Question : 31.Edson Enterprises wants to know if its profitability performance has : 1244539

31.Edson Enterprises wants to know if its profitability performance has improved. Calculate profit margin for 20×7 and 20×8, using the following data:

Net Income, 20×7

Net Income, 20×8

Net Revenues, 20×7

Net Revenues, 20×8

$  8,600

  10,000

160,000

192,000

a. Profit margin, 20×7 ___________

b. Profit margin, 20×8 ___________

c. Using profit margin as a measure, has profitability improved?

32.Susan Kane won the mayoral election in the City of Ashley partly on the basis of her charge that Allen Ross, the former mayor, was responsible for the budget deficit. After taking office, she hired a major international accounting firm to straighten things out. This excerpt appeared in an article from a leading business publication, West End Business Review:

[A riddle]

Q: When is a budget deficit not a deficit?

A: When it is a surplus, of course.

Ashley Mayor Susan Kane was once again caught with egg on her face last week as she and her financial advisers tried to defend that riddle. On one hand, Comptroller Jim Guan [a Kane appointee], explaining $75 million in assets the mayor [Kane] hopes to hold in reserve in the 2007 Ashley city budget, testified in hearings that the city had actually ended 2005 with a $6 million surplus, not the much-reported deficit. He said further that the modest surplus grew to $54 million as a result of tax-enrichment supplements to the 2005 balance sheet.

On the other hand, the mayor stuck by the same guns she used last year on her predecessor. The city had ended 2005, under the Allen Ross administration, not merely without a surplus, but with a deficit. The apparent discrepancy can be explained.

Like most U.S. cities, Ashley operates under a modified accrual accounting basis. This is a combination of the cash basis and the accrual basis. The modified accrual basis differs from the accrual basis in that revenue is recorded when it is collected. The collection of Ashley’s parking tax, which is assessed on all city parking lots and garages, is an example.

The tax is assessed and collected on a quarterly basis but the city doesn’t collect the amount due for the last quarter of 2006 until the first quarter of 2007. Under ideal accrual methods, the parking revenues should be recorded in the 2006 financial statements. Under a cash approach, the revenues would be recorded in the 2007 budget. What the city did before was to record the money whenever it was advantageous politically. That, combined with the infamous revolving funds, allowed the city to hide the fact it was running large deficits under [former] Mayor Ross. That also means that no one really knew where the city stood.

The auditors are now reallocating the parking revenues to the 2007 budget but are accruing other revenues by shifting the period of collection from a year in the past. Overall, more revenues were moved into earlier fiscal years than into later years, inflating those budgets. Thus, the 2007 deficit is a surplus.

The article concluded:

The upshot is that both Mayor Kane and Mr. Guan [the comptroller] were correct. There was a deficit in the 2005 corporate or checkbook fund, but because of corrections taking place now, a surplus exists.

a. Do you agree with the way the auditors handled parking revenues? Support your answer by explaining which method of accounting you think a city should use.

b. Comment on the statement, “Systematically applied accounting principles will allow all to know exactly where the city stands.”