$18
Supplies
$200
$280
Insurance
$450
$240
Printing and postage
$520
$115
Gain/loss on disposal of plant assets
($4,000)
($3,850)
Miscellaneous administrative
$220
$44
--------------- ------------- ------------$22,700
0.00%
$22,704
--------------- ------------- ------------$45,770
0.00%
$42,330
=============== ============= =============
* The denominator for each expense item is from WP A.1 for 20X8 and 20X9 respectively stated i
Prepared by:
Date:
Reviewed by:
Date:
Percent
of Sales
1.89% *
0.71%
15.31%
2.07%
5.21%
4.43%
5.57%
0.41%
0.71%
-------------36.33%
4.93%
0.42%
0.32%
0.39%
0.90%
0.05%
-------------7.01%
2.38%
0.79%
0.25%
0.79%
0.29%
0.81%
0.11%
3.57%
0.26%
0.01%
0.10%
0.09%
0.04%
-1.38%
0.02%
-------------8.11%
-------------15.12%
==============
respectively stated in 000s.
WP A.4
BRONY'S BIKES
INVENTORIES
December 31, 20X9 and 20X8
20X9
--------------- ------------- ------------Units of
Units
Inventory
Inventory
Purchased
Turnover
Finished Goods:
Grand Prix Touring Bike
Phoenix Touring Bike
Pike's Peak Mountain Bike
Himalaya Mountain Bike
Waistliner Stationary Bike
42398
27756
85478
8873
12774
na
na
na
na
na
442858
305556
997642
512387
2336780
2133111
1166487
4665149
1277604
8552751
Total Finished Goods Inventory
Materials and Purchased Parts:
Raw Materials Inventory
Derailleurs Inventory
Tires Inventory
Handlebar Inventory
Other Purchased Parts
Total Materials and Purchased Parts
20X8
--------------- ------------- ------------Units of
Inventory
Finished Goods:
Grand Prix Touring Bike
Phoenix Touring Bike
Pike's Peak Mountain Bike
Himalaya Mountain Bike
Waistliner Stationary Bike
Units
Purchased
Inventory
Turnover*
25167
16882
54548
3877
6644
na
na
na
na
na
20.85
25.06
16.10
40.87
30.45
276899
213630
447985
286476
1778326
1927688
999741
3211659
1232660
7889650
6.96
4.68
7.17
4.30
4.44
Total Finished Goods Inventory
Materials and Purchased Parts:
Raw Materials Inventory
Derailleurs Inventory
Tires Inventory
Handlebar Inventory
Other Purchased Parts
Total Materials and Purchased Parts
* Inventory turnover denominator in units from units for each product line
20X9 From WP A.2 Sales Revenue
Grand Prix
20X9
Total
Touring
Percent
Units
Selling Price per Unit
Total Sales Revenue
$335,000,036
675454
$75
------------$50,659,050
Total
Grand Prix
Touring
$280,000,104
524759
$72
------------$37,782,648
20X8 From WP A.1 Sales Revenue
Units
Selling Price per Unit
Total Sales Revenue
100.00%
Percent
100.00%
Prepared by:
Date:
Reviewed by:
Date:
-------------- ------------12/31/20X9
Cost per Unit
Total
$51
$66
$91
$121
$209
$2,162,298
$1,831,896
$7,778,498
$1,073,633
$2,669,766
------------$15,516,091
=============
$14
$18
$4
$8
$3
$6,200,012
$5,500,008
$3,990,568
$4,099,096
$7,010,340
------------$26,800,024
=============
-------------- ------------12/31/20X8
Cost per Unit
Total
$55
$71
$101
$138
$228
$1,384,185
$1,198,622
$5,509,348
$535,026
$1,514,832
------------$10,142,013
=============
$13
$16
$4
$7
$3
$3,599,687
$3,418,080
$1,791,940
$2,005,332
$5,334,978
------------$16,150,017
=============
Phoenix
Touring
Percent
Pike's Peak
Mountain
Percent
Himalaya
Mountain
Percent
498524
$95
-------------$47,359,780
Phoenix
Touring
423112
$92
-------------$38,926,304
984386
182441
100.00%
$135 100.00%
$188 100.00%
-------------------------$132,892,110
$34,298,908
Percent
100.00%
Pike's Peak
Mountain
Percent
Himalaya
Mountain
Percent
878009
158437
$131 100.00%
$183 100.00%
-------------------------$115,019,179
$28,993,971
Waistliner
Stationary
Percent
233412
$299 100.00%
------------$69,790,188
Waistliner
Stationary
Percent
202314
$293 100.00%
------------$59,278,002
WP A.5
BRONY'S BIKES
BUDGETED VS. ACTUAL INCOME STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 20X9
Prepared by Client
Date:
Reviewed by:
Date:
(in thousands of dollars)
Sales Revenue
Cost of Goods Sold:
Beginning Inventories
Cost of Goods Manufactured
(Schedule 1)
Cost of Goods Available for Sale
Ending Inventories
Actual
12/31/20X9
---------$335,000
$10,142
Gross Profit on Sales
Operating Expenses (Schedule 2)
Operating Income
Financial Income and Expense:
Interest Expense
$12,890
