Please provide a financial analysis with the information below

Assume that you are Ms. Cruz, an associate in the Loan Delinquency Department at the Bank of Green Valley. Your supervisor would like to find out from you whether the Bank of Green Valley has a claim of negligence against the accounting firm of Victor Hines, LLP. You have gathered additional information from the bankruptcy courts and know about the 2004 sale of stock to GreenSel and its accounting treatment in the income statement. Read the legal cases collected by the legal assistant and attached in the Library. Assume that the applicable precedent is from the fictional jurisdiction of the state of Green provided to you in the attached library. Assume that the financial statements audited by Victor Hines for the calendar years of 2003, 2002 and 2001 were accurate.

In determining whether breach occurred, make sure to perform the following accounting analysis: a. Recreate the journal entry that ZonTech made when it sold the stock to GreenSel. How much gain was recognized on the sale of the stock? How much cash inflow did this transaction create for ZonTech? b. Calculate the present value of the note receivable using a 15% interest rate. Using the present value of the note as the only economic benefit received, recalculate the gain or loss on the transaction. c. Connect the above analyses to the applicable legal elements that could be argued by both the plaintiff and the defendant. d. In order to calculate the potential damages sustained by the Bank of Green Valley, you will need to do the following: (1) correct the 2004 income statement using the analysis you completed above; (2) perform ratio analysis on the four year's income (as originally stated and then after your corrections) to determine if the firm had a pattern of income stability; (3) Lastly, calculate the standard profitability ratios (Return on Sales, Gross Profit Margin, Earnings per share, plus any other analysis you wish to perform.)

A B C D E F 1 Bank of Green Valley 2 Income Statement For the Year Ended December 31, 2004 4 2004 Adjustment 2004 5 Account (unadjusted) (adjusted) 6 Net Revenues and Gains $27,500,000 2,900,000 $24,600,000 7 Cost of Sales 15,200,000 15,200,000 8 Operating Expenses 3,160,000 3,160,000 9 Other Expenses 4,570,000 4,570,000 10 Net Income Before Taxes 4,570,000 -2,900,000 1,670,000 11 Taxes 1,690,000 617,566 12 Net Income After Taxes $2,880,000 $1,052,434 13 14 Tax Rate (imputed) 36.98% 36.98% 15 16 17 18 19Bank of Green Valley 2 Comparative Income Statements 3 For the Years Ended December 31, 2001 to December 31, 2004 4 5 (ordered chronologically) 6 2001 2002 2003 2004 7 Account (adjusted) Net Revenues and Gains $20,900,000 $25,100,000 $26,300,000 $24,600,000 9 Cost of Sales 9,200,000 9,845,000 12,150,000 15,200,000 10 Gross Profit 11,700,000 15,255,000 14,150,000 9,400,000 17 Operating Expenses 2,300,000 2,890,000 3,075,000 3,160,000 12 Other Expenses 2,214,000 3,146,000 3,966,000 4,570,000 13 Net Income Before Taxes 7,186,000 9,219,000 7,109,000 1,670,000 14 Taxes 2,515,000 3,318,000 2,671,000 617,566 15 Net Income After Taxes $4,671,000 $5,901,000 $4,438,000 $1,052,434 16 17 Common Shares Outstanding 3,000,000 3,000,000 3,000,000 3,000,000 18 19 20 Other Yearly Calculations 21 Tax Rate (imputed) 35.00% 35.99% 37.57% 36.98% 22 23 Earnings per Share $1.56 $1.97 $1.48 $0.35 24 25 Gross Profit % 55.98% 60.78% 53.80% 38.21% 26 Return on Sales % 22.35% 23.51% 16.87% 4.28% 27 28 Calculations Adjusted Income Comparative Income Statements Process PV (+)A B C D E F G H 16 17 Common Shares Outstanding 3,000,000 3,000,000 3,000,000 3,000,000 18 19 20 Other Yearly Calculations 21 Tax Rate (imputed) 35.00% 35.99% 37.57% 36.98% 22 23 Earnings per Share $1.56 $1.97 $1.48 $0.35 24 25 Gross Profit % 55.98% 60.78% 53.80% 38.21% 26 Return on Sales % 22.35% 23.51% 16.87% 4.28% 27 28 29 Other Year-to-Year Calculations 30 Change -- Net Revenues and Gains N/A 20.10% 4.78% -646.00% 31 Change -- Net Income Before Taxes N/A 28.29% -22.89% -76.51% 32 33 34General Journal Entry (existing, uncorrected) 2 Note Receivable $ 8,000,000.00 3 Investment in Stock $ 5,100,000.00 4 Gain on Sale $ 2,900,000.00 5 6 Correct Valuation of Note Receivable 7 Face Value of Note $ 8,000,000.00 Prevailing (Market) Interest Rate 15% 9 Number of Years to Maturity S 5.00 10 Present Value $ (3,977,413.88) 17 Discount on Note $ 4,022,586.12 12 13 Correct Calculation of Gain/Loss on Issuance of Note 14 Present Value of Note $ 3,977,413.88 15 Carrying Value $ 5,100,000.00 16 Gain/Loss on Issuance $ (1,122,586.12) 17 18 General Journal Entry (new, corrected) 19 Loss on Sale 1.122586.12 20 Note Receivable $ 8,000,000.00 21 Discount on Note $ 4,022,586.12 22 Investment in Stock $ 5,100,000.00 23 24 Calculation of Amortization (Interest) of Note 25 Present Value $ 3,977,413.88 26 Prevailing (Market) Interest Rate 15% 27 Interest at the end of the 1st Yr. 596,612.08A B C D 13 Correct Calculation of Gain/Loss on Issuance of Note 14 Present Value of Note $ 3,977,413.88 15 Carrying Value $ 5,100,000.00 16 Gain/Loss on Issuance $ (1,122,586.12) 17 18 General Journal Entry (new, corrected) 19 Loss on Sale 1.122586.12 20 Note Receivable $ 8,000,000.00 21 Discount on Note $ 4,022,586.12 22 Investment in Stock $ 5,100,000.00 23 24 Calculation of Amortization (Interest) of Note 25 Present Value $ 3,977,413.88 26 Prevailing (Market) Interest