Accounting and Finance Project

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AccountingandFinanceProject.xlsx

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Instructions to complete

Some questions refer to data in the Art Levinsen Corporation financial statements. The financial statement tabs are red. You may also need to refer to th e Industry Averages and Other Information tabs to complete the problems.

All references used to complete must be cited in APA Style on the sheet to which they apply.

All cells that require calculations must use Excel functions or formulas.

Round all answers to 2 decimal places.

Add more rows and columns as needed.

Balance Sheet

Art Levinsen Corporation
Comparative Balance Sheet
For the 12 Months Ended December 31
	20X3	20X2	20X1
Current Assets:
Cash	710,000	625,000	560,000
Accounts Receivable	494,000	450,000	410,000
Inventory	526,000	487,000	443,000
Prepaid Insurance	46,000	51,000	43,000
Total Current Assets	1,776,000	1,613,000	1,456,000
Property, Plant, & Equipment
Land	1,520,000	1,340,000	1,400,000
Buildings	2,530,000	2,440,000	2,350,000
Less: Accumulated Depreciation	-550,000	-480,000	-420,000
Net Buildings	1,980,000	1,960,000	1,930,000
Total Long-Term Assets	3,500,000	3,300,000	3,330,000
Total Assets	5,276,000	4,913,000	4,786,000
Liabilities:
Short-term Liabilities:
Accounts Payable	284,000	277,000	240,000
Salaries and Wages Payable	83,000	74,000	67,000
Dividends Payable	47,044	37,995	44,000
Notes Payable—Line of Credit	212,000	230,000	210,000
Total Current Liabilities	626,044	618,995	561,000
Long-term Liabilities
Notes Payable—Long Term	2,090,587	1,609,831	1,105,421
Bonds Payable	1,000,000	1,000,000	1,000,000
Less: Discount on Bonds Payable	-249,244	-263,260	-275,973
Net Bonds Payable	750,756	736,740	724,027
Total Long-Term Liabilities	2,841,343	2,346,571	1,829,448
Total Liabilities	3,467,387	2,965,566	2,390,448
Stockholder’s Equity:
Contributed Capital	500,000	500,000	500,000
Retained Earnings	3,424,613	2,679,434	1,983,552
Treasury Stock	-2,116,000	-1,232,000	-88,000
Total Stockholders’ Equity (SE)	1,808,613	1,947,434	2,395,552
Total Liabilities and SE	5,276,000	4,913,000	4,786,000

Income Statement

Art Levinsen Corporation
Income Statement
For the 12 Months Ended December 31
	20X3	20X2	20X1
Sales	$6,150,000	$5,150,000	$3,450,000
Cost of Goods Sold	-3,890,000	-3,215,000	-1,680,000
Salaries and Wages	-912,000	-875,000	-823,000
Depreciation-Building	-134,000	-123,000	-120,000
Insurance	-78,000	-92,000	-89,000
Total Expenses	-5,014,000	-4,305,000	-2,712,000
Operating Income	1,136,000	845,000	738,000
Interest Expense - Notes	-134,757	-95,410	-43,917
Interest Expense - Bonds	-74,016	-72,713	-71,531
Gain (Loss) Sale of Buildings	-120,000	21,000	38,000
Gain (Loss) Sale of Land	-31,000	27,000	-77,000
Total Other Revenues & Expenses	-359,773	-120,123	-154,448
Net Income	$776,227	$724,877	$583,552
Earnings Per Share (EPS)	$6.16	$4.77	$2.98

St. of Cash Flows

Art Levinsen Corporation
Statement of Cash Flows
For the 12 Months Ended December 31 20X3
	20X3	20X2
Cash received from customers	$6,106,000	$5,110,000
Cash paid to suppliers	-3,922,000	-3,222,000
Cash paid for salaries and wages	-903,000	-868,000
Cash paid for insurance	-73,000	-100,000
Cash paid for interest—Bonds	-60,000	-60,000
Cash paid for interest—Notes Payable	-134,757	-95,410
Net Cash from Operating Activities	$1,013,243	$764,590
Investment in Land	-790,000	-980,000
Investment in Building	-770,000	-720,000
Sale of Building	496,000	588,000
Sale of Land	579,000	1,067,000
Net Cash from Investing Activities	($485,000)	($45,000)
Proceeds (Payment) Notes Pay	462,757	524,410
Purchase of Treasury Stock	-884,000	-1,144,000
Dividends Paid	-22,000	-35,000
Net Cash from Financing Activities	($443,243)	($654,590)
Net Change in Cash	85,000	65,000
Beginning Cash	625,000	560,000
Ending Cash	$710,000	$625,000