Interest and Dividends Earned
($220)
(Gain)Loss on Disposal of Investments
$198
Loss on Decline in Market Value of Securities
$2,800
---------Net Financial Expense
Net Income before Taxes and
Extraordinary Items
Income Taxes
Net Income
Schedule 1
Cost of Goods Manufactured
$10,142
$233,174
---------$243,316
$15,516
----------
Cost of Goods Sold
Budget
12/31/20X9
---------$302,000
$225,000
----------$235,142
$10,500
----------$227,800
---------$107,200
$45,770
---------$61,430
$224,642
---------$77,358
$48,418
---------$28,940
$12,800
($500)
($200)
$200
-----------
$15,668
----------
$12,300
----------
$45,762
$13,729
---------$32,033
==========
$16,640
$6,500
---------$10,140
==========
(in thousands of dollars)
Actual
12/31/20X9
----------
Budget
12/31/20X9
----------
Beginning Work in Process Inventories
Manufacturing Costs:
Direct Materials:
Beginning Inventories of Materials
and Purchased Parts
$16,150
Purchases
$105,400
---------Available for Production
$121,550
Ending Inventories of Materials
and Purchased Parts
$26,800
---------Cost of Materials Used in Production $94,750
Direct Labor
$35,600
Manufacturing Overhead (Schedule 1A) $103,324
---------Total Manufacturing Costs
Total Work in Process
Ending Work in Process Inventories
Cost of Goods Manufactured
$4,000
$4,000
$16,150
$85,400
----------$101,550
$10,500
----------$91,050
$31,500
$102,600
----------$233,674
---------$237,674
$4,500
---------$233,174
==========
$225,150
---------$229,150
$4,150
---------$225,000
==========
Actual
12/31/20X9
---------$5,500
$2,000
$42,060
$6,000
$15,042
$13,200
$1,222
$16,100
$2,200
---------$103,324
==========
Budget
12/31/20X9
---------$5,400
$2,000
$42,000
$6,000
$15,500
$13,000
$1,000
$15,800
$1,900
---------$102,600
==========
SCHEDULE 1A
MANUFACTURING OVERHEAD
Indirect Labor
Depreciation of Factory Building
Depreciation of Factory Equipment
Property Taxes
Manufacturing Supplies
Payroll Taxes and Fringe Benefits
Repairs and Maintenance Expense
Utilities
Miscellaneous
SCHEDULE 2
OPERATING EXPENSES
(in thousands of dollars)
Actual
12/31/20X9
----------
Selling Expenses:
Sales commissions
Sales salaries
Bad Debts Expense
Product warranty
Advertising
Miscellaneous selling
$16,500
$1,200
500
$1,139
$3,311
$420
----------
Budget
12/31/20X9
---------$15,100
$1,000
$1,000
$1,100
$3,300
$380
-----------
$23,070
$21,880
General Expenses:
Administrative salaries
$7,550
Research and development
$1,050
Patent amortization
$700
Payroll taxes and fringe benefits
$2,245
Depreciation-office building
$800
Depreciation-office fixtures
and equipment
$1,875
Depreciation-autos and trucks
$320
Depreciation-warehouses
$10,000
Accounting and legal fees
$750
Other Professional Services
$20
Supplies
$200
Insurance
$450
Printing and postage
$520
Gain/Loss on Disposal of Plant Assets ($4,000)
Miscellaneous administrative
$220
----------
$7,400
$1,000
$700
$2,150
$800
$1,860
$330
$10,000
$700
$18
$220
$460
$500
$200
$200
----------$22,700
---------$45,770
==========
$26,538
---------$48,418
==========
repared by Client
eviewed by:
Variance as %
Variance
of Budget
Favorable
Favorable
(Unfavorable)
(Unfavorable)
---------- -----------$33,000
10.93%
($8,174)
-3.63%
$29,842
$2,648
38.58%
5.47%
($3,368)
-27.38%
$21,893
215.91%
f dollars)
Variance as %
Variance
of Budget
Favorable
Favorable
(Unfavorable)
(Unfavorable)
---------- ------------
($3,700)
($4,100)
($724)
-4.06%
-13.02%
-0.71%
Variance as %
Variance
of Budget
Favorable
Favorable
(Unfavorable)
(Unfavorable)
---------- -----------($100)
-1.85%
$0
0.00%
($60)
-0.14%
$0
0.00%
$458
2.95%
($200)
-1.54%
($222)
-22.20%
($300)
-1.90%
($300)
-15.79%
---------- -----------($724)
-0.71%
Variance as %
Variance
of Budget
Favorable
Favorable
(Unfavorable)
(Unfavorable)
---------- -----------($1,400)
($200)
$500
($39)
($11)
($40)
---------($1,190)
-9.27%
-20.00%
50.00%
-3.55%
-0.33%
-10.53%
-5.44%
($150)
($50)
$0
($95)
$0
-2.03%
-5.00%
0.00%
-4.42%
0.00%
($15)
$10
$0
($50)
($2)
$20
$10
($20)
$4,200
($20)
---------$3,838
---------$2,648
==========
-0.81%
3.03%
0.00%
-7.14%
-11.11%
9.09%
2.17%
-4.00%
2100.00%
-10.00%
14.46%
5.47%
WP A.6
BRONY'S BIKES
