Reference no: EM13298330

You are a new staff accountant with a largeregional CPA firm, participating in your first audit.

You recallfrom your auditing class that CPAs often use ratios to test the reasonableness of accounting numbers provided by the client. Sinceratios reflect the relationships among various account balances, ifit is assumed that prior relationships still hold, prior years'ratios can be used to estimate what current balances shouldapproximate. However, you never actually performed this kind ofanalysis until now.

The CPA in charge of the audit of CovingtonPike Corporation brings you the list of ratios shown below andtells you these reflect the relationships maintained by CovingtonPike in recent years.   

Profit margin on sales = 5%   

Return on assets = 7.5%   

Gross profit margin = 40%   

Inventory turnover ratio = 6 times   

Receivables turnover ratio = 25   

Acid-test ratio = .9   

Current ratio = 2 to 1   

Return on shareholders' equity = 10%  

Debt to equity ratio = 1/3   

Times interest earned ratio = 12 times

Jotted in the margins are the following notes:

1. Net income $15,000

2. Only one short-term note ($5,000); all other currentliabilities are trade accounts

3. Property, plant, and equipment are the only noncurrentassets

4. Bonds payable are the only noncurrent liabilities

5. The effective interest rate on short-term notes and bondsis 8%

6. No investment securities

7. Cash balance totals $15,000

Requirements: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.