Industry Averages

Industry Averages for the Art Levinsen, Inc. Industry	Industry Averages
	20X3
Return on Equity	0.16
Dividend Payout	0.12
Return on Assets	0.09
Return on Sales	0.09
Asset Turnover	0.9
Current Ratio	2.75
Quick Ratio	1.82
Debt/Assets	0.2
Accounts Receivable Days	32.01
Inventory Days	49.53
Accounts Payable Days	24.59
Summary: Cash Conversion Days	56.95

Other Information

Art Levinsen: Other Information
Bonds Payable: On December 31, 20X1, Art Levinsen Corp. issued 1,000, 6% bonds with a 20-year maturity. The bonds pay interest every six months (June 30 and December 31), and the market interest rate is 10%. HINTS: the face of a bond is $1,000 unless otherwise stated.	1,000	1,000,000	20	10%
Stock Price-Firm: The market price of the stock (per the stock exchange) was $34 at year-end 20X3, $26 at year-end 20X2, $22 at year-end 20X1, and $17 at year-end 2006.	34	26	22	17
Market Information: The average return in the market over 20X1–20X3 is 12%, and its standard deviation 6.50%.	12%	6.50%
Treasury Bonds: The average rate on U.S. Treasury bonds was 5%, which is considered to be the risk free rate of return.	5%
Stock Shares: Art Levinsen, Inc. has 600,000 authorized shares and 200,000 issued, and 126,000 outstanding at year-end 20X3.	200,000	126,000
Stock Valuation Data: The required rate of return demanded by some investors is approximately 17%. The firm’s beta is 1.75. The firm estimates that the growth rate in dividends is 20% for 20X4 and 20X5, and 14% for all years thereafter.	17%	1.75	20%	14%
Treasury Stock: The firm had zero treasury stock at year-end 20X0. The firm purchased: 4,000 treasury shares at year-end 20X1, 44,000 at year-end 20X2, and 26,000 at year-end 20X3. There were no sales of treasury stock during this period—only purchases of treasury stock.	4,000	44,000	26,000	shares of TS

Treasury Stk (5 points)

Recalculate Art Levinsen Corporation's 20X3 total assets, 20X3 total liabilities, and 20X3 total stockholders’ equity assuming Art Levinsen Corp. did not purchase any treasury stock during 20X3. (Total = 5 points)

&"-,Bold"Treasury Stock

ROI (8 points)

During the period 20X1–20X3, Art Levinsen Corporation's closest competitor had stock price activity that resulted in an average stock return of 25.7% with a standard deviation of 19.275%. This competitor’s beta is 1.20. The average rate on U.S. Treasury bonds was 5% and is considered to be the risk free rate of return.(Total = 8 points)
a. Calculate the required rates of return for Art Levinsen Corporation and for its competitor. Show calculations. (4 points)
b. If the return on the market were to fall from its current level of 12% to 9%, what would be the resulting impact on required return for Art Levinsen Corporation and its competitor? (2 points)

c. If an investor held a portfolio consisting of equal percentages of the market portfolio, the firm’s stock, and the competitor’s stock, what would the beta of this portfolio be? HINT: Market beta is always = 1.00. (2 points)

&"-,Bold"Return on Investment (ROI)

Bond Issuance (8 points)

On December 31, 20X1, Art Levinsen Corporation issued 1,000, 6% bonds with a 20-year maturity. The bonds pay interest semiannually (on June 30 and December 31), and the market/effective interest rate is 10%. HINT: the face of all bonds is $1,000 unless otherwise stated. (Total = 8 points)
a) Compute the price of the bonds. (4 points)
b) Prepare the bond issuance journal entry Art Levinsen Corp. will record on December 31, 20X1. (2 points)
	A	B	C	D	E	F
c) Use the bond amortization schedule that begins in cell D49to respond to this question. Calculate total interest expense Art Levinsen Corporation will record on the books from January 2, 20X2, through December 31, 20X9 (assume zero interest expense during 20X1). (2 points)	Period	Interest Payments to Investors [Face X 1/2 Contract rate: Cell E12]	Interest Expense [F x 1/2 Mkt rate: Cell E14]	Amortization of Bond Discount [C - B]	UN-Amortized Discount [Prior pd amt - D]	Carrying Value of Bonds [Prior pd amt + E]
	0				343,181.73	656,818.27
	1	30,000	32,840.91	2,840.91	340,340.81	659,659.19
	2	30,000	32,982.96	2,982.96	337,357.85	662,642.15
	3	30,000	33,132.11	3,132.11	334,225.75	665,774.25
	4	30,000	33,288.71	3,288.71	330,937.03	669,062.97
	5	30,000	33,453.15	3,453.15	327,483.89	672,516.11
	6	30,000	33,625.81	3,625.81	323,858.08	676,141.92
	7	30,000	33,807.10	3,807.10	320,050.98	679,949.02
	8	30,000	33,997.45	3,997.45	316,053.53	683,946.47
	9	30,000	34,197.32	4,197.32	311,856.21	688,143.79
	10	30,000	34,407.19	4,407.19	307,449.02	692,550.98
	11	30,000	34,627.55	4,627.55	302,821.47	697,178.53
	12	30,000	34,858.93	4,858.93	297,962.55	702,037.45
	13	30,000	35,101.87	5,101.87	292,860.67	707,139.33
	14	30,000	35,356.97	5,356.97	287,503.71	712,496.29
	15	30,000	35,624.81	5,624.81	281,878.89	718,121.11
	16	30,000	35,906.06	5,906.06	275,972.84	724,027.16
	17	30,000	36,201.36	6,201.36	269,771.48	730,228.52
	18	30,000	36,511.43	6,511.43	263,260.05	736,739.95
	19	30,000	36,837.00	6,837.00	256,423.05	743,576.95
	20	30,000	37,178.85	7,178.85	249,244.21	750,755.79
	21	30,000	37,537.79	7,537.79	241,706.42	758,293.58
	22	30,000	37,914.68	7,914.68	233,791.74	766,208.26
	23	30,000	38,310.41	8,310.41	225,481.32	774,518.68
	24	30,000	38,725.93	8,725.93	216,755.39	783,244.61
	25	30,000	39,162.23	9,162.23	207,593.16	792,406.84
	26	30,000	39,620.34	9,620.34	197,972.82	802,027.18
	27	30,000	40,101.36	10,101.36	187,871.46	812,128.54
	28	30,000	40,606.43	10,606.43	177,265.03	822,734.97
	29	30,000	41,136.75	11,136.75	166,128.28	833,871.72

&"-,Bold"Bond Issuance

Ratio Analysis (8 points)

Sasha Morgan is interested in investing in Art Levinsen Corporation. The CFO has asked you, a financial analysis, to calculate basic ratios to present to Sasha and other potential investors.
The 20X2 ratios are provided below. Compute the 20X3 ratios. Round each answer to 2 decimal points. (Total 8 points)				Decrease in Cash balance
				Increase in Accounts Receivable
Ratios	20X3	20X2		Increase in Net Sales
Current ratio		2.61		Increase in Prepaid Insurance
Quick ratio		1.74		Increase in Short-term Investments
Accounts Receivable turnover		11.98		Implement a Just in Time Inventory System
Average Collection Period Accounts Receivable		30.48		Increase the quantity of inventory purchased
Inventory turnover		6.91		Improved
Days in Inventory		52.79		Worsened
				Faster
				Slower
			Select your answer from the drop down lists below:
Based on the current ratio and quick ratio, has Art Levinsen Corporation's liquidity improved or worsened from 20X2 to 20X3?
Indicate the primary contributing factor to the change in liquidity that has occurred between 20X2 and 20X3.
Based on the Accounts Receivable turnover ratios, in 20X3 is Art Levinsen Corp. collecting its receivable faster or slower than it was in 20X2?
Indicate the primary contributing factor to the change in Accounts Receivavle turnover that has occurred between 20X2 and 20X3.
Based on inventory turnover ratios, in 20X3 is Art Levinsen Corp. moving inventory faster or slower than it was in 20X2?
If the industry average for inventory turnover is 10.0, which of the following reasons could result in a ratio more in line with the industry?

