Chapter 6 Solutions All

8/19/2019 Chapter 6 Solutions All

http://slidepdf.com/reader/full/chapter-6-solutions-all 1/41

Chapter 06 - Reporting and Interpreting Sales Revenue, Receivables, and Cash

Chapter 6Reporting and Interpreting Sales Revenue,

Receivables, and Cash

ANSWERS TO QESTIONS

1. The difference between sales revenue and net sales includes the amount ofgoods returned by customers because the goods were either unsatisfactory ornot desired, sales discounts given to business customers, and credit card feescharged by credit card companies (also refer to the answers given below toquestions 3, 4 and 5.

!. "ross profit or gross margin on sales is the difference between net sales andcost of goods sold. #or e$ample, assuming sales of %1&&,&&&, and cost of goodssold of %'&,&&&, the gross profit on sales would be %4&,&&&.

3. credit card discount is the fee charged by the credit card company for services.)hen a company deposits its credit card receipts in the ban*, it only receivescredit for the sales amount less the discount. The credit card discount accounteither decreases net sales (it is a contra revenue or increases selling e$pense.

4. sales discount is a discount given to customers for payment of accounts withina specified short period of time. +ales discounts arise only when goods are sold

on credit and the seller e$tends credit terms that provide for a cash discount. #or e$ample, the credit terms may be 11&, n3&. These terms mean that if thecustomer pays within 1& days, 1- can be deducted from the invoice price of thegoods. lternatively, if payment is not made within the 1&day period, no discountis permitted and the total invoice amount is due within 3& days from thepurchase, after which the debt is past due. To illustrate, assume a %1,&&& salewith these terms. /f the customer paid within 1& days, %00& would have beenpaid. Thus, a sales discount of %1& was granted for early payment.

Financial Accounting, 8/e 6- 1© 2014 by McGraw-Hill Global Education Holdings, LLC. Tis is !ro!ri"tary #at"rial sol"ly $or autori%"d instructorus". &ot autori%"d $or sal" or distribution in any #ann"r. Tis docu#"nt #ay not b" co!i"d, scann"d, du!licat"d,$orward"d, distribut"d, or !ost"d on a w"bsit", in wol" or !art.




5. sales allowance is an amount allowed to a customer for unsatisfactorymerchandise or for an overcharge in the sales price. sales allowance reducesthe amount the customer must pay, or if already paid, a cash refund is required.+ales allowances may occur whether the sale was for cash or credit. /n contrast,a sales discount is a cash discount given to a customer who has bought oncredit, with payment made within the specified period of time. (efer toe$planation of sales discount in 2uestion 4, above.

'. n account receivable is an amount owed to the business on open account by atrade customer for merchandise or services purchased. /n contrast, a notereceivable is a shortterm obligation owed to the company based on a formalwritten document.

. /n conformity with the e$pense matching principle, the allowance method recordsbad debt e$pense in the same period in which the credit was granted and thesale was made.

. sing the allowance method, bad debt e$pense is recogni6ed in the period in

which the sale related to the uncollectible account was recorded.

0. The writeoff of bad debts using the allowance method decreases the assetaccounts receivable and the contraasset allowance for doubtful accounts by thesame amount. s a consequence, (a net income is unaffected and (b accountsreceivable, net, is unaffected.

1&. n increase in the receivables turnover ratio generally indicates faster collectionof receivables. higher receivables turnover ratio reflects an increase in thenumber of times average trade receivables were recorded and collected duringthe period.

11. 7ash includes money and any instrument, such as a chec*, money order, orban* draft, which ban*s normally will accept for deposit and immediate credit tothe depositor8s account. 7ash equivalents are shortterm investments withoriginal maturities of three months or less that are readily convertible to cash,and whose value is unli*ely to change (e.g., ban* certificates of deposit andtreasury bills.

1!. The primary characteristics of an internal control system for cash are9 (aseparation of the functions of cash receiving from cash payments, (b separationof accounting for cash receiving and cash paying, (c separation of the physical

handling of cash from the accounting function, (d deposit all cash receipts dailyand ma*e all cash payments by chec*, (e require separate approval of allchec*s and electronic funds transfers, and (f require monthly reconciliation ofban* accounts.

