Question

Which of the following reviews would be most likely to indicate that a company's property, plant, and equipment accounts are not understated?

a) review of the company's repairs and maintenance expense accounts
b) review of supporting documentation for recent equipment purchases
c) review and recompilation of the company's depreciation expense accounts
d) review of the company's miscellaneous revenue account

Answer 1

Reviewing a company's miscellaneous revenue account does not effectively indicate the accuracy of property, plant, and equipment valuations. Instead, thorough assessments of physical assets and financial records are needed. In the secondary market, the value of a loan will fluctuate based on the borrower's reliability and changes in economy-wide interest rates.

Step-by-step explanation:

A review of the miscellaneous revenue account does not directly indicate whether a company's property, plant, and equipment (PP&E) accounts are overstated or understated. PP&E are long-term assets vital for operations, and their value is generally assessed through physical inventory counts, appraisal of asset conditions, and review of purchasing and disposal records. A proper assessment would involve looking at depreciation schedules, asset registers, and the reconciliation of the PP&E ledger with actual physical assets.

A firm with sales revenue of $1 million, which spent $600,000 on labor, $150,000 on capital and $200,000 on materials, would have an accounting profit of $50,000. This is calculated by subtracting the total costs ($950,000) from the total sales revenue ($1 million).

Money listed as assets on a bank balance sheet may not be physically in the bank because of the banking practice called fractional-reserve banking. Banks loan out most of the funds deposited with them, keeping only a fraction as reserves. Therefore, while these loaned-out funds are accounted for as assets, they are not physically present in the bank.

In the secondary market for loans:

• You would pay less for a loan if the borrower has been late on payments due to increased risk.
• You might pay less for a loan if interest rates have risen, as the loan's fixed interest rate would be less attractive compared to new loans.
• You would pay more for a loan if the borrower is a firm with high declared profits, indicating less risk.
• You might pay more for a loan if interest rates have fallen, since the loan's rate is relatively more attractive.