COMPARATIVE COMMON SIZED BALANCE SHEETS
As of December 31, 20X9 and 20X8
(in thousands of dollars)
Percent of
12/31/20X9 Total Assets
----------ASSETS
Current Assets:
Cash on hand and in banks
Investments in marketable securities
Accounts and notes receivable-trade
$12,000
Less allowance for doubtful accounts
($220)
------------
$12,362
$4,200
$13,200
($800)
----------$11,780
Inventories:
Materials and purchased parts
$26,800
Goods in process
$4,500
Finished goods
$15,516
Indirect materials and repair parts
$3,400
------------
$16,150
$4,000
$10,142
$3,200
----------$50,216
Prepaid expenses
Deferred tax asset-warranty
$600
$400
----------- --------$79,558
0.00%
----------- ---------
Total current assets
Property, Plant, and Equipment:
Land
$4,000
Factory building
Less accumulated depreciation
$50,000
($14,140)
------------
Warehouses and Sales Offices
Less accumulated depreciation
$200,000
($105,000)
------------
Factory equipment
Less accumulated depreciation
$360,000
($144,660)
------------
Office building
Less accumulated depreciation
$20,000
($8,000)
------------
Office fixtures and equipment
Less accumulated depreciation
$10,000
($6,150)
------------
$50,000
($12,140)
----------$35,860
$200,000
($95,000)
$95,000
$320,000
($147,460)
----------$215,340
$20,000
($7,200)
----------$12,000
$9,000
($5,075)
----------$3,850
Autos and trucks
$1,000
$900
Less accumulated depreciation
($620)
------------
Total property, plant, and equipment
($300)
----------$380
----------- --------$366,430
0.00%
Investments and Other Assets:
Patents and copyrights (net of
accumulated amortization)
Deposits
$6,000
$340
-----------Total investments and other assets
TOTAL ASSETS
$6,700
$340
----------$6,340
----------- --------$452,328
0.00%
=========== =========
LIABILITIES
Current Liabilities:
Notes payable
$3,660
Accounts payable
$10,200
Interest payable
$3,400
Salaries and wages payable
$2,190
Payroll withholdings
$510
Taxes and fringe benefits payable
$370
Income taxes payable
$6,000
Estimated product warranty liability
$544
Accrued commissions payable
$1,400
-----------Total current liabilities
Long-Term Liabilities:
Mortgage note payable (10%)
Deferred tax liability-depreciation
12% note payable to Bank Two
$28,274
$14,890
$18,600
$2,200
$2,018
$490
$345
$1,800
$860
$1,200
--------- ----------0.00%
$60,000
$10,600
$45,000
------------
TOTAL LIABILITIES
$60,000
$9,800
$0
----------$115,600
----------- --------$143,874
0.00%
----------- ---------
STOCKHOLDERS' EQUITY
Invested Capital:
Preferred stock-$100 par value, 10%
cumulative, 10 million shares authorized,
1.2 million shares issued and outstanding
$120,000
Common stock, $10 par value, 90 million
shares authorized, 10 million shares
issued, of which 220,000 shares are
in the treasury
$100,000
Paid-in capital in excess of par
value of capital stock
$50,000
------------
$120,000
$100,000
$50,000
----------$270,000
Retained Earnings
Total
Less cost of 1,300 shares of
treasury stock
TOTAL STOCKHOLDERS' EQUITY
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY
$46,607
----------- --------$316,607
($8,153)
----------- --------$308,454
----------- ---------
$452,328
0.00%
=========== =========
20X9
20X8
CURRENT RATIO
QUICK RATIO
TIMES INTEREST EARNED
RETURN ON STOCKHOLDERS' EQUITY
NET INCOME BEFORE TAXES AND
EXTRAORDINARY ITEMS
$45,762
$13,110
NET INCOME BEFORE EXTRAORDINARY ITEMS
$32,033
$8,568
INTEREST EXPENSE
$12,890
$9,682
QUICK ASSETS
$28,342
$31,500
Prepared by:
Date:
Reviewed by:
Date:
Percent of
12/31/20X8
Total Assets
-----------
$15,800
$5,300
3.84%
1.29%
$12,400
3.01%
$33,492
8.13%
$560
0.14%
$460
0.11%
----------- ------------$68,012
16.52%
----------- ------------$4,000
0.97%
$37,860
9.19%
$105,000
25.50%
$172,540
41.90%
$12,800
3.11%
$3,925
0.95%
$600
0.15%
----------- ------------$336,725
81.77%
$7,040
1.71%
----------- ------------$411,777
100.00%
=========== =============
Percent of
Total L + SE
$42,403
3.62%
4.52%
0.53%
0.49%
0.12%
0.08%
0.44%
0.21%
0.29%
------------10.30%
$69,800
16.95%
----------- ------------$112,203
27.25%
----------- -------------
$270,000
65.57%
$29,574
7.18%
----------- ------------$299,574