6- 2 Solutions Manual© 2014 by McGraw-Hill Global Education Holdings, LLC. Tis is !ro!ri"tary #at"rial sol"ly $or autori%"d instructorus". &ot autori%"d $or sal" or distribution in any #ann"r. Tis docu#"nt #ay not b" co!i"d, scann"d, du!licat"d,$orward"d, distribut"d, or !ost"d on a w"bsit", in wol" or !art.




13. 7ashhandling and cashrecording activities should be separated to remove theopportunity for theft of cash and a coverup by altering the records. Thisseparation is accomplished best by assigning the responsibility for cash handlingto individuals other than those who have the responsibility for record*eeping. /nfact, it usually is desirable that these two functions be performed in differentdepartments of the business.

14. The purposes of a ban* reconciliation are (a to determine the :true; cashbalance and (b to provide data to ad<ust the 7ash account to that balance. ban* reconciliation involves reconciling the balance in the 7ash account at theend of the period with the balance shown on the ban* statement (which is not the:true; cash balance at the end of that same period. +eldom will these twobalances be identical because of such items as deposits in transit= that is,deposits that have been made by the company but not yet entered on the ban*statement. nother cause of the difference is outstanding chec*s, that is, chec*sthat have been written and recorded in the accounts of the company that havenot cleared the ban* (and thus have not been deducted from the ban*>s balance.sually the reconciliation of the two balances, per boo*s against per ban*,

requires recording of one or more items that are reflected on the ban* statementbut have not been recorded in the accounting records of the company. ne$ample is the usual ban* service charge.

15. The total amount of cash that should be reported on the balance sheet is thesum of (a the true cash balances in all chec*ing accounts (verified by a ban*reconciliation of each chec*ing account, (b cash held in all :cash on hand; (or:petty cash; funds, and (c any cash physically on hand (any cash nottransferred to a ban* for deposit?usually cash held for change purposes.

1'. (7hapter +upplement nder the gross method of recording sales discounts, the

amount of sales discount ta*en is recorded at the time the collection of theaccount is recorded.

ANSWERS TO !"TI#"E C$OICE

1. b !. c 3. b 4. d 5. c'. c . d . b 0. d 1&. c





Authors% Reco&&ended Solution Ti&e

'Ti&e in &inutes(

Mini-exercises Exercises Problems AlternateProblems

Cases and Projects

No. Time No. Time No. Time No. Time No. Time

1 5 1 15 1 !5 1 35 1 !5! 5 ! 15 ! 35 ! 35 ! 3&3 1& 3 15 3 35 3 5& 3 354 1& 4 !& 4 5& 4 4& 4 !&5 1& 5 !& 5 4& 5 45 5 35' 1& ' 15 ' 45 ' 45 5 15 45 @ 1& 15 45

0 151& 1511 !&

1! !&13 !& Continuing Case

14 !& 1 3&15 !&1' 3&1 3&1 1510 15!& !&!1 !&!! !&

!3 3&!4 3&

@ Aue to the nature of these cases and pro<ects, it is very difficult to estimate the amountof time students will need to complete the assignment. s with any openended pro<ect,it is possible for students to devote a large amount of time to these assignments. )hilestudents often benefit from the e$tra effort, we find that some become frustrated by theperceived difficulty of the tas*. Bou can reduce student frustration and an$iety by

ma*ing your e$pectations clear. #or e$ample, when our goal is to sharpen researchs*ills, we devote class time to discussing research strategies. )hen we want thestudents to focus on a real accounting issue, we offer suggestions about possiblecompanies or industries.





!INI)E*ERCISES

!6+-

Transaction #oint A #oint .

(a) +ale of inventory to a business

customer on open account$ +hipment 7ollection of account

(b) 7omputer sold by mail ordercompany on a credit card $ +hipment Aelivery

(c) irline tic*ets sold by an airline on acredit card Coint of sale $ 7ompletion of flight

!6+/-

/f the buyer pays within the discount period, the income statement will report %0,4&5 asnet sales (%0,5&& $ &.00.

!6+0-

7redit card sales ( %0,4&&.&&Dess9 7redit card discount (E !!.&&

Fet credit card sales %0,11.&&

+ales on account ( %1!,&&&.&&Dess9 +ales returns (E '5&.&&

11,35&.&&

Dess9 +ales discounts (1! $ %11,35& $ !- (E 113.5&Fet sales on account 11,!3'.5&Fet sales (reported on income statement %!&,354.5&





!6+1-

(a llowance for doubtful accounts (GE, H ...............14,5&& ccounts receivable (G................................... 14,5&&

To write off specific bad debts.

