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o-na [289]
3 years ago
15

Err Company has a major lawsuit against them for unsafe products. It recognizes a huge liability in 2004 of $300 million. The ef

fect of this liability is to decrease stockholders' equity by 50%. In 2005, the effect of recognizing this liability, all else equal, is:A. Return on net operating assets will increase dramatically
B. Return on net operating assets will decrease dramatically
C. Return on equity will increase dramatically
D. Return on equity will decrease dramatically
Business
1 answer:
Arturiano [62]3 years ago
5 0

Answer:

C) Return on equity will increase dramatically

Explanation:

Return on equity (ROE) is a profitability ratio and it is calculated using the following formula:

ROE = net income/ shareholders' equity

If shareholders' equity is reduced by 50%, and the net income remains stable, then ROE should double.

For example, net profit = $100, shareholders' equity = $1,000

ROE = $100 / $1,000 = 0.10

If shareholders' equity is reduced by 50%, then the new ROE will be:

ROE = $100 / $500 = 0.20

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Answer:

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3 years ago
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Degger [83]

Answer:

Identification of the Internal Control Weaknesses:

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B.  There is no segregation of duties and there is lack of supervision,  proper reconciliations, and assets audit.  Sharon Fisher handles purchase transactions from the beginning to the close all alone with a third party.  This exposes the company to procurement frauds and collusion with suppliers.  She can purchase assets for the company at prices that would enrich her personally.

C. Forming an audit opinion on the basis of ratio analysis of last year's comparative financial statements exposes the company to audit risks.  While ratio analysis is part of the basis for forming audit opinions, it is surely not the first audit procedure to obtain audit evidence to support his audit opinion on the financial statements.  An auditor is expected to obtain sufficient audit evidence and perform audit substantive tests of financial statement assertions.  He or she is also expected to review the internal control system to ensure that it is operating effectively after establishing its existence and reviewing changes in internal controls.

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Internal Controls are controls established by management in order to help it achieve business goals.  There are many internal controls, including Separation of Duties, Access Controls , Authorization and Approvals, Asset Audits, Reconciliations, and Data Backups.  The purposes of internal controls are to establish the reliability of financial reporting, ensure timely feedback on the achievement of operational or strategic goals, and achieve compliance with financial management laws, and accounting regulations.

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