&"-,Bold"Ratio Analysis

YTM Bonds (6 points)

You must use the "Rate" function in Excel to solve this problem. Assume Art Levinsen Corporation is contemplating purchasing its own 6%, 20-year bonds on the open market on December 31, 20X6 for $748,485. These bonds pay interest every six months (June 30 and December 31), and the market interest rate is 10%. HINTS: Interest payments (Pmt) and the future value (Fv) must be entered as negative numbers into the Rate function fields. Assume interest payments are at the end of the period. For "Guess" use .11 to represent 11%. The resulting rate will be for 6 months and therefore must be multiplied by 2 for an annual yield. (Total = 6 points)

a) What is the yield-to-maturity for these bonds at 12/31/20X6 with 14 remaining years until maturity. (4 points)

b. Assume that the change in the yield to maturity is due solely to default risk and this change in default risk is due to a change in the bond’s ratings. As a result, would this rating have increased (upgrade) or decreased (downgrade). Explain. (2 points)

&"-,Bold"Yield to Market (YTM)

Options (5 points)

On January 2, 20X5, Art Levinsen Corp. entered into three options contracts through its brokerage firm, Sen Investments. An analyst in the company's derivatives trading department is reviewing the confirmations below for the three trades to get the details of the transactions. (5 points)
		Up
Use the information in the exhibits above to determine whether Art Levinsen Corp. will benefit if the stock prices rise or fall. Enter profits as positive whole dollars and losses as negative whole dollars.		Down
1. For the option on the ABC stock:	Drop Down Box
a. Art Levinsen Corp. will benefit when the stock goes
b. Calculate the profit or loss if the stock goes to $30 and Art Levinsen exercises its options

2. For the option on the DEF stock:	Drop Down Box
a. Art Levinsen Corp. will benefit when the stock goes


b. Calculate the profit or loss if the stock goes to $20
c. Calculate the profit or loss if the stock goes to $10

&"-,Bold"Options '

CAPM (8 points)

Davcher, Inc. is considering a project for next year, which will cost $5 million. Davcher plans to use the following combination of debt and equity to finance the investment. Issue $1.5 million of 10-year bonds at a price of 101, with a coupon/contract rate of 4%, and flotation costs of 2% of par. Use $3.5 million of funds generated from retained earnings. The equity market is expected to earn 8%. U.S. Treasury bonds are currently yielding 3%. The beta coefficient for Davcher, Inc. is estimated to be .70. Davcher is subject to an effective corporate income tax rate of 30 percent. (8 points)

Compute Davcher's expected rate of return using the Capital Asset Pricing Model (CAPM).

&"-,Bold"CAPM

Mgt Dec Making (7 points)

Jones Corporation sells a single product. Management has provided the following data for two levels of monthly sales volume. The company sells the product for $172.50 per unit. Total = 7 points.
Sales Volume in Units	4,000	5,000
Cost of Sales (COS)*	$ 307,600	$ 384,500
Selling, General & Administrative Costs (SG&A)*	$ 321,200	$ 337,000
Selling Price Per Unit	$ 173
* Total costs for these cost categories and may include both Fixed and Variable costs.
HINT: See high-low analysis.
1. Calculate the total contribution margin when 4,300 units are sold. Be sure to show and label your calculations. (3 points)
2. What is the breakeven point in Sales dollars if Advertising (a fixed SG&A cost) is increased by $40,000? Be sure to show and label your calculations. (4 points)