(b Iad debt e$pense (HJ, G+J......................................1',&&&

llowance for doubtful accounts (HE, G........ 1',&&&To record estimated bad debt e$pense.

!6+2-

Assets "iabilities Stoc3holders4 E5uit

(a llowance for doubtfulaccounts G15,&&&

Iad debt e$pense G15,&&&

(b llowance for doubtfulaccounts H0,5&&

ccounts receivable G0,5&&

!6+6-

H (a "ranted credit with shorter payment deadlines.H (b) /ncreased effectiveness of collection methods. G (c "ranted credit to less creditworthy customers.

!6+7-

Reconciling Ite&Co&pan4s

.oo3s.an3

State&ent

(a) Kutstanding chec*s G(b) Ian* service charge G(c) Aeposit in transit H

!6+8- 'Supple&ent(

%',&&& credit sale with terms, 31&, n3&, should be recorded as follows9 ccounts receivable (H.............................................. ',&&&

+ales revenue (H, H+J .................................. ',&&&

This entry records the sale at the gross amount. /f the customer does pay within thediscount period, only %5,!& must be paid, in which case the entry for payment wouldbe as follows9

7ash (H ..................................................................... 5,!&+ales discounts (HE, G, G+J .................................. 1&

ccounts receivable (G .................................. ',&&&





E*ERCISES

E6+-+ales revenue (%1,5&& H %5& H %5&&...................................... %!,5&Dess9 +ales discount (%1,5&& collected from +. "reen $ !-.. . 3&Fet sales..................................................................................... %!,!&

E6+/-+ales revenue (%3,&&& H %0,&&& H%4,&&&................................. %1',&&&Dess9 +ales discounts (%0,&&& collected from + $ 3-............. !&Dess9 7redit card discounts (%3,&&& from $ !-.................... '&Fet sales..................................................................................... %15,'&

E6+0-+ales revenue (%5,5&& H %4&& H %0,&&&................................... %14,0&&Dess9 +ales returns and allowances (11& $ %0,&&& from A........ 0&&Dess9 +ales discounts (01& $ %0,&&& from A $ 3-..................... !43Dess9 7redit card discounts (%4&& from 7 $ !-........................

Fet sales................................................................................ %13,40

E6+1-

7ost ofTransaction Fet +ales "oods +old "ross Crofit

Luly 1! H !0 H 15 H 1!!

Luly 15 H 5,&&& H !,5&& H !,5&&Luly !& G 15& FJ G 15&Luly !1 G 1,&&& G '&& G 4&&

E6+2-

eq. 1 (mount saved M mount paid N /nterest rate for 4& days.(3- M 0- N 3.&0- for 4& days.

/nterest rate for 4& days $ (3'5 days M 4& days N nnual interest rate3.&0- $ (3'5 M 4& days N !.!!-

eq. ! Bes, because the 15- rate charged by the ban* is less than the !.!!-rate implicit in the discount. The customer will earn 13.!!- by doing so (!.!!-

G 15-.





E6+6-(a Iad debt e$pense (HJ, G+J (%1,3&&,&&& $ &.&1.....13,&&&

llowance for doubtful accounts (HE, G........ 13,&&&To record estimated bad debt e$pense.

(b llowance for doubtful accounts (GE, H ............... 4,&&& ccounts receivable (G................................... 4,&&&

To write off a specific bad debt.

E6+7-(a Iad debt e$pense (HJ, G+J (%5,&&&,&&& $ &.&!.....1&&,&&&

llowance for doubtful accounts (HE, G........ 1&&,&&&To record estimated bad debt e$pense.

(b llowance for doubtful accounts (GE, H ...............0,&&& ccounts receivable (G................................... 0,&&&


E6+8-

Assets "iabilities Stoc3holders4 E5uit

(a llowance for doubtfulaccounts G1&&,&&&

Iad debt e$pense G1&&,&&&

(b llowance for doubtfulaccounts H0,&&&

ccounts receivable G0,&&&

E6+9-eq. 1(a Iad debt e$pense (HJ, G+J (%'&,&&& $ &.&35......!3,&&

llowance for doubtful accounts (HE, G........ !3,&&To record estimated bad debt e$pense.

(b llowance for doubtful accounts (GE, H ............... !,&& ccounts receivable (G................................... !,&&


eq. !

