Running head: ACCOUNTING 1

Accounting
Name:
University:
Question 1
Absorption Costing is accosting technique here a percentage o! the !irm"s !i#ed
overhead costs is app$ied to the cost o! manu!acturing its products% The !i#ed overhead
costs are app$ied per unit o! the product produced% It is computed by ta&ing the tota$ !i#ed
costs and dividing it by the number o! produced and so$d in the period% The resu$t
represents the cost per unit o! every unit manu!actured and so$d% 'ariab$e costing on the
other hand ma&es use o! !i#ed overhead costs as a sing$e sum as opposed to e#penses per
unit% Under this method( a$$ costs that change ith the $eve$ o! output such as shipping
and ra materia$ are inc$uded% The main di!!erence is that hi$e absorption costing
inc$udes e#penses on a per unit basis( variab$e costing treats a$$ e#penses as a sing$e $arge
e#pense and the same is deducted !rom the company)s revenues to get the pro!it !igure%
ACCOUNTING
Absorption costing is the best method because in practice many companies do not
se$$ a$$ that they produce in the same accounting period% This imp$ies that there is some
stoc& $e!t at the end o! the accounting period% Absorption costing is superior to variab$e
costing because every product in the unso$d inventory has a va$ue that !orms part o! the
!i#ed overhead% As a resu$t( the e#pense is not re!$ected in the income statement unti$ the
unso$d inventory is so$d% This does not on$y improve the !irm"s pro!itabi$ity( but a$so
boosts the company"s $iquidity%
Question 2
Under the audit ris& mode$( audit ris& is a product o! inherent ris&( contro$ ris&(
and deduction ris&% Inherent ris&s by de!inition re!er to the possibi$ity that a given
re$evant assertion is misstated( hich cou$d be materia$ in itse$! or hen combined ith
other misstatements assuming no re$ated contro$s are present% The mere !act that no
accounting ad*ustment have been recommended !or the !ive years does not imp$y absence
o! inherent ris&s% The !act that +amp$e +$ingers Corporation provides sta!!ing services to
severa$ $arge discount stores imp$ies that it has comp$e# ca$cu$ations that are high$y $i&e$y
to be misstated% +imi$ar$y( e#terna$( interna$( and environmenta$ !actors that a!!ect a$$
transaction types( disc$osure and account ba$ances may have in!$uenced the inherent ris&
re$ated to particu$ar re$evant assertion in the company"s !inancia$ statements%
,urthermore( the auditor cannot be sure that the !inancia$ statements !or the !ive-year
period are !ree !rom any materia$ misstatements that may have been a resu$t o! !raud or
error% +imi$ar$y( an audit process equa$$y has inherent $imitations arising !rom the !act that
audits have to be per!ormed ithin a reasonab$e period and at a reasonab$e cost% .ecause
o! these !actors( the auditor cannot reduce inherent ris&s to /ero%
Question 3
ACCOUNTING
There are !our ma*or considerations that Rebecca and 0en shou$d consider in
deciding hether to choose a Genera$ 1artnership or a Corporation%
Ease of Formation
Compared to a corporation( a genera$ partnership is easy to !orm and has $imited
government oversight% The oners simp$y need to register their business name in the
country in hich they intend to conduct business% Corporations on the other hand require
a $ot o! paperor& and much government oversight% .e!ore a corporation is created( the
oners must !i$e artic$es o! incorporation ith the secretary o! state in their country o!
operation% +imi$ar$y( the business has to !i$e annua$ !inancia$ reports%
Raising Capital
Given that Rebecca and 0en re$y on their individua$ savings in addition to a sma$$
ban& $oan( a genera$ partnership business ou$d be the most idea$% A corporation is best i!
the investors intend to attract venture capita$ists% In addition( a corporation has the
advantage o! either permitting its investors to trade their stoc&s private$y or pub$ic$y to
raise additiona$ capita$%
Tax Burden
A corporation incurs a high ta# burden given that in addition to corporate ta# on
the company"s pro!its( a$$ emp$oyees have to pay an income ta# on any income derived
!rom the corporation 2doub$e ta#ation3% Under genera$ partnership on the other hand( a$$
business income is passed over to the partners( and the partners) incomes are sub*ected to
se$!-emp$oyment ta#%
Liability Exposure
ACCOUNTING
A corporation is an independent entity separate !rom the oners% As a resu$t( in
case o! recovering any business debt( it i$$ be $imited to the assets o! the corporation% On
the other hand( under a genera$ partnership( partners have un$imited debt e#posure and
their persona$ assets can be so$d to recover business debt% +imi$ar$y( partner A can be he$d
$iab$e !or business debts incurred by partner .%
Question 4
Government revenue is raised main$y through ta#ing the citi/enry% As a resu$t(
accountabi$ity is premised on the be$ie! that citi/ens have a right to &no ho the
government raises its resources during a particu$ar !inancia$ period and the purpose !or
hich the resources have been e#pended% In estab$ished democracies( pub$ic o!!icers have
to be accountab$e to the citi/ens%
Question
4hereas simp$icity is one o! the qua$ities o! any good ta# system( the
achievement o! this goa$ is di!!icu$t% ,or the !edera$ income ta# system to achieve
simp$icity( other important ob*ectives have to be !oregone% ,or instance( there is a
tradeo!! beteen !airness and simp$icity% 5a&ing the income ta# $a much simp$er by !or
instance ta#ing a$$ incomes at the same !$at rate i$$ resu$t in un!air treatment o! many
ta#payers in the $o-income brac&et% Consider individua$ 6 and 7 ho both earn an
annua$ income o! 819:(:::% I! they pay a !$at rate ta# o! ;:<( each i$$ pay 8=9(:::%
Assuming that 7 has su!!ered a chronic condition that i$$ cost him 8>:(::: in medica$
!ees annua$$y( it ou$d be un!air !or 6 and 7 to pay the same income ta# per year% It is !or
this reason that $ama&ers incorporated the provisions in the ta# code as a ay o! ma&ing
it !airer and reducing ta# burden% 4hereas !airness is a sub*ective issue( in my vie(
comp$e#ity is the price that has to be paid to achieve a !air ta# system%
ACCOUNTING
Question !