&"-,Bold"Cost Volume Profit (CVP)

Fraud (8 points)

In approximately 200-300 words, discuss the Fraud Triangle as it relates to the Elizabeth Holmes fraud trial that began in 2021. (8 points)

&"-,Bold"Apply the Fraud Triangle to Current Fraud

Auditing (7 points)

In approximately 200 words, define the following terms in your own words and discuss their relevance to auditing. (7 points)

a) Materiality

b) Professional skepticism

&"-,Bold"Auditing Concepts

MC 30 points

1) In the capital asset pricing model, beta measures the:
a.	The volatility of a stock relative to its competitors.
b.	The volatility of a stock relative to the market.
c.	The additional return required over the risk-free rate.
d.	Unsystematic risk.
2) Which of the following rates is most commonly compared to the internal rate of return to evaluate whether to make an investment?
a.	Short-term rate on U.S. Treasury bonds.
b.	Prime rate of interest.
c.	Weighted-average cost of capital.
d.	Long-term rate on U.S. Treasury bonds.
3) Which of the following observations regarding the valuation of bonds is correct?
a.	The market value of a discount bond is greater than its face value during a period of rising interest rates.
b.	When the market rate of return is less than the stated coupon/contract rate, the market value of the bond will be more than its face value, and the bond will be selling at a premium.
c.	When interest rates rise so that the required rate of return increases, the market value of the bond will increase.
d.	For a given change in the required return, the shorter its maturity, the greater the change in the market value of the bond.
4) A company with high operating leverage:
a.	Will observe that a relatively small change in sales will have a smaller impact on profits.
b.	Will observe that new sales can only be achieved with additional costs.
c.	Will have greater risk and greater potential return.
d.	Will have less risk and less potential return.
5) On January 8, 20X4, Art Levinsen Corp. purchased 20% of Gilbertson Inc. preferred stock and 40% of its common stock. Gilbertson's stock outstanding at December 31, 20X4, is as follows:
	10% Cumulative Preferred Stock = $100,000
	Common stock = $700,000
	Gilbert Inc. reported net income of $60,000 and paid $10,000 in dividends to preferred shareholders for the year ended December 31, 20X4. How much total revenue should Art Levinsen record due to its investment in Gilbert, Inc.?
a.	$20,000
b.	$22,000
c.	$50,000
d.	$70,000
6) A distinguishing feature of the Black-Scholes option pricing model is:
a.	it is adaptable to extreme stock price movements.
b.	transaction costs are factored into the model.
c.	the assumption of dividend paying stocks.
d.	it requires European-style options.
7) Behavioral finance literature disputes which of the following concepts?
a.	Investors pay more attention to information that confirms their beliefs
b.	Groupthink leads to more effective decisions
c.	Investors are irrational beings
d.	Markets are inefficient
8) On December 31, an entity had a reporting unit that had a book value of $3,450,000, including goodwill of $225,000. As part of its annual review of goodwill impairment, the entity determined that the fair value of the reporting unit including goodwill was $3,310,000.
What is the goodwill impairment loss to be reported on December 31?
a.	$0
b.	$85,000
c.	$140,000
d.	$225,000
9) On January 1, Art Levinsen Coro. purchased a delivery truck for $60,000. The truck's salvage value is $2,000, and its estimated useful life is 10 years. The productive life of the truck is estimated to be 100,000 miles. During the first year, the truck was driven 25,000 miles. Nick uses the double-declining balance method of depreciation. HINT DDB ignores salvage value until the final year of depreciation.
What amount of depreciation expense should Nick record for the first year?
a.	$5,800
b.	$11,020
c.	$11,600
d.	$12,000
10) Art Levinsen Corp. projects its 20X4 net income at $810,000, and plans to declare dividends of $65,000. What is the projected balance in Retained Earnings at 12/31/20X4? HINT: see Retained Earnings at 12/31/20X3.
a.	3,489,613
b.	4,169,613
c.	4,299,613
d.	None of the above

&"Calibri (Body),Bold"&14Multiple Choice Questions (3 points each) Highlight the cells of your chosen answer