/ncome fromTransaction Fet +ales "ross Crofit Kperations

a. FJ FJ G !3,&&b. FJ FJ FJ





E6+:-

ged accounts receivable

Jstimatedpercentageuncollectible

Jstimatedamount

uncollectibleFot yet due %!!,&&& $ 3- N % ''&p to 1!& days past due ',5&& $ 14- N 01&Kver 1!& days past due !,&& $ 34- N 05!Jstimated balance in llowance for Aoubtful ccounts !,5!!7urrent balance in llowance for Aoubtful ccounts 1,!&&Iad Aebt J$pense for the year %1,3!!

E6+-

eq. 1

Aecember 31, !&13d<usting entry9

Iad debt e$pense (HJ, G+J......................................... 4,1& llowance for doubtful accounts (HE, G........ 4,1&

To ad<ust for estimated bad debt e$pense for !&13 computed as follows9



Jstimatedamount

uncollectibleFot yet due %5&,&&& $ 3- N % 1,5&&p to 1& days past due 14,&&& $ 1!- N 1,'&Kver 1& days past due 4,&&& $ 3&- N 1,!&&Jstimated balance in llowance for Aoubtful ccounts 4,3&

7urrent balance in llowance for Aoubtful ccounts !&&Iad Aebt J$pense for the year %4,1&

eq. !Ialance sheet9

ccounts receivable (%5&,&&& H %14,&&& H %4,&&& %',&&&Dess allowance for doubtful accounts...................... 4,3&

ccounts receivable, net of allowance fordoubtful accounts.......................................... %'3,'!&





E6+/-

eq. 1

Aecember 31, !&15d<usting entry9Iad debt e$pense (HJ, G+J......................................... 1,!5

llowance for doubtful accounts (HE, G........ 1,!5

To ad<ust for estimated bad debt e$pense for !&15 computed as follows9



Jstimatedamount

uncollectibleFot yet due %!05,&&& $ !.5- N %,35p to 1!& days past due 55,&&& $ 11- N ',&5&Kver 1!& days past due 1,&&& $ 3&- N 5,4&&Jstimated balance in llowance for Aoubtful ccounts 1,!57urrent balance in llowance for Aoubtful ccounts 1&&Iad Aebt J$pense for the year %1,!5

eq. !Ialance sheet9

ccounts receivable (%!05,&&& H %55,&&& H %1,&&& %3',&&&Dess allowance for doubtful accounts...................... 1,!5

ccounts receivable, net of allowance fordoubtful accounts.......................................... %340,15

E6+0-

1. Iad debt e$pense (HJ, G+J .................................................. !13 llowance for doubtful accounts (HE, G................... !13

To record estimated bad debt e$pense.

llowance for doubtful accounts (GE, H............................. !&1 ccounts receivable (G.............................................. !&1

To write off specific bad debts.

!. /t would have no effect because the asset :ccounts receivable; and contraasset :llowance for doubtful accounts; would both decline by Juro 1& million.Feither :eceivables, net; nor :Fet income; would be affected.





E6+1-

eq. 1 Allo;ance <or =oubt<ul Accounts

11 Ieg. balance

)riteoffs 5! Iad debt e$p.

153 Jnd. balance

Ieg. Ialance H Iad debt e$p. G )riteoffs N Jnd. IalanceIeg. Ialance H Iad debt e$p. G Jnd. Ialance N )riteoffs11 H G 153 N 5!

Iad debt e$pense increases (is credited to the allowance. +ince we are giventhe beginning and ending balances in the allowance, we can solve for writeoffs,which decrease (are debited to the allowance.

eq. ! Accounts Receivable '>ross(

Ieg. balance@ 11,455 5! )riteoffsFet sales '&,4!& 5,&1 7ash collections

Jnd. balance @@ 13,4!

@ 11,33 H 11@@ 13,50 H 153Ieg. balance H Fet sales G )riteoffs G 7ash collections N Jnd. IalanceIeg. balance H Fet sales G )riteoffs G Jnd. Ialance N 7ash collections11,455 H '&,4!& G 5! G 13,4! N 5,&1

ccounts receivable gross is increased by recording credit sales and decreasedby recording cash collections and writeoffs of bad debts. Thus, we can solve forcash collections as the missing value.