Corporate !ormations qua$i!y to be ta#ab$e events because !or various reasons% To
begin ith( corporate !ormations !a$$ under e#change transactions% As a resu$t( the parties
to the transaction rea$i/e $osses or gains arising !rom the e#change% +econd$y( by ma&ing
corporate transactions ta#ab$e( the government idens its revenue base% +imi$ar$y( it
simp$i!ies the ta# system by e$iminating the ambiguity o! hether a transaction is ta#ab$e
or not% This not on$y ma&es it easier to administer ta# $a( nut a$so e$iminates the
incentives !or ta#payers to tai$or their transactions temporari$y to avoid section ;91
re$ating to recognition o! $osses and gains%
Question "
It is possib$e !or a company to minimi/e !oreign e#change ris& e#posure through
hedging% ?edging !oreign currency transactions and commitments a$so introduces an
e$ement o! certainty into the !irm"s !uture cash !$os arising !rom !oreign currency
transactions% ?edging simp$y means estab$ishing a price today at hich the !oreign
currency i$$ be bought or so$d at a !uture date% A !orard contract is one o! the too$s o!
hedging under hich a !irm can negotiate a rate today to e#change its !oreign currency at
a !uture date% The !orard rate is o!ten determined by a combination o! the prevai$ing
e#change rate and interest rate di!!erences beteen the to mar&ets% .y setting the
e#change rate in advance( a company is ab$e to e$iminate uncertainties associated ith
currency !$uctuations%
Question #
Fraud $ete%tion
A !orensic auditor eva$uates a !irm"s system o! interna$ contro$s ith the ob*ective
o! identi!ying i! any individua$ has ta&en advantage o! any ea&nesses in contro$s !or his
or her persona$ gain% ,orensic accountants not on$y identi!y asset-the!t !raud( but a$so
ACCOUNTING
identi!y the perpetrators% Un$i&e a !inancia$ statement auditor( a !orensic auditor i$$ not
e#press his opinion on a !irm"s !inancia$ statements%
&sset'T(eft Fraud
A !inancia$ statement audit i$$ not !ind out asset-the!t !raud given that its main
ob*ective is to ascertain hether the !inancia$ reports are a !air representation o! the
company)s !inancia$ position% As a $ong as the !inancia$ statements !air$y represent the
!irm"s !inancia$ position( a !inancia$ statement auditor i$$ be *usti!ied to give unqua$i!ied
opinion hen in !act an unidenti!ied asset-the!t !raud may be present%
Legally Enfor%eable
A !orensic audit determines the degree o! economic damages or $osses su!!ered
and co$$ect !inancia$ records that can be used as evidence in a court o! $a to rec$aim !or
recovery% On the other hand( !inancia$ statements audit on$y serves to chec& hether
interna$ contro$ structures have been adhered to in the process o! preparing the !inancia$
statements( and high$ight possib$e ea&nesses and brea&dons !or possib$e correction%
Question )
*oti+ation
A motive is a !orm o! pressure that an individua$ e#periences and hich cannot be
shared ith !riends, There are di!!erent types o! motivation that inc$ude psychotic
motivation( egocentric motivation( ideo$ogica$ motivations( and economic motivation%
The $atter is !ar too common in business !rauds compared to the others% ,or e#amp$es( an
otherise honest individua$ may be motivated to stea$ money to purchase a home or buy
drugs%
-pportunity
ACCOUNTING
An opportunity is de!ines as an open door !or addressing the individua$ prob$em
through vio$ation o! a trust% The vio$ation may be in the !orm o! circumventing interna$
contro$ procedures and po$icies or simp$y ta&ing advantage o! contro$ $oopho$es ithin an
entity% 1eop$e in senior positions ith greater $eve$s o! trust are more $i&e$y to have
greater opportunities% ,or e#amp$e( a manager sets a bad e#amp$e by ta&ing some
company supp$ies to his home%
Rationali.ation
In practice( a$$ humans by nature &no the di!!erence beteen right and rong%
An impeccab$e integrity is individua$"s abi$ity to behave in accordance ith the highest
ethica$ and mora$ va$ues at a$$ times% 5otive and opportunity o!ten resu$t in !raud because
o! $ac& o! integrity on the part o! individua$s% ?oever( individua$s do not de$iberate$y
decide to $ac& integrity% Instead( they $oo& !or a$ternatives to rationa$i/e their actions
through ords that ma&e their actions acceptab$e !or their se$!-image% ,or e#amp$e( a
manager may increase his pay on grounds that the company is big enough to a!!ord it or
under the argument that he is underpaid%