CASE FOR ADVANCED ACCOUNTING

Profit versus Cash Flow

Sennett Designs (SD) sells furniture on a retail basis. SD began operations during December
2009. and sold furniture for €250,000 in cash The furniture sold by SD was purchased on
credit for €150,000 and delivered by the supplier during December The credit terms
granted by the supplier required SD to pay the €150,000 in January for the furniture it
received during December, in addition to the purchase and sale of furniture, in December, SD
paid €20,000 in cash for rent and salaries.

1 How much is RD's profit for December 2009 if no other transactions

Occurred?

2. How much is SD's cash flow for December 2009?

3 if SD purchases and sells exactly the same amount in January 2010 as it

did in December and under the same terms (receiving cash for the sales and making
purchases on credit that will be due in February), how much will the company's profit
and cash flow be for the month tit January?

CASE FOR AUDITING

Kelsey, a senior accountant at a multi-office CPA firm, is assigned to the audit of Compo Corporation.
Compo is a closely held corporation and a major client of the firm. During the audit, Kelsey finds a
material cutoff error which causes Compo’s income to be significantly misstated. Kelsey is aware that the
CPA firm’s policy clearly states the audit senior must document any potential material adjustment in the
work papers. The final determination of materiality is then made by the partner in charge of the audit.
Kelsey also knows Compo does not want to make the adjustment. Before wrapping up the field work, the
audit manager, Bruce, tells Kelsey, :Let’s not mention this adjustment in the work papers. Since Compo
is closely held and there are not tax implications, the partner has decided not to force an adjustment.
Compo is our largest client. We need to get the Compo work up to the partner as soon as possible.”
Kelsey is concerned and upset after the conversation with Bruce. Failure to document such a material
amount just does not seem right.