Albrecht Ch 6 SM 2PP.docx

1、Albrecht Ch 6 SM 2PPCHAPTER 6DISCUSSION QUESTIONS1. The three types of business activities are operating activities, investing activities, and financing activities.2. The purchase of inventory for resale to customers is classified as an operating activity rather than an investing activity because op

2、erating activities are associated with the primary purpose of a business. Purchasing inventory for resale is essential to selling a product. Investing activities are related to purchasing assets for use in the business.3. Revenues should be recognized and reported when (1) the work has been substant

3、ially completed and (2) cash, or a valid promise of future payment, has been received. For example, revenues generally should not be reported until a sale has been made or a service has been performed.4. Some of the reasons revenues are misstated to manipulate financial statements are: a. It is quit

4、e easy. All one has to do to overstate revenues is record fictitious sales, record sales earlier than they should be recorded, or overstate the amount of legitimate sales. b. When revenues are overstated, assets (accounts receivables) are also overstated. By overstating revenues and assets, financia

5、l statements look good. c. Determining when to recognize revenues is not always easy and requires professional judgment.5. It is important to have separate sales returns and allowances and sales discounts accounts rather than to reduce Sales Revenue directly because a knowledge of the original amoun

6、t of sales (undisturbed by adjustments for returns and discounts) is valuable when assessing what percentage of sales is returned and/or what the net revenue from sales is. For example, if a company found that a significant percentage of sales was being returned (as calculated by dividing sales retu

7、rns and allowances by sales), it might decide that it is selling inferior merchandise or has a return policy that is too liberal.6. Companies need more controls over cash than other assets because cash is the most liquid asset and the easiest one to lose and/or have stolen. It is very common to hear

8、 of cash being stolen, but very unusual to hear of major plant or intangible assets being misplaced.7. The three most generally practiced controls for cash are: a. Separation of the duties of accounting for and handling of cash. b. Making daily deposits in a bank of all cash received. c. Paying all

9、obligations by prenumbered checks. The purpose of all these controls is to protect and safeguard cash.8. Most companies tolerate a small percentage of uncollectible accounts receivable because if they monitored their customers so closely that there were never any bad debts, their credit policy would

10、 be so strict that many potential customers would be lost and ill will would be created among others. On the other hand, if a company has too many bad accounts, it could eventually go bankrupt. Thus, it is important that a company walk a fine line in deciding who should and should not be granted cre

11、dit. If too strict, the firm may lose customers; if too lenient, it may lose profits and possibly even solvency. The optimal position for a company to take is to choose that point at which the marginal revenues from customers just equals the marginal cost of bad debts and other costs of servicing cu

12、stomers.9. The allowance method of accounting for uncollectible receivables is required by the profession because it provides a better matching of expenses with revenues. For example, if a sale made in the last month of a year eventually became uncollectible, the bad debt would not be recognized unt

13、il the following year (at the time the bad debt is known) when using the direct write-off method. The revenue would be recognized in the first period and the expense in the second. With the allowance method, the amount of bad debts is estimated on the basis of past experience or industry averages an

14、d matched with revenues of that period.10. The net balance of Accounts Receivable does not change when an uncollectible account is written off because the journal entry to write off the receivable decreases the Accounts Receivable balance and the Allowance for Bad Debts account by the same amount.11

15、. Aging of accounts receivable is usually more accurate than basing the estimate on total receivables because the aging procedure considers the length of time receivables have been outstanding. Each age category is multiplied by an expected uncollectible rate rather than applying a general uncollect

16、ible rate to all receivables.12. Operating ratios such as accounts receivable turnover tell you how fast a company is collecting receivables. When examined over a period of time, trends in collectibility can be assessed. Having money tied up in accounts receivable is very expensive for an organizati

17、on. Some companies have even gone bankrupt because they let their receivables get out of hand.13. Proper matching requires that both the sales and the associated warranty expense be recognized in the same period. Thus, even though the actual amount that will be incurred is not known at the end of th

18、e period, an estimate of the cost of customer services associated with warranty agreements must be recorded. If customer service expenses were not recorded until the actual work was performed, sales revenue could be reported in periods earlier than the customer service expenses arising from those sa

19、les, resulting in poor matching of revenues and expenses.14.* Some of the most common reasons for differences between bank balances and book balances are: a. Outstanding checks. b. Deposits in transit. c. Errors by either the bank or the depositor. d. Transactions that have been entered by the bank

20、but not yet recorded by the company, such as (1) bank service charges, (2) collections for the company by the bank, (3) direct deposits, and (4) interest earned on the account.15.* Bank balance additions and deductions do not require adjusting entries because they are adjustments for the bank, not t

21、he depositor. Most adjustments (for example, deposits in transit and outstanding checks) take care of themselves over time, and the ones that do not (bank errors) are corrected by notifying the bank.16.* When a transaction is denominated in U.S. dollars, no special accounting is necessary by a U.S.

