small explanations 3-5

1. You are a furniture retailer planning a Super Bowl sale on a home theatre seating that requires no payments for two years. At the end of two years, buyers must pay the full amount. The system’s suggested retail price is $4,100, but you are willing to sell it today for $3,000 cash. What is your sale price if payment will not occur for two years and the market interest rate is 10%?

2. Your tests reveal a 3% increase in sales from $200,000 to $206,000 and 4% decrease in expenses from $190,000 to $182,400. Both changes are within your “reasonableness” criterion of plus/minus 5%, and thus you don’t pursue additional tests. The audit partner in charge questions your lack of follow-up and mentions the joint relation between sales and expenses. To what is the partner referring?

3. You invite three friends to a restaurant. When the dinner check arrives, David, a self-employed entrepreneur, picks it up saying , “Here, let me pay. I’ll deduct it as a business expense on my tax return.” Denise, a salesperson, takes the check from David’s hand and says, “I’ll put this on my company’s credit card. It won’t cost us anything.” Derek, a factory manager for a company, laughs and says, “Neither of you understands. I’ll put this on my company’s credit card and call it overhead on a cost-plus contract my company has with a client.” (A cost-plus contract means the company receives its costs plus a percent of those costs). Adds Derek, “That way, my company pays for dinner and makes a profit.” Who should pay the bill? Why?

4. You are working to identify the direct and indirect costs of a new processing department that has several machines. This department’s manager instructs you to classify a majority of the costs as indirect to take advantage of the direct labor-based overhead allocation method so it will be charged a lower amount of overhead (because of its small direct labor cost). This would penalize other departments with higher allocations. It also will cause the performance ratings of managers in these other departments to suffer. What action do you take?

5. Your center’s usual return on total assets is 19%. You are considering two new investment for your center. The first requires a $250,000 average investment and is expected to yield annual net income of $50,000. The second requires a $1 million average investment with an expected annual net income of $175,000. Do you pursue either? Explain.