Question:
You are a new staff accountant with a large regional CPA firm, participating in your first audit. You
recall from your auditing class that CPAs often use ratios to test the reasonableness of accounting
numbers provided by the client. Since ratios reflect the relationships among various account balances, if it
is assumed that prior relationships still hold, prior years’ ratios can be used to estimate what current
balances should approximate. However, you never actually performed this kind of analysis until now. The
CPA in charge of the audit of Covington Pike
Corporation brings you the list of ratios shown below and tells you these reflect the relationships
maintained by Covington Pike in recent years.
Required:
You are requested to approximate the current year’s balances in the form of a balance sheet and income
statement, to the extent the information allows. Accompany those financial statements with the
calculations you use to estimate each amount reported.
Answer:
You are a new staff accountant with a large regional CPA firm, participating in your first audit. You
recall from your auditing class that CPAs often use ratios to test the reasonableness of accounting
numbers provided by the client. Since ratios reflect the relationships among various account balances, if it
is assumed that prior relationships still hold, prior years’ ratios can be used to estimate what current
balances should approximate. However, you never actually performed this kind of analysis until now. The
CPA in charge of the audit of Covington Pike
Corporation brings you the list of ratios shown below and tells you these reflect the relationships
maintained by Covington Pike in recent years.
Required:
You are requested to approximate the current year’s balances in the form of a balance sheet and income
statement, to the extent the information allows. Accompany those financial statements with the
calculations you use to estimate each amount reported.
Answer:
