Chapter 1 Accounting in Action: CM Corporation (CMC)

CM Corporation (CMC) was founded in 2000 by Eric Conner and Phil Martin. The company designs, installs, and services security systems for high-tech companies. The founders, who describe themselves as "entrepreneurial geeks," met in a computer lab when they were teenagers and found they had common interests in working on security systems for critical industries. In January 2012, CMC hired you as an accounting intern. Lately Conner and Martin have been working with “radio frequency identification” (RFID) technology. They have developed a detailed system designed to track inventory items using RFID tags embedded invisibly in products. This technology has numerous inventory applications in multiple industries. One of the most basic applications is tracking manufacturing components; if tagged components "go walking" (if employees attempt to take them), companies can easily track and find them. Conner and Martin have sold their system to several high-tech companies in the area. These companies have a number of government contracts that require extensive security systems to protect sensitive data from infiltration by terrorists and others. To date, CMC’s cash flow from sales and services has adequately funded its operations. CMC anticipates growth potential for its products. As a result, it is planning to go to the market with a new common stock issue at the end of 2013. Many of the issues you will address in this continuing problem involve choices that are affected by preparing for this anticipated stock issue. Instructions Conner and Martin have asked you to explain to them the importance of SEC regulations and FASB standards to a non-public company like CMC. Prepare a brief memorandum with responses to the following questions.

(a) As a non-public company, with no securities traded on a stock exchange, is CMC subject to SEC regulations? Explain.

(b) Since CMC’s stock is privately held and not traded on any stock exchange, must a CPA audit the company’s books? Must these audited statements be prepared in accordance with GAAP? Support your answer.