Review Keystone Computer working papers and then respond to the following questions in two essays...

Question

Review Keystone Computer working papers and then respond to the following questions in two essays that address the specific questions posed.

In the audit plan for the audit of Keystone Computers & Networks, Inc., there is a section on significant accounting and auditing matters. The second matter described involves capitalizing the costs of developing a software program for sale.

Research this issue and write a brief memorandum for the working papers describing the issue and summering the appropriate method of accounting for the development costs.
Based on your research, describe the major audit issue that you believe will be involved in auditing the software development costs.
A partially completed analytical ratios working paper for Keystone Computers & Networks, Inc., is presented on page 241 of the attached case study.

Complete the working paper by computing the financial ratios for 20X5 and provide these in your paper.
After completing part a, review the ratios and identify financial statement accounts that should be investigated because the related ratios are not comparable to prior-year ratios, industry averages, or your knowledge of the company. Provide these in your paper.
For each account identified in part b, identify and discuss potential reasons for the unexpected account balances and related ratios.
Your essay should total 4-6 pages in length and be well written and in conformity with APA Guidelines.
Specifically I am looking for a clear written document that is not overly wordy and one I can understand and critique.

David · Accepted Answer

APPROPRIATE METHOD OF ACCOUNTING FOR THE DEVELOPMENT COSTS. 
Software development cost can be capitalized in two situations,  
1) Development of software cost for sale. 
2) Cost incurred for development of software for internal use. 
When expenses are incurred on development of  software for sale, then the we should follow  FASB  
Statement No. 86 which breaks spending on software development into the following three stages: 
a)  Research & Development costs  
b)  Software development costs once technological feasibility is established  
c) Costs incurred once the product is available for general sale to customers 
Costs incurred in the first and third stages are expensed as incurred. Costs in the second stage are  
capitalized. Research & Development (R&D) costs are defined as those costs that occur prior to  
the software product reaching technological feasibility. FASB Statement No. 86 requires these 
 costs to be expensed as incurred according to FASB statement No. 2,  Accounting for Research 
 and Development Costs.  
Once technological feasibility has been reached – but before general release to customers – all  
costs associated with bringing the product to market are eligible for capitalization. According to  
FASB statement No. 86, technological feasibility 
 “… is established when the enterprise has completed all planning, designing, coding, and testing  
activities that are necessary to establish that the product can be produced to meet its design  
specifications including functions, features, and technical performance requirements.”
MAJOR AUDIT ISSUES INVOLVED IN AUDITING THE SOFTWARE DEVELOPMENT 
COSTS. 
Major issues in auditing the software cost would be determining which costs are to capitalized 
and which costs are to be expensed. Determining the stages of completion, allocation of direct and 
indirect cost involved in software development, and the extent to which administrative cost 
directly related to the software cost are to be capitalized, should be determined
CALCULATION OF DIFFERENT RATIOS. 
A) Current ratio: 
  Current Assets =  11,949,852 
        Current liabilities = 10,352,563 
                           current ratio = Current assets / current liabilities = 11,949,852/10,352,563 
 = 1.15
B) Average accounts receivables:
Average accounts receivables  = (Average accounts receivables) / Average daily sales
     = [(8,534,524 + 10,235,457)/2] / 92,586,051/365 
     = 9,384,991/253,

Review Keystone Computer working papers and then respond to the following questions in two essays that address the specific questions posed. In the audit plan for the audit of Keystone Computers &...

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