PROBLEM 1 (Questions 1 – 8) – 16 points

Gary Crenshaw is an investor in several businesses. His first investment, Bream’s Sporting Goods,
operates five stores in the Cleveland, Ohio area. Gary owns 15% of the common stock and is evaluating
whether to sell his shares. Before he makes a decision, he would like to examine the company’s
profitability and market ratios. Financial statements for the year 20X2 are shown here:
PROBLEM 2 (Questions 9 – 10) - 9 points

Cathy Connors is a CMA and a CPA who completed three years as an auditor in a CPA firm. After
deciding she did not like public accounting, she took a job as an assistant controller at a paper
manufacturing company called Brock Industries. She reported to the controller, Jim Burrows, who
reported to the CFO, Ariana Logan.

Almost immediately, Cathy noticed irregularities which aroused her suspicions as a former auditor. Jim
and Ariana seemed to be very friendly, going to lunch together often, spending a lot of time together in
the office and often socializing after work hours. Jim often talked about his own personal finances. He
complained of an ex-wife receiving alimony, college tuition bills, and costs of caring for elderly parents.
Ariana was always dressed beautifully in designer clothes and drove a very expensive car.

During the first month-end close, Cathy discovered some very unusual journal entries that were posted
during the month. Sales orders were being booked as sales in advance of the company shipping the
goods, or even confirming the quantity and price. Cathy also discovered that various selling, general and
administrative (SG&A) expenses (such as salaries of marketing staff) were being misclassified as product
costs, leading to some of the costs being inventoried as opposed to expensed.

Cathy took her concerns to Jim, her immediate supervisor. Jim told her that these entries were common
practice for the company because of their unique management accounting systems. He assured Cathy
that there was a process to reverse the specialized entries during the month-end closing process.

Cathy decided to do her own investigating. She looked at the last six months of accounting records. She
saw many similar journal entries where revenue was booked prior to it being earned and many SG&A
expenses miscategorized as product costs. She saw no month-end reversing entries during this time
period. All month-end closing entries were approved by both Jim and Ariana. Cathy estimated that
income was overstated between $200,000 and $400,000 each month, and Jim and Ariana both received
bonuses based upon total company profitability.