72.75%
$0
----------- ------------$299,574
72.75%
----------- -------------
$411,777
100.00%
=========== =============
20X9
Industry Ratios
1.90
1.00
4.00
3.40%
WP A.7
WHEELS-4-U CORPORATION
CONSOLIDATED BALANCE SHEETS
($000 except share data)
12/31/20X9
ASSETS
Current Assets:
Cash and cash equivalents
$1,432
Accounts and other receivables, net
101,283
Inventories
49,606
Deferred income tax assets
9,338
Prepaid expenses
12,551
Total current assets
174,210
Property, Plant, and Equipment, at cost:
Land and land improvements
1,621
Buildings and building improvements
4,611
Machinery and equipment
19,403
Office furniture, fixtures, and equipment 16,210
Leasehold improvements
2,322
Construction in progress
1,303
45,470
Less: Accumulated depreciation
(28,671)
Net Property, Plant, and Equipment
16,799
Excess of cost over net assets acquired
29,627
Intangible assets, net
45,313
Deferred income tax assets
16,539
Pension assets
506
Other assets
9,977
TOTAL ASSETS
$292,971
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Notes payable
$62,374
Current installments of LT obligations
18,028
Accounts payable
74,722
Accrued expenses:
Salaries, wages, and other compensation 3,313
Insurance
5,152
Environmental
879
Other
8,460
Total accrued expenses
17,804
Other current liabilities
606
Total current liabilities
173,534
Long-term obligations, less current installments
542
Pension liabilities
31,692
Postretirement benefits other than pension 9,158
Other long-term liabilities
5,389
Total Liabilities
220,315
Shareholders' Equity:
Common stock: 60,000,000 shares authorized
22,553,280 and 21,153,290 shares issued, and
16,037,799 and 14,637,809 shares outstanding
at December 31, 2007 and 2006, respectively
22,523
Additional paid-in capital
102,917
12/31/20X8
$5,419
92,850
41,847
12,227
8,755
161,098
1,621
4,611
18,970
17,498
2,069
933
45,702
(30,191)
15,511
26,663
48,112
22,484
574
6,650
$281,092
$54,069
5,258
65,519
6,854
6,141
879
13,986
27,860
8,090
160,796
317
31,934
9,340
6,958
209,345
21,153
95,267
Retained earnings
66,314
Unearned stock compensation
(23)
Accumulated other comprehensive loss
(29,109)
Treasury shares, at cost
(89,966)
Total Shareholders' Equity
72,656
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
$292,971
73,769
(18)
(28,551)
(89,873)
71,747
$281,092
WHEELS-4-U CORPORATION
CONSOLIDATED INCOME STATEMENTS
($000 except share data)
12/31/20X9
Product sales
$347,019
Service revenue
90,657
Net sales
437,676
Cost of products sold
281,877
Cost of services sold
77,541
Cost of sales
359,418
Gross profit
78,258
Selling, general, and administrative expenses
79,872
Restructuring costs
-------Operating income (loss)
(1,614)
Other expense (income):
Interest expense
5,990
Interest income
(363)
Other (income) expense, net
(730)
Earnings (loss) before income taxes
(6,511)
Income tax expense (benefit)
966
Earnings (loss) from continuing operations
(7,477)
Discontinued operations:
Income (loss from discontinued operations, net
of income tax provision (benefit) of $810 and
$(3,182), in 2007 and 2006, respectively
926
Loss on disposal of discontinued operations,
net of income tax benefit of $84
(904)
Net loss
($7,455)
12/31/20X8
$282,676
87,108
369,784
226,369
77,842
304,211
65,573
57,374
-------8,199
1,973
(285)
1,636
4,875
540
4,335
(5,713)
------($1,378)
Module I requirement part 5 e. Complete the 20X9 columns. You can copy and paste the 20X8 co
5 e. Comparison of Brony's Bikes and Wheels-4-U:
1). Compare Wheels-4-U’s common-sized income statements with Brony’s Bikes’ common-sized
2). Go to Wheels-4-U’s comparative common-sized balance sheets and income statements and calc
Current ratio
Quick ratio
Times interest earned
Return on stockholders' Equity
3). On the basis of (1) and (2) above, what strengths and weaknesses of Brony’s Bikes relativ
1.928%
33.032%
14.887%
4.350%
3.115%
57.311%
0.577%
1.640%
6.749%
6.225%
0.736%
0.332%
16.259%
-10.741%
5.518%
9.486%
17.116%
7.999%
0.204%
2.366%
100.000%
19.24%
1.87%
23.31%
0.00%
2.44%
2.18%
0.31%
4.98%
9.91%
2.88%
57.20%
0.11%
11.36%
3.32%
2.48%
74.48%
7.53%
33.89%
26.24%
-0.01%
-10.16%
-31.97%
25.52%
100.00%
76.44%
23.56%
100.00%
61.22%
21.05%
82.27%
17.73%
15.52%
2.22%
0.53%
-0.08%
0.44%
1.32%
0.15%
1.17%
12/31/20X7
$252,109 76.13%
79,029 23.87%
331,138 100.00%
223,914 67.62%
67,274 20.32%
291,188 87.94%
39,950
12.06%
47,607
14.38%
3,713
1.12%
(11,370) -3.43%
1,761
(633)
303
(12,801)
(4,391)
(8,410)
0.53%
-0.19%
0.09%
-3.87%
-1.33%
-2.54%
-1.54%
-------0.37%
------- ------($8,410) -2.54%
y and paste the 20X8 columns but may need to edit after pasting.
’s Bikes’ common-sized income statements for the same years.
ome statements and calculate the same ratios that you calculated for Brony’s Bikes in (b) above
f Brony’s Bikes relative to Wheels-4-U can you identify?
ikes in (b) above
Module II: Preliminary Assessment of Control Risk Based on an Understanding of the Design of
Controls
In this module, you will be asked to consider the information presented in the Description of the Practice
case in order to develop a preliminary assessment of control risk. AU 200 Overall Objectives of the
Independent Auditor and the Conduct of an Audit in Accordance With Generally Accepted Auditing
Standards in paragraph A41-A44 discuss inherent risk and control risk. AU 200.A44 states in part: “GAAS
do not ordinarily refer to inherent risk and control risk separately, but rather to a combined assessment
of the risks of material misstatement. However, the auditor may make separate or combined
assessments of inherent and control risk depending on preferred audit techniques or methodologies and
practical considerations.” While Brony’s Bikes is not required to obtain an audit opinion on the
effectiveness of its internal controls because the entity is not an SEC issuer, the audit committee has
asked your audit firm to provide feedback on its assessment of the design of its internal control over
financial reporting, including the five components of internal control as described by the Committee of
Sponsoring Organizations (COSO). The COSO guidance is a purchase item, however in the requirements
section of this Module you can find a link to obtain the COSO Executive Summary that is very useful.
Additional information you should consider is presented below.
The Accounting Information System and Internal Control over Financial Reporting
All computer-based information systems (CBIS) and accounting functions are centralized at the Texas
home office. Some of the more significant features of the system are discussed in the following
paragraphs.
Computerized Ledger
The general ledger software package, revised as part of the upgrade project, contains the following
integrated modules: accounts receivable, accounts payable, inventories, plant assets, payroll, and
general ledger.
Sales Processing
Customer sales orders received by salespersons are input directly into the system via terminals from
each of the regional locations. The regional sales manager is responsible for entering the orders after
checking for proper credit approval and determining the maximum credit limit. A transaction log is
maintained at each remote terminal; the log shows date of order entry, identification number of the
salesperson receiving the order, customer number, stock number, and quantity ordered. After
determining stock availability, the computer prepares a consecutively numbered, three-part sales
invoice. As part of the sales processing, the computer inserts the customer’s name and address, product
descriptions and prices, and extensions and footings. Terms of payment and discount availability also are
determined by the computer and included on the invoice. For each order processed, the computer
records the transaction, including costing the sale, and updates the accounts receivable and inventory
modules. The original invoice is mailed to the customer, the first copy is faxed to the warehouse as
shipping authorization, and the second copy is retained awaiting a signed bill of lading evidencing
shipment. Upon its receipt from the regional unit, the bill of lading is attached to the second invoice
copy and placed in a numeric file. Exhibit BB.7 (link) describes the sales processing function in the form
of a flowchart.