Rate 15% 27 Interest at the end of the 1st Yr. S 596,612.08 28 29 Additional General Journal Entry (for year 2005) 30 Discount on Note S 596,612.08 31 Interest Revenue $ 596,612.08 32BANK OF GREEN VALLEY 1il'lul'eltnesday, gril 13, 2005 9:43 am: \"Congratulations are in order! You remember that I told you last year that we would be submitting your opinion about ZonTech's nancial statements to a bank to get some nancing for our planned addition of a production facility. Don't you? Well, the Bank of Green Valley just notied me that the loan committee approved our three million dollars loan after analyzing this year's audited nancial statements. The committee was really impressed that while everyone else in our industry operated at a loss orjust broke even, we showed a substantial prot this period,\" crowed Roger Shaw, CFO of ZonTech, in a telephone call to Michael Free, an auditing manager at "u'ictor Hines, LLP. Michael headed the audit team that issued an unqualied opinion on ZonTech's nancial statements for each of the last four years. \"That's great!" Michael responded. \"The loan means that you'll be able to complete that new circuit board production facility that you told me about, doesn't it? That circuit board is the product your budget shows is going to increase sales revenue and cash ow next year. It's a good thing you were able to generate a prot and get the loan. Without the new product, things looked pretty bleak." ZonTech designs and manufacturers circuit boards for low-tech applications, such as those used in major household appliances. Sales in the appliance circuit board industry had declined or been flat in the past 18 months because of people's reluctance to buy new appliances in a poor economy. ZonTech's new circuit board was for washers and dryers that compete with Maytag's Neptune series. 2onTech's customer {a major competitor of Maytag} was launching a new washerldryer with characteristics similar to the Neptune series, but they expected the price to be about 25% below that charged by Maytag. ZonTech had developed a circuit board to meet the engineering specications of the new product, but could only land the business if they had new production facilities. Lily Meza, an auditing staff member assigned to one of Michael's jobs, overheard the conversation between Michael and Roger on the speakerphone while sitting in Michael's ofce. \"Michael, I didn't know that the company operated at a prot this year!\" exclaimed Lily. \"During my eldwork, I analyzed the monthly income statements through November, and they showed that the company operated at a loss almost every month! How did they report a substantial prot at year-end?\" Michael replied, \"Several years ago they made an investment in the stock of a closely held company that they thought might be a good strategic alliance. Unfortunately, that opportunity didn't work out. Until December 2cm, 2onTech had been holding the investment and hadn't been receiving any dividends. The CFO of ZonTech actively searched for a company to buy the stock, and in December 2004, located a strategic buyer who took it off their hands at a substantial gain!" Michael continued. " Since ZonTech frequently buys and sells stock investments, the gain is a part of their income from continuing operations." \"Oh, that's clever!" Lily responded. \"But if it were such a large transaction, why didn't they just use the cash flow from the stock sale to nance the new manufacturing facility?" \"Well,\" Michael explained, 'the company that ZonTech sold the stock to, GreenSeI, is having their own cash flow problems right now. They couldn't afford to give ZonTech cash, so EonTech accepted a non- interest bearing note due in 5 years. Although ZonTech won't see the cash for ve years, since the title to the stock has passed to the new owners, it can record the gain on the sale." Lily pondered this information for a few minutes, and then queried, \"Why a non -interest beating note? Most companies with a credit rating like GreenSeI are paying about 15% on loans for transactions like this one.\" "ZonTech didn't have any loans against the investment, so they aren't incurring any interest cost on the stock or the new note. They figured that there isn't any need to hurt GreenSel's cash flow when Zon Tech doesn't have any interest cost on the investment," Michael responded "Michael, you sure know a lot about this transaction," teased Lily. "You'd think that you had found the buyer and negotiated the deal." "Well, I am pretty excited," Michael responded. " I worked with the CFO on the transaction, reviewing the entry in the general journal and its reporting in ZonTech's income statement. I may not have arranged the deal, but I was instrumental in getting out the audited statements just in time. As you know, ZonTech really needed some serious cash infusion as soon as possible from some lender to complete a production facility for that new circuit board." "Since I missed all the excitement while I was working on a different client, why don't you share the details of the transaction?" demanded Lily. "Well, ZonTech was carrying the investment at $5, 100,000 and sold it to GreenSel for $8,000,000. So they booked a $2,900,000 gain on the transaction," Michael confidentially replied. Lily looked troubled and finally confided to Michael, "I'm enrolled in a CPA review course, and last week we studied long-term receivables and payables. I learned that generally accepted accounting principles (GAAP) require notes receivable due in more than one year to be carried at their present value. Wouldn't that affect the profit you reported?" Michael looked at Lily like she was trying to put him on the spot and icily replied, "I explained that ZonTech didn't incur any interest on this investment before the sale, so present value calculations aren't necessary! And, yes, the income statement we audited is consistent with GAAP.