Internal Control

You are required to complete all questions, in the same sequence as listed below, and submit all necessary workings. Follow the assignment requirements (refer below to the Requirements section above) very closely.

Question 1 Internal Control

See Reading 5 in the learning materials within Interact2.

The following situations suggest a strength or a weakness in e-commerce internal controls.

a. Netproducts sells merchandise over the Internet. Customers input their credit card information for payment.

b. Netproducts maintains employee information on the company intranet. Employees can retrieve information about annual leave, payroll deposits, and benefits, from any computer using their login information.

c. Netproducts maintains trend information about its customers, products, and pricing on the

company’s intranet.

d. Tax identification numbers for all vendors are maintained in Netproduct’s database.

Requirement

Identify the controls that will best protect the company.

Question 2 Bank Reconciliation

A. How can the bank reconciliation be used as a control device?

B. Create a spreadsheet model to show a bank reconciliation statement. Use the Smart Touch Learning example in Reading 5 for inspiration but create your own original data. Implement all the usual spreadsheet requirements.

Question 3 Introduction to management accounting

A. “The emphases of financial accounting and management accounting differ.” Explain.

B. Name the six primary business functions (excluding support functions) that make up the value chain, and briefly describe each.

C. “The problem with accounting is that accountants never get to become top managers such as CEOs.” Do you agree? Explain. Illustrate your explanation with examples. Use the internet as a resource.

D. “It is confusing to think of fixed costs on a per-unit basis.” Do you agree?Â

E. “Classification of costs into variable and fixed categories depends on the decision situation.”

Explain. Illustrate your explanation with examples.

Question 4 Ethical Issues

Suppose you are controller of a medium-sized gold exploration company in South Australia. You adhere to the standards for ethical conduct for management accountants. How would those standards affect your behaviour in each of the following situations?

1. Late one Friday afternoon you receive a geologist’s report on a newly purchased property. It indicates a much higher probability of gold than had previously been expected. You are the only one to read the report that day. At a party on Saturday night, a friend asks about the prospects for the property.

2. A gold industry stock analyst invites you and your wife to spend a week in Broome free of charge. All she wants in return is to be the first to know about any financial information your company is about to announce to the public.

3. It is time to make a forecast of the company’s annual earnings. You know that some additional losses will be recognized before the company prepares its final statements. The company’s CEO has asked you to ignore these losses in making your predictions because a lower-than-expected earnings forecast could adversely affect the chances of obtaining a loan that is being negotiated and that will be completed before actual earnings are announced.

4. You do not know whether a particular expense is deductible for income tax purposes. You are debating whether to research the tax laws or simply assume the item is deductible. After all, if you are not audited, no one will ever know the difference. If you are audited, you can plead ignorance of the law.

Question 5 Work Integrated Assessment case study

McDonald’s Annual Report

Learning Objectives: The subject you are studying is vocational. It is designed with the workplace in mind. Work integrated assessment provides opportunities for students to link theory and skills learned in a subject to a real work context. Students can use these opportunities to develop and practice the professional and academic skills they learn about in a subject or through the online environment and then be assessed on their capabilities in these simulated authentic environments. Work integrated assessment allows students to simulate and situate their learning in an authentic workplace that encourages them to explore their knowledge and apply it to practice. Integrating real world, authentic assessment tasks allows students to learn about the particular environments and culture of their chosen professions, while at the same time absorbing and practicing the skills they need to succeed. Doing these tasks can help students develop skills that can help their employability.

Question 6 Costing

A. What is the advantage of the contribution approach as compared with the absorption approach?

b. “Basing pricing on only the variable costs of a job results in suicidal under-pricing.” Critically evaluate this statement.

Question 7 Costing

A. “Accountants do not ordinarily record opportunity costs in the formal accounting records.” Why? Illustrate your explanation with examples.

B. Distinguish between an incremental cost and a differential cost. Illustrate your explanation with examples.

Question 8 Decision making

Please be frank and creative in answering the following questions.

A. (i)  Suppose you’re on a TV game show, and you’re given the choice of three doors. Behind one door is a brand new car, behind the others, nothing. You pick a door. The TV host, who knows what’s behind the doors, chooses another door and opens it to show you that it has nothing. Should you change your decision?

Don’t think about this too deeply just yet. Do you feel (intuit?) that you should change your choice? Answer initially without researching the question. What is the thinking behind your answer? Conduct a survey of ten of your friends/colleagues to give their opinion. You may wish to provide them with a copy of the question.

Include in your answer a table setting out the results of this survey. Also create a simple chart with Excel to present the results of your survey.

 A (ii) After you answer the first part of this question, search the Internet for the Monty Hall problem. Provide your own explanation of the correct solution. Why do so many get the wrong answer? Did you?

B. A man goes to see his medical doctor to find out whether or not he has a deadly disease. The test is positive. The test is 95% accurate and one in one thousand men of his age has this disease. What is the probability he has the disease? He decides to seek a second opinion but the results are exactly the same. When this question was put to a group of doctors, 80% of them answered “95%”. He now plans to sell up all his assets, tell his boss what he really thinks of her, quit his job on the spot and live in Fiji in the time he has left. Is this a rational decision? Explain.

C. Suppose an urn contains 100 marbles, 75 red and 25 black. A marble is drawn at random from the urn and you are asked to guess what colour you believe the marble to be. The marble is then shown,

replaced, and the urn’s contents again randomised. The aim is to maximise the number of correct guesses. Before reading any further, what strategy would you employ? What would you guess?

Assume 4 red come out in a row. What would your next guess be? Why? Include a brief discussion of the gambler’s fallacy.

D. Creatively discuss the rationality of human decision making using these and other examples. Use the Internet as a source (about 300 words for this section).

Question 9 Cash Budget

See problem 7-35 on page 317 of your text.

Change the figures in the problem to those below.

Sales $1,290,000

Inventory $42,000

% of sales collected

June 70%

May 20%

April 10%

Spreadsheet a cash budget for June with the revised figures. Incorporate the usual spreadsheet requirements.

Question 10 Variance analysis

Spreadsheet the following to calculate materials and labour variances. Follow all spreadsheet requirements. Use the IF function to determine if variances are favourable or unfavourable.Â

Question 11 Capital budgeting

Burger Queen Drive-In is considering a proposal to invest in a speaker system that would allow its employees to service drive-through customers. The cost of the system (including installation of special windows and drive-way modifications) is $28,000. Michele McDonald, manager of Burger Queen, expects the drive-through operations to increase annual sales by $14,000, with a 25% contribution margin ratio. Assume that the system has an economic life of 10 years, at which time it will have no disposal value. The required rate of return is 10%. Ignore taxes.

Use a spreadsheet to answer each part of this question. Use the Excel NPV function. As usual, paste a formula view.

1. Compute the payback period. Is it a good measure of profitability? Explain.

2. Compute the NPV. Should Michele accept the proposal? Why or Why not?

3. Using the ARR model, compute the rate of return on the initial investment.

4. Assume now: Cost of new speaker system $30,000, Cash operating cost savings per year $20,000, Contribution margin rate 30%

5. How is item 4 an example of sensitivity analysis? Explain.

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