Albrecht Ch 6 SM 2PP.docx

Albrecht Ch 6 SM 2PP.docx

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AlbrechtCh6SM2PP

CHAPTER6

DISCUSSIONQUESTIONS

1.Thethreetypesofbusinessactivitiesareoperatingactivities,investingactivities,andfinancingactivities.

2.Thepurchaseofinventoryforresaletocustomersisclassifiedasanoperatingactivityratherthananinvestingactivitybecauseoperatingactivitiesareassociatedwiththeprimarypurposeofabusiness.Purchasinginventoryforresaleisessentialtosellingaproduct.Investingactivitiesarerelatedtopurchasingassetsforuseinthebusiness.

3.Revenuesshouldberecognizedandreportedwhen

（1）theworkhasbeensubstantiallycompletedand

（2）cash,oravalidpromiseoffuturepayment,hasbeenreceived.Forexample,revenuesgenerallyshouldnotbereporteduntilasalehasbeenmadeoraservicehasbeenperformed.

4.Someofthereasonsrevenuesaremisstatedtomanipulatefinancialstatementsare:

a.Itisquiteeasy.Allonehastodotooverstaterevenuesisrecordfictitioussales,recordsalesearlierthantheyshouldberecorded,oroverstatetheamountoflegitimatesales.

b.Whenrevenuesareoverstated,assets（accountsreceivables）arealsooverstated.Byoverstatingrevenuesandassets,financialstatementslookgood.

c.Determiningwhentorecognizerevenuesisnotalwayseasyandrequiresprofessionaljudgment.

5.ItisimportanttohaveseparatesalesreturnsandallowancesandsalesdiscountsaccountsratherthantoreduceSalesRevenuedirectlybecauseaknowledgeoftheoriginalamountofsales（undisturbedbyadjustmentsforreturnsanddiscounts）isvaluablewhenassessingwhatpercentageofsalesisreturnedand/orwhatthenetrevenuefromsalesis.Forexample,ifacompanyfoundthatasignificantpercentageofsaleswasbeingreturned（ascalculatedbydividingsalesreturnsandallowancesbysales）,itmightdecidethatitissellinginferiormerchandiseorhasareturnpolicythatistooliberal.

6.Companiesneedmorecontrolsovercashthanotherassetsbecausecashisthemostliquidassetandtheeasiestonetoloseand/orhavestolen.Itisverycommontohearofcashbeingstolen,butveryunusualtohearofmajorplantorintangibleassetsbeingmisplaced.

7.Thethreemostgenerallypracticedcontrolsforcashare:

a.Separationofthedutiesofaccountingforandhandlingofcash.

b.Makingdailydepositsinabankofallcashreceived.

c.Payingallobligationsbyprenumberedchecks.

Thepurposeofallthesecontrolsistoprotectandsafeguardcash.

8.Mostcompaniestolerateasmallpercentageofuncollectibleaccountsreceivablebecauseiftheymonitoredtheircustomerssocloselythattherewereneveranybaddebts,theircreditpolicywouldbesostrictthatmanypotentialcustomerswouldbelostandillwillwouldbecreatedamongothers.Ontheotherhand,ifacompanyhastoomanybadaccounts,itcouldeventuallygobankrupt.Thus,itisimportantthatacompanywalkafinelineindecidingwhoshouldandshouldnotbegrantedcredit.Iftoostrict,thefirmmaylosecustomers;iftoolenient,itmayloseprofitsandpossiblyevensolvency.Theoptimalpositionforacompanytotakeistochoosethatpointatwhichthemarginalrevenuesfromcustomersjustequalsthemarginalcostofbaddebtsandothercostsofservicingcustomers.

9.Theallowancemethodofaccountingforuncollectiblereceivablesisrequiredbytheprofessionbecauseitprovidesabettermatchingofexpenseswithrevenues.Forexample,ifasalemadeinthelastmonthofayeareventuallybecameuncollectible,thebaddebtwouldnotberecognizeduntilthefollowingyear（atthetimethebaddebtisknown）whenusingthedirectwrite-offmethod.Therevenuewouldberecognizedinthefirstperiodandtheexpenseinthesecond.Withtheallowancemethod,theamountofbaddebtsisestimatedonthebasisofpastexperienceorindustryaveragesandmatchedwithrevenuesofthatperiod.

10.ThenetbalanceofAccountsReceivabledoesnotchangewhenanuncollectibleaccountiswrittenoffbecausethejournalentrytowriteoffthereceivabledecreasestheAccountsReceivablebalanceandtheAllowanceforBadDebtsaccountbythesameamount.

11.Agingofaccountsreceivableisusuallymoreaccuratethanbasingtheestimateontotalreceivablesbecausetheagingprocedureconsidersthelengthoftimereceivableshavebeenoutstanding.Eachagecategoryismultipliedbyanexpecteduncollectiblerateratherthanapplyingageneraluncollectibleratetoallreceivables.

12.Operatingratiossuchasaccountsreceivableturnovertellyouhowfastacompanyiscollectingreceivables.Whenexaminedoveraperiodoftime,trendsincollectibilitycanbeassessed.Havingmoneytiedupinaccountsreceivableisveryexpensiveforanorganization.Somecompanieshaveevengonebankruptbecausetheylettheirreceivablesgetoutofhand.