E6+2-

eq. 1 Allo;ance <or =oubt<ul Accounts

35 Ieg. balance

)riteoffs 5' 14 Iad debt e$p.

333 Jnd. balance

Ieg. Ialance H Iad debt e$p. G )riteoffs N Jnd. IalanceIeg. Ialance H Iad debt e$p. G Jnd. Ialance N )riteoffs35 H 14 G 333 N 5'

Iad debt e$pense increases (is credited to the allowance. +ince we are giventhe beginning and ending balances in the allowance, we can solve for writeoffs,which decrease (are debited to the allowance.

eq. ! Accounts Receivable '>ross(

Ieg. balance@ 13,30 5' )riteoffsFet sales '0,043 ',05' 7ash collections

Jnd. balance @@ 15,3!&

@ 13,&14 H 35@@ 14,0 H 333Ieg. balance H Fet sales G )riteoffs G 7ash collections N Jnd. IalanceIeg. balance H Fet sales G )riteoffs G Jnd. Ialance N 7ash collections13,30 H '0,043 G 5' G 15,3!& N ',05'

ccounts receivable gross is increased by recording credit sales and decreasedby recording cash collections and writeoffs of bad debts. Thus, we can solve forcash collections as the missing value.





E6+6-

eq. 1

The allowance for doubtful accounts is increased (credited when bad debt e$pense isrecorded and decreased (debited when uncollectible accounts are written off. This casegives the beginning and ending balances of the allowance account and the amount of

uncollectible accounts that were written off. Therefore, the amount of bad debt e$pense(in thousands can be computed as follows9

Allo;ance <or =oubt<ul Accounts

'0&,&&& Ieg. balance

)riteoffs 414,&&& 154,&&& Iad debt e$p.

43&,&&& Jnd. balance

Ieg. Ialance H Iad debt e$p. G )riteoffs N Jnd. IalanceJnd. Ialance G Ieg. Ialance H )riteoffs N Iad debt e$p.

43&,&&&G '0&,&&& H 414,&&& N 154,&&&

eq. !

)or*ing capital is unaffected by the writeoff of an uncollectible account when theallowance method is used. The asset account (accounts receivable and the contraasset account (allowance for doubtful accounts are both reduced by the same amount=therefore, the boo* value of net accounts receivable is unchanged.

)or*ing capital is decreased when bad debt e$pense is recorded because the contraasset account (allowance for doubtful accounts is increased. #rom requirement (1, we

*now that net accounts receivable was reduced by %154,&&& when bad debt e$pensewas recorded in year !, reducing wor*ing capital by %154,&&&.

Fote that income before ta$es was reduced by the amount of bad debt e$pense thatwas recorded, therefore ta$ e$pense and ta$ payable will decrease. The decrease inta$ payable caused wor*ing capital to increase= therefore, the net decrease was%154,&&& G (%154,&&& $ 3&- N %1&,&&.

eq. 3

The entry to record the writeoff of an uncollectible account did not affect any income

statement accounts= therefore, net income is unaffected by the %414,&&& writeoff inyear !.

The recording of bad debt e$pense reduced income before ta$es in year ! by %154,&&&and reduced ta$ e$pense by %4',!&& (i.e., %154,&&& $ 3&-. Therefore, year ! netincome was reduced by %1&,&& (as computed in eq. !.





E6+7-

eq. 1

Aec. 31, !&14 llowance for doubtful accounts (GE, H................ 1,&&

ccounts receivable (L. Aoe (G................... 1,&&

To write off an account receivable determined tobe uncollectible.

Aec. 31, !&14Iad debt e$pense (HJ, G+J ..................................... 1,1!5

llowance for doubtful accounts (HE, G..... 1,1!5 d<usting entryestimated loss on uncollectibleaccounts= based on credit sales (%5,&&& $ 1.5-N %1,1!5.

eq. !

/ncome statement9Kperating e$penses9

Iad debt e$pense......................................................... %1,1!5

Ialance sheet9Current assets

ccounts receivable (%1',&&& H %5,&&& %'&,&&& %1,&& ...................................... %!0,3&&Dess9 llowance for doubtful accounts

(%0&& %1,&& H %1,1!5 ............................. 3!5 %!,05

eq. 3

The 1.5- rate on credit sales may be too low because it resulted in bad debt e$pense onlytwothirds the amount of receivables written off (%1,&& during the year. Oowever, if theuncollectible account receivable written off during !&14 is not indicative of averageuncollectibles written off over a period of time, the 1.5- rate may be appropriate. There isnot sufficient historical data to ma*e a definitive decision.





