TRANSACTION CYCLES

1. Transaction cycles include cycles for revenue, expenditures, inventory, investments,

property, plant and equipment, payroll and personnel, and financing.

2. For each of these cycles, the auditor wants to answer two crucial questions:

a. Are controls operating effectively?

b. Have transactions, balances, and disclosures been recorded properly in

accordance with GAAP? ACCOUNTINGSpirit Freightways is a leader in transporting agricultural products in the western provinces of Canada. Reese Brown, a financial analyst at Spirit Freightways, is studying the behavior of transportation costs for budgeting purposes. Transportation costs at Spirit are of two types: (a) operating costs (such as labor and fuel) and (b) maintenance costs (primarily overhaul of vehicles). Brown gathers monthly data on each type of cost, as well as the total freight miles traveled by Spirit vehicles in each month. The data collected are shown below (all in thousands): Conduct a regression using the monthly data of operating costs on freight miles. You should obtain the following result: Regression: Operating costs = a + (b X Number of freight miles) 2. Plot the data and regression line for the above estimation. Evaluate the regression using the criteria of economic plausibility, goodness of fit, and slope of the regression line. 3. Brown expects Spirit to generate, on average, 3,600 freight miles each month next year. How much in operating costs should Brown budget for next year? 4. Name three variables, other than freight miles, that Brown might expect to be important cost drivers for Spirit’s operating costs. 5. Brown next conducts a regression using the monthly data of maintenance costs on freight miles. Verify that she obtained the following result: Regression: Maintenance costs = a + (b X Number of freight miles) 6. Provide a reasoned explanation for the observed sign on the cost driver variable in the maintenance cost regression. What alternative data or alternative regression specifications would you like to use to better capture the above relationship? 1. Explain why rooms inspected and inspection labor-hours are plausible cost drivers of inspection costs. 2. Plot the data and regression line for rooms inspected and inspection costs. Plot the data and regression line for inspection labor-hours and inspection costs. Which cost driver of inspection costs would you chose? Explain. 3. Mary expects inspectors to inspect 300 rooms and work for 105 hours next week. Using the cost driver you chose in requirement 2, what amount of inspection costs should Mary budget? Explain any implications of Mary choosing the cost driver you did not choose in requirement 2 to budget inspection costs.
$$
\begin{matrix}
\text{Month} & \text{Operating Costs} & \text{Maintenance Costs} & \text{Freight Miles}\\
\text{January} & \text{\$942} & \text{\$974} & \text{1,710}\\
\text{February} & \text{1,008} & \text{776} & \text{2,655}\\
\text{March} & \text{1,218} & \text{686} & \text{2,705}\\
\text{April} & \text{1,380} & \text{694} & \text{4,220}\\
\text{May} & \text{1,484} & \text{588} & \text{4,660}\\
\text{June} & \text{1,548} & \text{422} & \text{4,455}\\
\text{July} & \text{1,568} & \text{352} & \text{4,435}\\
\text{August} & \text{1,972} & \text{420} & \text{4,990}\\
\text{September} & \text{1,190} & \text{564} & \text{2,490}\\
\text{October} & \text{1,302} & \text{788} & \text{2,610}\\
\text{November} & \text{962} & \text{762} & \text{2,240}\\
\text{December} & \text{772} & \text{1,028} & \text{1,490}\\
\end{matrix}
$$
$$
\begin{matrix}
\text{Variable} & \text{Coefficient} & \text{Standard Error} & \text{t-Value}\\
\text{Constant} & \text{\$445.76} & \text{\$112.97} & \text{3.95}\\
\text{Independent variable: No.of freight miles } & \text{\$0.26} & \text{\$0.03} & \text{7.83}\\
\text{}{r^{2}=0.86; Durbin-Watson\ statistic=2.18} & \text{} & \text{} & \text{}\\
\end{matrix}
$$
$$
\begin{matrix}
\text{Variable} & \text{Coefficient} & \text{Standard Error} & \text{t-Value}\\
\text{Constant} & \text{\$1,170.57} & \text{\$91.07} & \text{12.85}\\
\text{Independent variable: No.of freight miles } & \text{\$-0.15} & \text{\$0.03} & \text{-5.83}\\