Cash Receipts from Customers
All mail is centrally received in the mailroom, opened, and distributed. Checks from customers are
forwarded to CBIS, where the customer number, invoice numbers paid, discount taken, and net amount
remitted are entered into the system based on the remittance advice information. The computer then
updates the customer accounts, as well as the accounts receivable control and cash in bank accounts. At
the end of the day, the computer produces a printout of detail and totals by customer, as well as a grand
total.
The checks and remittance advices are then separated and the checks are forwarded to Mark Wilkins,
cashier. Wilkins prepares the deposit and deposits each day’s remittances intact. Receipted deposit
tickets are forwarded by the bank to the controller’s office where a comparison is made with the daily
printout of cash receipts.
Miscellaneous cash receipts are processed in a fashion similar to that accorded customer remittances,
except that a recording form is prepared by the general ledger section and forwarded daily to CBIS for
entry into the computer. Prepared from the remittance advice, the recording form contains the date,
amount remitted, account number(s), and amount(s) to be credited. Exhibit BB.8 (link) is a flowchart
describing processing of customer cash receipts.
Purchases and Accounts Payable Processing
Brony’s Bikes buys its derailleurs and other bicycle parts from three unrelated vendors; steel and paint
are purchased from selected vendors, based on a bidding process. Supplies are purchased from various
vendors. All parts, materials, and supplies are ordered as reorder points are reached on the basis of a
three-part purchase order generated by the computer. Emil Ransbottom, director of purchasing, reports
to Elmer Fennig, production vice president. Prices, as agreed upon by Ransbottom and the respective
vendors, also appear on the purchase order, which is mailed to the vendor after being reviewed and
approved by Fennig. A copy of the purchase order is sent to accounts payable and another goes to the
purchasing department for later comparison with the incoming goods.
When goods are received, they are counted and inspected by employees in the receiving department
and a two-part receiving report is prepared. The original accompanies the goods to stores (stores is used
here to mean store room or store warehouse, not retail stores), where quantities and types of goods are
compared with the receiving report, and the copy is filed numerically in the receiving department. The
store’s manager then signs the receiving report and forwards it to the director of purchasing for
comparison with the purchase order for type, quantity, price, and discount terms. After signing for
agreement, the director of purchasing forwards the receiving report to accounts payable where it is filed
by vendor, along with the purchase order copy, awaiting receipt of a vendor’s invoice.
When the vendor’s invoice is received, an accounts payable clerk compares it with the purchase order
and receiving report, and then prepares a voucher for processing the invoice. The voucher contains the
vendor number, vendor invoice number, stock number, quantities, price, and terms. Voucher copies are
forwarded to CBIS for daily processing of vendors’ invoices. A daily control tape of dollar totals
appearing on the invoices is retained by accounts payable for later comparison with computer output.
During the input of vouchers, the accounts payable software module of the general ledger package edits
for the following characteristics: valid vendor number, valid stock number, price in agreement with
vendor price, and agreement with discount and payment terms stored in the computer. During the
processing run, the computer updates the accounts payable ledger, the manufacturing overhead detail,
the operating expense detail, and the perpetual inventory records for purchased parts, materials, and
supplies. The computer also performs a record count and compares output with input at the end of the
processing run. Lastly, the due date of the invoice is stored in the computer for purposes of generating
daily disbursement checks for invoices to be paid on that date.
Computer output consists of a purchases summary that is forwarded to accounts payable for review and
comparison with the control tape. Accounts payable also files alphabetically the voucher, along with the
attached purchase order, receiving report, and vendor’s invoice in an unpaid vouchers file. All of these
documents are prenumbered. Exhibit BB.9 (link) is a flowchart depicting the documents and procedures
just described.
Payment Processing
The daily computer check writing process produces a two-part check/remittance advice set. The
remittance advice, indicating invoice number(s) being paid, gross amount, discount, and net amount of
the check constitutes the lower part of the set. The check/remittance advice set is sent to accounts
payable for comparison with the documents contained in the alphabetic vendors’ invoice file. If the
amounts appearing on the remittance advice agree with the vendor’s invoice, an accounts payable clerk
initials the voucher, attaches the purchase order, vendor’s invoice, and receiving report, and forwards
the documents to the treasurer. The treasurer examines the documentation received from accounts
payable for agreement among the invoice, purchase order, and receiving report as to type, quantities,
and prices. If everything is in agreement and the documents include initials evidencing proper approvals,
the check is approved for signature. The checks are then signed by a check-signing machine and mailed
directly to the vendor by the treasurer’s office. The documents are effectively canceled to prevent reuse
and are returned to accounts payable for filing in the paid vouchers file.
Responsibility for operating the check-signing machine is assigned to one individual. The machine is
locked at all times when not being used to sign checks and the key is in the custody of the check signer.
Exhibit BB.10 (link) is a flowchart describing the payment process.
