Car To ons Audio Inc. Car Toons Audio Inc. (CTAI) is a young company that recently completed its initial public offering. The company designs and develops leading-edge car stereo equipment. including MP4 compatible decks, speakers, amplifiers, and subwoofers. The company is investing heavily in research and development. In order to reduce strain on cash, the manage-ment team is compensated mostly through share-based compensation in the current year. In addition, the company has raised cash though the issuance of common shares in the open market and by offering various complex financial instruments. Management believes that all cash should be diverted toward the research and development process in order for the company to become the leader in automotive stereo equipment. In addition to the stock options, management receives a bonus of 5% of net income if diluted EPS is greater than $0.10. The bonus is the only cash compensation that management receives at this cage of the company’s life cycle. Management is excited because this year’s draft income statement (Exhibit I) shows diluted EPS in excess of $0.10, and therefore, a bonus will be paid. Lebeau and Liang LLP has been the auditor of CTAI since the company’s inception. You are a senior accountant with the firm and have been assigned the year-end audit for CTAI. The partner, Sharrnila Chaudary, has just met with the company’s management and discussed various accounting issues. She has asked you to prepare a report to be provided to the client that addresses all of the accounting issues, along with any other issues that you feel are impor-tant. Sharrnila’s notes from the meeting can be found in Exhibit II. In addition, the company’s current and future tax expenses most be calculated. Tax-related details can be found in Exhibit DI.
Required Prepare a report for Sharrnila. ‘FRS is the appropriate accounting standards for CTAI.
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