\text{}{r^{2}=0.77; Durbin-Watson\ statistic=1.94} & \text{} & \text{} & \text{}\\
\end{matrix}
$$ ACCOUNTINGUsing the current year, journalize the following transactions. Use page 3 of a general journal and page 5 of a cash receipts journal. Source documents are abbreviated as follows: note receivable, NR; receipt, R; memorandum, M.
Transactions:
Mar. 4. Accepted a 90-day, 10% note from Kim Pratt for an extension of time on her account, $2,500.00. NR24.
Mar. 18. Received cash for the maturity value of NR18, a 60-day, 12% note for$1,500.00. R68.
Mar. 26. T. J. Cross dishonored NR15, a 90-day, 10% note, for $1,800.00. M21. ACCOUNTINGForten Company, a merchandiser, recently completed its calendar-year 2017 operations. For the year, (1) all sales are credit sales, (2) all credits to Accounts Receivable reflect cash receipts from customers, (3) all purchases of inventory are on credit, (4) all debits to Accounts Payable reflect cash payments for inventory, and (5) Other Expenses are paid in advance and are initially debited to Prepaid Expenses. The company’s income statement and balance sheets follow.
$$
\begin{matrix}
\text{FORTEN COMPANY Income Statement For Year Ended December 31, 2017}\\
\text{Sales} \ldots\ldots\ldots& \quad & \text{\$582,500}\\
\text{Cost of goods sold} \ldots\ldots\ldots& \quad & \text{285,000}\\
\text{Gross profit} \ldots\ldots\ldots& \quad & \text{297,500}\\
\text{Operating expenses}\\
\text{Depreciation expense} \ldots\ldots\ldots& \text{\$ 20,750}\\
\text{Other expenses} \ldots\ldots\ldots& \text{132,400} & \text{153,150}\\
\text{Other gains (losses)}\\
\text{Loss on sale of equipment} \ldots\ldots\ldots& \quad & \text{(5,125)}\\
\text{Income before taxes} \ldots\ldots\ldots& \quad & \text{139,225}\\
\text{Income taxes expense} \ldots\ldots\ldots& \quad & \text{24,250}\\
\text{Net income}\ldots\ldots\ldots & \quad & \text{\$114,975}\\
\end{matrix}
$$
$$
\begin{matrix}
\text{FORTEN COMPANY Comparative Balance Sheets December 31, 2017 and 2016}\\
& \text{2017} & \text{2016}\\
\text{Assets}\\
\text{Cash} \ldots\ldots\ldots& \text{\$ 49,800} & \text{\$ 73,500}\\
\text{Accounts receivable}\ldots\ldots\ldots & \text{65,810} & \text{50,625}\\
\text{Inventory} & \text{275,656} & \text{251,800}\\
\text{Prepaid expenses} & \text{1,250} & \text{1,875}\\
\text{Total current assets} & \text{392,516} & \text{377,800}\\
\text{Equipment} & \text{157,500} & \text{108,000}\\
\text{Accum. depreciation—Equipment} & \text{(36,625} & \text{(46,000)}\\
\text{Total assets} & \text{\$513,391} & \text{\$439,800}\\
\text{Liabilities and Equity}\\
\text{Accounts payable} & \text{53,141} & \text{\$114,675}\\
\text{Short-term notes payable} & \text{10,000} & \text{6,000}\\
\text{Total current liabilities} & \text{63,141} & \text{120,675}\\
\text{Long-term notes payable} & \text{65,000} & \text{48,750}\\
\text{Total liabilities} & \text{128,141} & \text{169,425}\\
\text{Equity}\\
\text{Common stock, \$5 par value} & \text{162,750} & \text{150,250}\\
\text{Paid-in capital in excess of par, common stock} & \text{37,500} & \text{0}\\
\text{Retained earnings} & \text{185,000} & \text{120,125}\\
\text{Total liabilities and equity} & \text{\$513,391} & \text{\$439,800}\\
\end{matrix}
$$
Additional Information on Year 2017 Transactions a. The loss on the cash sale of equipment was $5,125 (details in b). b. Sold equipment costing$46,875, with accumulated depreciation of $30,125, for$11,625 cash. c. Purchased equipment costing $96,375 by paying$30,000 cash and signing a long-term note payable for the balance. d. Borrowed $4,000 cash by signing a short-term note payable. e. Paid$50,125 cash to reduce the long-term notes payable. f. Issued 2,500 shares of common stock for $20 cash per share. g. Declared and paid cash dividends of$50,100. 1. Prepare a complete statement of cash flows; report its operating activities using the indirect method. Disclose any noncash investing and financing activities in a note. 2. Analyze and discuss the statement of cash flows prepared in part 1, giving special attention to the wisdom of the cash dividend payment.