Question

ATC 12-6 Ethical Dilemma Would I lie to you, baby? Andy and Jean Crocket are involved in divorce proceedings. When discussing a property settlement, Andy told Jean that he should take over their investment in an apartment complex because she would be unable to absorb the loss that the apartments are generating. Jean was somewhat distrustful and asked Andy to support his contention. He produced the following income statement, which was supported by a CPA's unqualified opinion that the statement was prepared in accordance with generally accepted accounting principles. CROCKET APARTMENTS Income Statement For the Year Ended December 31, 2016 $580,000 Rent revenue Less: Expenses $280,000 Depreciation expense Interest expense 184,000 88,000 Operating expense Management fees 56,000 Total expenses (608,000) (28,000) Net loss All revenue is earned on account. Interest and operating expenses are incurred on account. Management fees are paid in cash. The following accounts and balances were drawn from the 2015 and 2016 year-end balance sheets: Account Title 2015 2016 $40,000 $44,000 Rent receivable Interest payable 12,000 18,000 Accounts payable (oper. exp.) 6.000 4,000 Jean is reluctant to give up the apartments but feels that she must do so because her present salary is only $40,000 per year. She says that if she takes the apartments, the $28.000 loss would absorb a significant portion of her salary, leaving her only $12.000 with which to support herself. She tells you that, while the figures seem to support her husband's arguments, she believes that she is failing to see something. She knows that she and her husband collected a $20,000 distribution from the business on December 1 2016. Also, $150,000 cash was paid in 2016 to reduce the principal balance on a mortgage that was taken out to finance the purchase of the apartments two years ago. Finally, $24.000 cash was paid during 2016 to purchase a computer system used in the business. She wonders, "If the apartments are losing money, where is my husband getting all the cash to make these payments?" Required Page Prepare a statement of cash flows for the 2016 accounting period. b. Compare the cash flow statement prepared in requirement a with the income statement and provide Jean Crocket with a. recommendations. c. Comment on the value of an unqualified audit opinion when using financial statements for decision-making purposes.

Answer 1

Angwes Shaternend cash Ploos' finamcial etatemovt Statoment cash aos is a eshich repot the mflao nd autflao ash f peeti calaz peiod f time. 4t shaas ho OVe a Compuny Hhe opevating, inveshing, and tinamcing activity fect campany BeStatementcush flas earts ho cash eceipt ard cash paymerdt businest to a paxticular perid Reapirement a Pregere estoment ash fa aaountier Compunuy Statement tCash Fas For e year ended Deembe 3, 2016 Scanned with amScanner

Detais Amount AmountC) Cash floo fem opeting activities Cush flouo P xert vevenue 5, 76,0сo L) Less: Cash outflao fos expenses ndvest Expose 78,00)2) Opeating Ezpense (140оде) Maragement Fess (S0oc) Net cash flro fm opezating 252,000 activitief Cush flao fom investhing activities Puach ase tCom pute 2y000 Cash floo fom financing activitieg Repaygment doan (us0,00) Payment diatibution 20,00) Net cashto fom finame ivg CS Caiviaser (T0,000) with Star

Details Ameunt) Amounts Net change in ash Add. Beginning bulamte 8,000 Closing balonce Note (0 Compute te amant cash inftno fetsevenue rBegiminy balate Ltrent receivable Closing balance 2016 = Rent veceivable, |of sent xeceivable 40,o00 $hhooo ,000 Cash inflao Rent revenue- Rent veceivahles Pom ert seenue = $5 801000 - $4000 S,16,000 (ash imflow foom ent xevenue Hcash ut flao foo inteest expense Come pute Clasing bulame ot isterest poyuleLt inteest payuble Begining balane ánterespyable ,20l 6- EAYred CamScanner

ntexest payoble - Le,000- $12,000 ndese tpayable 4,000 Cash outfloo for i ntexest expense = fntevest expese-nteatpayoble Cadh autlas too intevest expense - ,8,000 Note 3 Compute tte cach adt Alao es opeing ezpemse [lesingbulame |d& Acousds payable Beginning bulamte Accaunt pyable, d Aounts payable 4000 000 Accaunt parable, ,20l6 -( 2,000) Copeating exponses patc Cash outflao Opesating expen se Opescating expense paid duing the yea fos opeling expemse S Scanned with: CamScanner

Reauirerthent b Ac estatement t cosh aos shaos a J Positive balanco o 458,000, it impltes hat it Ms. takex Ove e apatment che coould hove cagk in hand bo spendoftes eabbing e lass tht the apastments i geneuating Ms. J has also tteoption learing hes job and handling heaself e apastment business. t cooul save horhe maragment fees d $ 54.000 hith than hes salasy ot $40,000 ik eual quite More Reguirement An unapualitied audit opnim k on auclitoa stałes thatcompanu'imancial dedemente opoprietely guideline ( benealy ecepted Acoundig Primeiple falaMd toith nAA P vecaded in camplum Scanned with CamScanner

The users tle financial statements having coauld help o to e realadge t acauting amaly re well and take an appopaiafe decision greafers play's hae he aanting masedge dote fos e user in he decisi'an - makirg paoless to at am fuis cmclusin avive CS Scanned with CamScanner