Production Payroll Processing
Hourly production employees are paid weekly. Nonproduction employees are salaried and are paid
biweekly. Salespersons also are paid biweekly, on a combination salary and commission compensation
basis. The total time worked is accumulated for hourly employees by a time clock located at the factory
entrance. The employee’s name, Social Security number, and department number appear on the clock
card. Factory supervisors approve the clock cards at the end of each week for employees working in
their respective departments, before submitting them to payroll.
Each Monday morning the timekeepers summarize and assemble the clock cards by department number
and forward the packets to payroll. The clock cards are examined in payroll for proper approval, a tape is
run of total hours by department, and then the cards and tape are forwarded to CBIS for processing. A
data entry clerk enters via a terminal the employee number, the department number, and the hours
worked. Input editing consists of checking for valid employee number, valid department, and
reasonableness of hours worked. The employee computer file contains the current pay rates, and the
employee and department numbers.
Adjustments to the employee database for any rate changes, additions of new employees, and deletions
of terminated employees are made only on the basis of authorization slips obtained from Laura
Schroeder, director of human resources. Withholding information is also included in the database and is
updated on the basis of authorization received from the human resources division.
The computer calculates gross pay, withholdings, and net pay. The employer’s taxes (e.g., FICA,
unemployment, and workers’ compensation premium) also are calculated by the payroll module of the
accounting software package. A record count is performed by the computer and compared with
employee records updated at the end of the run. A register also accumulates hours by department for
comparison with total hours at the end of the run.
Output consists of prenumbered payroll checks, a payroll summary, and a cost distribution summary.
The control group is responsible for distributing the output. The checks, along with the summaries, are
forwarded to the treasurer for signature and distribution. A check for the total amount of net pay is first
drawn upon the general account for deposit in the payroll account; the treasurer signs this check and
forwards it to the cashier for deposit.
After being compared with the payroll summary on a test basis, the individual payroll checks are signed
with the aid of a check-signing machine and distributed by treasury personnel. Unclaimed checks are
retained in safekeeping by the treasurer’s office. The payroll summary and the control tape are
forwarded to the payroll department as a basis for comparing total hours by department and for
completing the various payroll tax returns and reports. The cost summary is sent to Oliver Perna,
director of cost accounting, for review and filing. Exhibit BB.11 (Link) is a flowchart describing the
production payroll process.
As part of the integrated software package, the payroll data serves as input for updating the goods-inprocess inventory accounts. To complete the updating of goods-in-process and finished goods inventory,
production reports and materials requisitions are entered into the system on a weekly basis. In addition
to the perpetual inventory ledgers, the database includes a manufacturing overhead detail and an
operating expense ledger. Current standard costs are also incorporated into the database. This enables
the computer to calculate and print daily, weekly, and monthly variance reports for analysis by Perna
and Malissa Rust, director of information systems and data processing.
The salaried payroll is prepared in a similar fashion. CBIS updates the employee database as written
authorizations are received from human resources. As with production employees, the authorizations
relate to changes in employee salaries, new employees, and terminated employees. Any overtime for
salaried employees must be approved in writing by the respective department heads and routed to CBIS
through payroll; the payroll department reviews the overtime for proper authorization and for
reasonableness before transmitting the information to CBIS.
Other Accounting System Features
Monthly financial statements consist of a balance sheet, an income statement, and a statement of cash
flows and are generated automatically by the computer. Month-end adjustments for accruals (payroll,
taxes, warranty, commissions, pension, profit sharing, interest, and fringe benefits) and apportionments
(depreciation, insurance, bad debts, and amortization) are determined by John Mesarvey, Brony’s Bikes’
chief accountant, and submitted to CBIS on standard recording forms. CBIS enters the data and invokes
the command for printing the financial statements. In addition to the financial statements, the adjusting
entries are printed and forwarded by the control group to Mesarvey for comparison with his copy of the
adjustments as originally submitted to CBIS. Exhibit BB.12 (Link) contains the December 31, 20X9,
adjustments for inventories (perpetual records adjusted to year-end physical inventory) and unrecorded
liabilities. Exhibits BB.13–BB.16 (Link) contain beginning and ending entries in the December 20X9
transaction registers.
Sales invoices, purchase orders, disbursement checks, and payroll checks are prenumbered and
generated by computer, as described previously. All manually prepared documents, such as vouchers
and receiving reports, are also prenumbered. They are safeguarded and under the responsibility of
designated individuals. Used documents are canceled to prevent reuse. Bills of lading are not
prenumbered or otherwise accounted for. The internal auditing department regularly accounts for the
numeric sequence of used documents. All voided documents are retained until the annual independent
audit has been completed.
Within the CBIS department, duties are separated among the following functions:
1.
Systems analysis and programming;
2.
Data entry;
3.
Data processing; and
4.
Control.
Systems analysts and programmers provide extensive documentation of all programs and systems, as
well as program changes. Complete instructions are provided for the computer operators who enter
data as part of the various processing modules.