13.Propermatchingrequiresthatboththesalesandtheassociatedwarrantyexpenseberecognizedinthesameperiod.Thus,eventhoughtheactualamountthatwillbeincurredisnotknownattheendoftheperiod,anestimateofthecostofcustomerservicesassociatedwithwarrantyagreementsmust

berecorded.Ifcustomerserviceexpenseswerenotrecordeduntiltheactualworkwasperformed,salesrevenuecouldbereportedinperiodsearlierthanthecustomerserviceexpensesarisingfromthosesales,resultinginpoormatchingofrevenuesandexpenses.

14.*Someofthemostcommonreasonsfordifferencesbetweenbankbalancesandbookbalancesare:

a.Outstandingchecks.

b.Depositsintransit.

c.Errorsbyeitherthebankorthedepositor.

d.Transactionsthathavebeenenteredbythebankbutnotyetrecordedbythecompany,suchas

（1）bankservicecharges,

（2）collectionsforthecompanybythebank,（3）directdeposits,and（4）interestearnedontheaccount.

15.*Bankbalanceadditionsanddeductionsdonotrequireadjustingentriesbecausetheyareadjustmentsforthebank,notthedepositor.Mostadjustments（forexample,depositsintransitandoutstandingchecks）takecareofthemselvesovertime,andtheonesthatdonot（bankerrors）arecorrectedbynotifyingthebank.

16.*WhenatransactionisdenominatedinU.S.dollars,nospecialaccountingisnecessarybyaU.S.company,evenifthetransactioniswithaforeignparty.However,whenaU.S.companyentersintoatransactioninwhichthepriceisdenominatedinaforeigncurrency,theU.S.companymustusespecialaccountingprocedurestorecognizethechangeinthevalueofthetransactionasforeigncurrencyexchangeratesfluctuate.

*Relatestoexpandedmaterial.

PRACTICEEXERCISES

PE6–1（LO1）ClassifyingMajorBusinessActivities

BusinessActivityTypeofActivity

a.Acquiringinventoryforresale.Operating

b.Buyingandsellingstocksandbondsofothercompanies.Investing

c.Sellingsharesofstocktoinvestorsforcash.Financing

d.Sellingproductsorservices.Operating

e.Buyingproperty,plant,orequipment.Investing

f.Acquiringandpayingforotheroperatingitems.Operating

g.Sellingproperty,plant,orequipment.Investing

h.Borrowingcashfromcreditors.Financing

PE6–2（LO2）RevenueRecognition

ThecorrectanswerisE.Inorderforrevenuetoberecognized,theearningsprocessmustbesubstantiallycompleteandcashcollectibilitymustbereasonablyassured.

PE6–3（LO2）RevenueRecognition

Cash（65$32）2,080

AccountsReceivable（55$32）1,760

SalesRevenue3,840

PE6–4（LO3）CashCollection

Cash1,760

AccountsReceivable1,760

PE6–5（LO3）SalesDiscounts

1.Cash（$1,7600.98）1,724.80

SalesDiscounts（$1,7600.02）35.20

AccountsReceivable1760.00

2.Cash1,760

AccountsReceivable1,760

PE6–6（LO3）SalesReturnsandAllowances

1.SalesReturnsandAllowances640

Cash640

2.SalesReturnsandAllowances640

AccountsReceivable640

PE6–7（LO3）ComputingNetSales

Grosssales$2,500,000

Less:

Salesdiscounts（50,000）

Less:

Salesreturnsandallowances（75,000）

Netsales$2,375,000

PE6–8（LO3）ControlofCash

ThecorrectanswerisB.Thespecificbalanceinthecashaccountisusuallynotconsideredacontrolassociatedwithcash.Foranygivencompany,thecashbalancecommonlyfallswellbelowthesumofinventoryandaccountsreceivable.

PE6–9（LO4）TheDirectWrite-OffMethod

BadDebtExpense90,000

AccountsReceivable90,000

PE6–10（LO4）TheAllowanceMethod

1.BadDebtExpense50,000

AllowanceforBadDebts50,000

2.AllowanceforBadDebts43,000

AccountsReceivable43,000

PE6–11（LO4）ComputingNetAccountsReceivable

1.BeforeWrite-Off

Accountsreceivable$200,000

Less:

Allowanceforbad

debts50,000

Netrealizablevalue$150,000

2.AfterWrite-Off

Accountsreceivable$157,000

（$200,000–$43,000）

Less:

Allowanceforbad

debts7,000

（$50,000–$43,000）

Netrealizablevalue$150,000

PE6–12（LO4）CollectinganAccountPreviouslyWrittenOff

AccountsReceivable7,000

AllowanceforBadDebts7,000

Cash7,000

AccountsReceivable7,000

PE6–13（LO4）EstimatingUncollectibleAccountsReceivableasaPercentageofCreditSales

BadDebtExpense8,600

AllowanceforBadDebts8,600

$860,0000.01=$8,600

PE6–14（LO4）EstimatingUncollectibleAccountsReceivableasaPercentageofTotalReceivables

BadDebtExpense5,100

AllowanceforBadDebts5,100

Toadjusttheallowanceaccounttothedesiredbalance:

$85,0000.10=$8,500;$8,500–$3,400=$5,100

PE6–15（LO4）EstimatingUncollectibleAccountsReceivableUsingAgingAccountsReceivable

EstimateofLossesfromUncollectibleAccounts

PercentageEstimated

Age

Balances

toBeUncollectible

Amount

Current

$16,450

1.75%

$288

1–30dayspastdue

8,150

6

489

31–60dayspastdue

7,15