E6+8-

eq. 1

Aec. 31, !&14 llowance for doubtful accounts (GE, H................ 55&

ccounts receivable (Toby8s "ift +hop (G... 55&

To write off an account receivable determined tobe uncollectible.

Aec. 31, !&14Iad debt e$pense (HJ, G+J ..................................... 5&&

llowance for doubtful accounts (HE, G..... 5&& d<usting entryestimated loss on uncollectibleaccounts= based on credit sales (%!5,&&& $ !-N %5&&.

eq. !

/ncome statement9Kperating e$penses9

Iad debt e$pense......................................................... %5&&

Ialance sheet9Current assets

ccounts receivable (%3,5&& H %!5,&&& %1,&&& %55& .......................................... %0,05&Dess9 llowance for doubtful accounts

(%3&& %55& H %5&& ................................... !5& %0,&&

eq. 3

The !- rate on credit sales appears reasonable because it appro$imates the amount ofreceivables written off (%55& during the year. Oowever, if the uncollectible accountreceivable written off during !&14 is not indicative of average uncollectibles written off over a period of time, the !- rate may not be appropriate. There is not sufficient historical datato ma*e a definitive decision.





E6+9-

eq. 1

eceivables turnover N Fet +ales N %30,3&4,&&& N .00 times verage Fet Trade

ccounts eceivable%4,3!,&&&@

verage days sales N 3'5 N 3'5 N 4&.'& daysin receivables eceivables Turnover .00

@ (%4,1'3,&&& H %4,51,&&& M !

eq. !

The receivables turnover ratio reflects how many times average trade receivables wererecorded and collected during the period. The average days sales in receivables

indicates the average time it ta*es a customer to pay its account.

E6+/:-

eq. 1

eceivables turnover N Fet +ales N %'!,&1,&&& N 0.5!! times verage Fet Trade

ccounts eceivable%',44,5&&@

verage days sales N 3'5 N 3'5 N 3.13 daysin receivables eceivables Turnover 0.5!!

@ (%',403,&&& H %',4',&&& M !

eq. !

The receivables turnover ratio reflects how many times average trade receivables wererecorded and collected during the period. The average days sales in receivablesindicates the average time it ta*es a customer to pay its account.





E6+/-

eq. 1

The change in the accounts receivable balance (%4,&'' G '3,4&3 N G%15,33 wouldincrease cash flow from operations by %15,33 thousand. This happens because the7ompany is collecting cash faster than it is recording credit sales revenue.

eq. !

(a Aeclining sales revenue leads to lower accounts receivable because fewer newcredit sales are available to replace the receivables that are being collected.

(b 7ash collections from the prior period>s higher credit sales are greater than the newcredit sales revenue. Fote that in the ne$t period, cash collections will also decline.

E6+//-

eq. 1?AC@SON CO!#AN

.an3 Reconciliation, ?une 0:, /:1

Company's Books Bank Statement Jnding balance per 7ash

accountPPPPPPPPP %5,'&&Jnding balance per ban* statementPPPPPP %',&'&

AdditionsB AdditionsB Fone Aeposit in transitPPPP 1,0&& @

=eductionsB =eductionsB

,0'&

Ian* service chargePP 4& Kutstanding chec*sP !,4&&7orrect cash balancePPP %5,5'& 7orrect cash balancePP %5,5'&

@%1,1&& G %1',!&& N %1,0&&.

eq. !Ian* service charge e$pense (HJ, G+J.................................... 4&

7ash (G......................................................................... 4&To record deduction from ban* account for service charges.

eq. 3The correct cash balance per the ban* reconciliation (%5,'&& G %4&, %5,5'&

eq. 4Ialance sheet (Lune 3&, !&1497urrent assets9

7ash..................................................................................... %5,5'&Financial Accounting, 8/e 6- 17© 2014 by McGraw-Hill Global Education Holdings, LLC. Tis is !ro!ri"tary #at"rial sol"ly $or autori%"d instructorus". &ot autori%"d $or sal" or distribution in any #ann"r. Tis docu#"nt #ay not b" co!i"d, scann"d, du!licat"d,$orward"d, distribut"d, or !ost"d on a w"bsit", in wol" or !art.