All program changes must be approved in writing by Rust, director of information systems and data
processing, as well as by affected user departments. Current backup programs and data files are
maintained in a location outside data processing. The internal auditors presumably have current copies
of the programs, but they rarely test transaction processing on an unannounced basis.
All computer output is distributed by the control group to authorized recipients. Any misstatements
occurring during processing runs are logged into the console and are accessible only by the control
group. The control group then monitors the reprocessing of the misstatements after satisfying
themselves that the misstatements were unintentional. Data processing personnel have no access to the
misstatement log and must contact the control group, inasmuch as processing cannot continue until any
misstatement is corrected.
An accounts receivable aging analysis is produced monthly by the computer. This analysis is used by
Lawrence White, credit manager, and John Mesarvey, chief accountant, for determining the monthly
adjustment to the allowance for doubtful accounts; White also performs extensive follow-up of
customers whose accounts are past due.
All bank accounts have been reconciled on a monthly basis, including the December 31, 20X9,
reconciliation.
The following are other policies and procedures that relate to Brony’s Bikes’ internal control over
financial reporting:
1.
Laura Schroeder, director of human resources, instituted a program for completely
updating job descriptions after the data processing system was converted to real time. This program is
now finished, and training programs have been developed for data processing, as well as for new and
existing employees in other functional areas.
2.
Three years ago, human resources developed a code of conduct for Brony’s Bikes
detailing expected standards of ethical behavior and distributed it to all existing employees. Since then,
all new hires have been provided the code of conduct, along with other firm-related materials, at
orientation. There are no formal employee training programs regarding the code but each monthly
newsletter devotes one page to some aspect of the code. The six page newsletter is mailed to the home
address of each employee.
3.
Inventories of materials, purchased parts, and finished goods are secured, and inventory
managers have been assigned responsibility for their safekeeping. The internal audit staff, however,
performs only infrequent test counts and comparisons with the perpetual records. Moreover, when they
do plan for these counts, the auditors notify the inventory managers weeks in advance.
4.
Directors and department heads are responsible for making hiring recommendations.
The human resources division, however, screens and investigates all applicants for proper background
and required education, training, and experience for the positions. In addition, final hiring and
termination authority rests with the human resources director.
5.
Groth has made efforts to minimize the chance of financial reporting improprieties at
Brony’s Bikes. To date, no cases of improprieties have been documented. One approach has been to
widely publicize among the accounting group the seriousness of and severe penalties (loss of job and
prosecution to the full extent of the law) for any improprieties. Another approach taken by Groth to
minimize improprieties was to create a process for anonymously communicating information upstream
through someone other than a direct superior. The process promises that “whistleblowers” will be
protected from possible reprisals. Finally, Groth has overseen the development of detailed job
descriptions for each of the accounting and information systems managers. In addition to providing
explicit responsibilities and authority for each manager, the job descriptions provide detailed guidance
on the situations in which a manager may override established controls, and the process for
documenting, explaining, and disclosing to superiors such overrides.
Requirements
1.
Given the description of the company, the industry, the accounting information system,
and the internal control over financial reporting, identify weaknesses in the internal control over
financial reporting. Also, be sure to relate the weaknesses to management’s assertions contained in the
financial statements. Because of management’s request for feedback on the design of its overall internal
control over financial reporting, in addition to assessing control activities, your assessment of
weaknesses should include controls that make up the Control Environment, Risk Assessment,
Information and Communication, and Monitoring. If the case does not contain enough information for
you to assess some aspect of internal control over financial reporting, develop a list of questions that
you would want to ask management so that you could gain enough information to make those
assessments. You may find it helpful to organize your identified weaknesses around the 17 principles
outlined in COSO’s 2013 Executive Summary. The Executive Summary can be accessed at
http://www.coso.org/documents/990025P_Executive_Summary_final_may20_e.pdf
Partially Completed
Figure BB.A: Brony's Bikes Organization Chart
T. Lawton
Pres. / CEO
E. Fennig
VP Production
C. Gibson
1
G. Groth
Corp. Controller
L. Schroeder
Dir. Of HR
Treasurer
E. Ransbottom
Dir. Of
Purchasing
Plant
Manager
3
J. Mesarvey
4
G. Florence
Dir. Internal
Audit
5
Dir. CBIS
Personnel
Officers
6
Sales
Staff
H. Smith
Transaction
Processing
O. Pema
Cost
Accounting
J. Hollins
Financial
Statem ents
Staff
Auditors
H. Cannon
Manager IT
N. Karling
MIS
Manager
General
Ledger
Statistical
Analysis
Accounts
Receivable
Data
Processing
Budget
Coordination
7
Systems
Analysis &
Programming
Report
Generation
Payroll
Control
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