Refer to the financial statements of American Eagle Outfitters in Appendix B at the end of this book.

Required:

Skim the annual report. Look at the income statement, balance sheet, and cash flow statement closely and attempt to infer what kinds of information they report. Then answer the following questions based on the report.

1. What types of products does it sell?

2. On what date does American Eagle Outfitters' most recent reporting year end?

3. For how many years does it present complete

   1. Balance sheets?

   2. Income statements?

   3. Cash flow statements?

4. Are its financial statements audited by independent CPAs? How do you know?

5. Did its total assets increase or decrease over the last year?

6. How much inventory (in dollars) did the company have as of February 3, 2007 (accountants would call this the ending balance)?

7. Write out the basic accounting (balance sheet) equation and provide the values in dollars reported by the company as of February 3, 2007.

Refer to the financial statements of Urban Outfitters in Appendix C at the end of this book.

Required:

1. What is the amount of net income for the most recent year?

2. What amount of revenue was earned in the most recent year?

3. How much inventory (in dollars) does the company have as of January 31, 2007?

4. By what amount did cash and cash equivalents^* change during the most recent year?

5. Who is the auditor for the company?

Refer to the financial statements of American Eagle Outfitters in Appendix B and Urban Outfitters in Appendix C.

Required:

1. Total assets is a common measure of the size of a company. Which company had the higher total assets at the end of the most recent year? (Note: some companies will label a year that has a January year end as having a fiscal year end dated one year earlier. For example, a January 2007 year-end may be labeled as Fiscal 2006 since the year actually has more months that fall in the 2006 calendar year than in the 2007 calendar year.)

2. Net sales is also a common measure of the size of a company. Which company had the higher net sales for the most recent year?

3. Growth during a period is calculated as:

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   Which company had the highest growth in total assets during the most recent year? Which company had the highest growth in net sales during the most recent year?

Urban Outfitters

Performance Corporation was organized on January 1, 2009. At the end of 2009, the company had not yet employed an accountant; however, an employee who was “good with numbers” prepared the following statements at that date:

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Required:

1. List all deficiencies that you can identify in these statements. Give a brief explanation of each one.

2. Prepare a proper income statement (correct net income is $30,000 and income tax expense is $10,000) and balance sheet (correct total assets are $142,000).

You are one of three partners who own and operate Mary's Maid Service. The company has been operating for seven years. One of the other partners has always prepared the company's annual financial statements. Recently you proposed that the statements be audited each year because it would benefit the partners and preclude possible disagreements about the division of profits. The partner who prepares the statements proposed that his Uncle Ray, who has a lot of financial experience, can do the job and at little cost. Your other partner remained silent.

Required:

1. What position would you take on the proposal? Justify your response.

2. What would you strongly recommend? Give the basis for your recommendation.

A key factor that an auditor provides is independence. The AICPA Code of Professional Conduct states that “a member in public practice should be independent in fact and appearance when providing auditing and other attestation services.”

Required:

Do you consider the following circumstances to suggest a lack of independence? Justify your position. (Use your imagination. Specific answers are not provided in the chapter.)

1. Jack Jones is a partner with a large audit firm and is assigned to the Ford audit. Jack owns 10 shares of Ford.

2. Jane Winkler has invested in a mutual fund company that owns 500,000 shares of Sears stock. She is the auditor of Sears.

3. Bob Franklin is a clerk/typist who works on the audit of AT&T. He has just inherited 50,000 shares of AT&T stock. (Bob enjoys his work and plans to continue despite his new wealth.)

4. Nancy Sodoma worked on weekends as the controller for a small business that a friend started. Nancy quit the job in midyear and now has no association with the company. She works full-time for a large CPA firm and has been assigned to do the audit of her friend's business.

5. Mark Jacobs borrowed $100,000 for a home mortgage from First City National Bank. The mortgage was granted on normal credit terms. Mark is the partner in charge of the First City audit.

As a team, select an industry to analyze. Reuters provides lists of industries and their makeup at www.reuters.com/finance/industries. Each team member should acquire the annual report or 10-K for one publicly traded company in the industry, with each member selecting a different company. (Library files, the SEC EDGAR service at www.sec.gov, or the company itself are good sources.)

Required:

On an individual basis, each team member should write a short report answering the following questions about the selected company. Discuss any patterns across the companies that you as a team observe. Then, as a team, write a short report comparing and contrasting your companies.

1. What types of products or services does it sell?

2. On what day of the year does its fiscal year end?

3. For how many years does it present complete

   1. Balance sheets?

   2. Income statements?

   3. Cash flow statements?

4. Are its financial statements audited by independent CPAs? If so, by whom?

5. Did its total assets increase or decrease over last year? By what percentage? [Percentage change is calculated as (current year - last year) ÷ last year. Show supporting computations.]

6. Did its net income increase or decrease over last year? By what percentage?