* ZonTech Income Statements For the four years ended December 31, 2004 (in 000's except per share amounts) 2004 2003 2002 2001 Net Revenues and Gains $27,500 $26,300 $25, 100 $20,900 Expenses and Losses Cost of Sales 15,200 12, 150 9,845 9,200 Operating Expenses 3,160 3,075 2,890 2,300 Other 4,570 3,966 3,146 2,214 Taxes 1,690 2,671 3,318 2,515 Net Income $2,880 $4,438 $5,901 $4,671 Common Shares Outstanding 3,000 3,000 3,000 3,000Memo To: Rosie Cruz, Loan Delinquency Department, Bank of Green Valley. From: Harold Ricardo, Senior Lending Officer, Bank of Green Valley Date: January 17, 2008 Re: Default on Zon Tech's loan As I mentioned to you earlier today, I am forwarding to you the ZonTech's file. It is now in default on the three million dollar loan we extended on April 12, 2005. The total amount currently outstanding is $2,390,000. We were just informed yesterday that Zon Tech has commenced bankruptcy protection under Chapter 7 of the Bankruptcy Code. As such, the prospects of a full recovery are minimal. In addition to the loan documents, I am attaching copies of all the financial statements that we obtained from ZonTech as part of the loan application, including the one for the year 2004, which we received from ZonTech's CFO on February 2, 2005. In looking back at the financial statements that we had in our file, I was stunned by ZonTech's dramatic and sudden collapse. When we approved the loan, the loan committee gave a lot of weight not only to the financial statements from 2004 but also to the ones from the prior three years; we were keenly impressed by the firm's pattern of income stability during those four calendar years. I am also attaching a copy of an article I had placed in my file a number of years back. Ever since reading the article, I have had a lingering suspicion that the story in the article is about Zon Tech. VALLEY TIMES overstated income and assets in December 15, 2005 contravention with General Accepted Accounting Principles. It is really too bad. I Glen Oak, Green. In a surprise move am really looking forward to joining this new yesterday, twelve staff accountants at Victor firm. I believe it has a lot of potential," said Hines, LLP left the firm and joined a one of the twelve departing accountants who competitor, Pillsbury & Skadden. In an wished to remain interview with one of the twelve former auditors, it was learned that the departure followed alleged auditing irregularities practiced by senior partners at Victor Hines, LLP. "I have been really disillusioned with the level of scrutiny the senior managers and partners have been employing with regard to a number of audit engagements. InVALLEY TIMES overstated income and assets in December 15, 2005 contravention with General Accepted Accounting Principles. It is really too bad. I Glen Oak, Green. In a surprise move am really looking forward to joining this new yesterday, twelve staff accountants at Victor firm. I believe it has a lot of potential," said Hines, LLP left the firm and joined a one of the twelve departing accountants who competitor, Pillsbury & Skadden. In an wished to remain interview with one of the twelve former auditors, it was learned that the departure followed alleged auditing irregularities practiced by senior partners at Victor Hines, LLP. "I have been really disillusioned with the level of scrutiny the senior managers and partners have been employing with regard to a number of audit engagements. In one case that I have worked on while I was an intern, my former manager signed off on an unqualified audit opinion where the client, a designer and manufacturer of home appliance circuit boards, had substantially 3 Required: Assume that you are Ms. Cruz, an associate in the Loan Delinquency Department at the Bank of Green Valley. Your supervisor would like to find out from you whether the Bank of Green Valley has a claim of negligence against the accounting firm of Victor Hines, LLP. You have gathered additional information from the bankruptcy courts and know about the 2004 sale of stock to GreenSel and its accounting treatment in the income statement. Read the legal cases collected by the legal assistant and attached in the Library. Assume that the applicable precedent is from the fictional jurisdiction of the state of Green provided to you in the attached library. Assume that the financial statements audited by Victor Hines for the calendar years of 2003, 2002 and 2001 were accurate. Prepare a report (see guidelines on the class website) for your supervisor. You may want to review section 53.01 of the AICPA Code of Professional Ethics. (You can visit the AICPA website at http://www.aicpa.org/about/code/index.htm.) In preparing your answers you may also wish to review the following Lower Division Core concepts, described in the Lower Division Core section of the Bus. 302L website: financial accounting concepts 4, 7, and 9, and business law concept 2