E6+/0-

eq. 1.ENNETT CO!#AN

.an3 Reconciliation, Septe&ber 0:, /:1

Company's Books Bank Statement

Jnding balance per 7ashaccount........................... %5,&&

Jnding balance per ban*statement......................... %5,&

AdditionsB AdditionsB Fone Aeposit in transit@......... 1,!&& @

',0&=eductionsB =eductionsB Ian* service charges. . . % '& F+# chec* G Ietty Irown.............. 1& !3&

Kutstanding chec*s (%!,0&& G %!,4&&..... 1,5&&

7orrect cash balance........ %5,4& 7orrect cash balance........ %5,4&

@%!,1&& %!',0&& N %1,!&&.

eq. !

(1 Ian* service charge e$pense (HJ, G+J................................. '&7ash (G...................................................................... '&

To record ban* service charges deducted from ban* balance.

(! ccounts receivable (Ietty Irown (H.................................. 1&7ash (G...................................................................... 1&

To record customer chec* returned due to insufficient funds.

eq. 3

+ame as the correct balance on the reconciliation, %5,4&.

eq. 4

Ialance +heet (+eptember 3&, !&1497urrent ssets97ash ............................................................................................%5,4&





E6+/1 '.ased on Supple&ent A(

Fovember !&, !&137ash (H...................................................................... 4417redit card discount (HE, G, G+J............................ 0

+ales revenue (H, H+J................................... 45&To record credit card sale.

Fovember !5, !&139 ccounts receivable (7ustomer 7 (H....................... !,&&

+ales revenue (H, H+J................................... !,&&To record a credit sale.

Fovember !, !&139 ccounts receivable (7ustomer A (H....................... ,!&&

+ales revenue (H, H+J................................... ,!&&To record a credit sale.

Fovember 3&, !&139+ales returns and allowances (HE, G, G+J............. '&&

ccounts receivable (7ustomer A (G............. '&&To record return of defective goods, %,!&& $ 11! N %'&&.

Aecember ', !&1397ash (H...................................................................... ',4'+ales discounts (HE, G, G+J................................... 13!

ccounts receivable (7ustomer A (G............. ','&&To record collection within the discount period,

0- Q (%,!&& G %'&& N %',4'

Aecember 3&, !&1397ash (H...................................................................... !,&&

ccounts receivable (7ustomer 7 (G............. !,&&To record collection after the discount period.

+ales revenue (%45& H %!,&& H %,!&&................................... %1&,45&Dess9 +ales returns and allowances (%,!&& $ 11!.................. '&&Dess9 +ales discounts (!- Q (%,!&& G %'&&........................... 13!Dess9 7redit card discounts (%45& $ !-.................................... 0Fet sales..................................................................................... %0,&0





#RO."E!S

#6+-

7ase

Iecause )endy>s collects cash when the coupon boo*s are sold, cash collection is notan issue in this case. /n order to determine if the revenue has been earned, the studentmust be careful in analy6ing what )endy>s actually sold. +tudents who focus on thesale of the coupon boo* often conclude that the earning process is complete with thedelivery of the boo* to the customer. /n reality, )endy>s has a significant additionalservice to perform= it has to serve a meal. The correct point for revenue recognition inthis case is when the customer uses the coupon or when the coupon e$pires and)endy>s has no further obligation.

7ase I

/n this case there is an e$tremely low down payment and some reason to believe thatptown Iuilders may default on the contract because of prior actions. /f studentsbelieve that ussell Dand Aevelopment could sue and collect on the contract, they willprobably argue for revenue recognition. "iven the ris* of cash collection, most studentswill argue that revenue should be recogni6ed as cash is collected. The te$t does notdiscuss #+I R'' (+7 3'&!&4&, but the instructor may want to mention during thediscussion that there is authoritative guidance concerning minimum down paymentsbefore revenue can be recorded on a land sale.

7ase 7

)hile warranty wor* on refrigerators can involve significant amounts of effort andmoney, companies are permitted to record revenue at the point of sale. The te$t doesnot discuss this specific issue, but the matching concept is mentioned in the conte$t ofrevenue and e$pense recognition. This is an e$cellent opportunity to mention the needto accrue estimated warranty e$pense at the time that sales revenue is recorded. +omestudents are surprised to see that costs that will be incurred in the future can berecorded as an e$pense in the current accounting period.