22、company, even if the transaction is with a foreign party. However, when a U.S. company enters into a transaction in which the price is denominated in a foreign currency, the U.S. company must use special accounting procedures to recognize the change in the value of the transaction as foreign currenc

23、y exchange rates fluctuate.*Relates to expanded material.PRACTICE EXERCISESPE 61 (LO1) Classifying Major Business Activities Business Activity Type of Activitya. Acquiring inventory for resale. Operatingb. Buying and selling stocks and bonds of other companies. Investingc. Selling shares of stock to

24、 investors for cash. Financingd. Selling products or services. Operatinge. Buying property, plant, or equipment. Investingf. Acquiring and paying for other operating items. Operatingg. Selling property, plant, or equipment. Investingh. Borrowing cash from creditors. FinancingPE 62 (LO2) Revenue Reco

25、gnitionThe correct answer is E. In order for revenue to be recognized, the earnings process must be substantially complete and cash collectibility must be reasonably assured.PE 63 (LO2) Revenue RecognitionCash (65 $32) 2,080Accounts Receivable (55 $32) 1,760 Sales Revenue 3,840PE 64 (LO3) Cash Colle

26、ctionCash 1,760 Accounts Receivable 1,760PE 65 (LO3) Sales Discounts1. Cash ($1,760 0.98) 1,724.80 Sales Discounts ($1,760 0.02) 35.20 Accounts Receivable 1760.002. Cash 1,760 Accounts Receivable 1,760PE 66 (LO3) Sales Returns and Allowances1. Sales Returns and Allowances 640 Cash 6402. Sales Return

27、s and Allowances 640 Accounts Receivable 640PE 67 (LO3) Computing Net Sales Gross sales $2,500,000 Less: Sales discounts (50,000) Less: Sales returns and allowances (75,000) Net sales $2,375,000PE 68 (LO3) Control of CashThe correct answer is B. The specific balance in the cash account is usually no

28、t considered a control associated with cash. For any given company, the cash balance commonly falls well below the sum of inventory and accounts receivable. PE 69 (LO4) The Direct Write-Off MethodBad Debt Expense 90,000 Accounts Receivable 90,000PE 610 (LO4) The Allowance Method1. Bad Debt Expense 5

29、0,000 Allowance for Bad Debts 50,0002. Allowance for Bad Debts 43,000 Accounts Receivable 43,000PE 611 (LO4) Computing Net Accounts Receivable1. Before Write-Off Accounts receivable $200,000 Less: Allowance for bad debts 50,000 Net realizable value $150,0002. After Write-Off Accounts receivable $157

30、,000 ($200,000 $43,000) Less: Allowance for bad debts 7,000 ($50,000 $43,000) Net realizable value $150,000PE 612 (LO4) Collecting an Account Previously Written OffAccounts Receivable 7,000 Allowance for Bad Debts 7,000Cash 7,000 Accounts Receivable 7,000PE 613 (LO4) Estimating Uncollectible Account

31、s Receivable as a Percentage of Credit SalesBad Debt Expense 8,600 Allowance for Bad Debts 8,600$860,000 0.01 = $8,600PE 614 (LO4) Estimating Uncollectible Accounts Receivable as a Percentage of Total ReceivablesBad Debt Expense 5,100 Allowance for Bad Debts 5,100To adjust the allowance account to t

32、he desired balance:$85,000 0.10 = $8,500; $8,500 $3,400 = $5,100PE 615 (LO4) Estimating Uncollectible Accounts Receivable Using Aging Accounts ReceivableEstimate of Losses from Uncollectible AccountsPercentage EstimatedAgeBalancesto Be UncollectibleAmountCurrent $16,450 1.75% $ 288130 days past due 8,150 6 4893160 days past due 7,15