#6+/-

eq. 1

SalesRevenue

Sales =iscounts'ta3en(

Sales Returnsand Allo;ances

.ad =ebtEpense

(a H!35,&&& FJ FJ FJ(b H11,5&& FJ FJ FJ(c H!',5&& FJ FJ FJ(d FJ FJ H5&& FJ(e H!4,&&& FJ FJ FJ(f FJ H!!& FJ FJ(g FJ H!,&&&@ FJ FJ(h FJ H53& FJ FJ(i H10,&&& FJ FJ FJ(< FJ G& H3,5&& FJ(* FJ FJ FJ FJ

(l FJ FJ FJ FJ(m FJ FJ FJ H1,155@@Total H%31',&&& H%!,'& H%4,&&& H%1,155

@%0,&&& M (1 S .&! N %1&&,&&& gross sales= %1&&,&&& $ .&! N %!,&&&

@@7redit sales (%11,5&& H %!',5&& H %!4,&&& H %10,&&&. . %1,&&&

Dess9 +ales returns (%5&& H %3,5&&.............................. 4,&&&Fet sales revenue............................................................ ,&&&Jstimated bad debt rate...................................................$ 1.5-Iad debt e$pense............................................................ %1,155

eq. !

/ncome statement9+ales revenue............................................................. %31',&&&

Dess9 +ales returns and allowances............... 4,&&&+ales discounts..................................... !,'&

Fet sales revenue....................................................... %3&0,3!&Kperating e$penses Iad debt e$pense..................................................... 1,155





#6+0-

1. Iad debt e$pense (HJ, G+J...................................................... 4! llowance for doubtful accounts (HE, G..................... 4!

Jndofperiod bad debt e$pense estimate.

llowance for doubtful accounts (GE, H................................!&1 ccounts receivable (G................................................. !&1

)riteoff of bad debts.

!. Bear !........................................%13! H %1 G %3' N %!3Bear 1 ........................................%1! H %4 G %& N %13!

Allo;ance <or =A ear / Allo;ance <or =A ear

13! Ieg. bal. 1! Ieg. bal

)riteoffs 3' 1 Iad debt e$p. )riteoffs & 4 Iad debt e$p.

!3 Jnd. bal. 13! Jnding Ial.

The solution involves solving for the missing value in the Taccount.





#6+1-

eq. 1 Aging Analysis of Accounts Receivable

7ustomer Total

eceivables(a Fot Bet

Aue

(b p to KneBear CastAue

(c ore ThanKne BearCast Aue

I. IrownPPPP.. % ',!&& %',!&&

A. AonaldsPPP.. ,&&& % ,&&&

F. FapierPPPP. ,&&& % ,&&&

+. +trothersPPP !4,5&& 4,&&& !&,5&&

T. ThomasPPP... 4,&&& 4,&&&

TotalsPPPPP %4,&& %15,&&& %!,5&& %',!&&

eq. ! Aging Schedule--Estimated Amounts Uncollectible

ge mount of eceivables

JstimatedncollectibleCercentage

Jstimated mount

ncollectible

a. Fot yet duePPPPPPPP %15,&&& 3- % 45&

b. p to one year past duePP. !,5&& 0- !,45

c. Kver one year past duePP.. ',!&& !- 1,3'

Jstimated ending balance in llowance for Aoubtful ccounts

4,''1

Ialance before ad<ustment 0!&Iad Aebt J$pense for the year %3,41

eq. 3Iad debt e$pense (HJ, G+J........................................... 3,41

llowance for doubtful accounts (HE, G............ 3,41

eq. 4

/ncome statement9 Kperating e$penses

Iad debt e$pense............................................................ %3,41

Ialance sheet97urrent ssets9

ccounts receivable......................................................... %4,&&Dess9 llowance for doubtful accounts............................ 4,''1





ccounts receivable (net ............................................... %44,&30





#6+2-

eq. 1TN>STEN CO!#AN, INC-

Inco&e State&entDor the ear Ended =ece&ber 0, /:1

Fet sales revenue (%14,1&&− %5,'&&

− %',4&&................. %135,1&&

7ost of goods sold................................................................. ,4&&"ross profit on sales.............................................................. 5',&&Kperating e$penses9

+elling e$pense............................................................. %14,1&& dministrative e$pense................................................. 15,4&&Iad debt e$pense......................................................... 1,'&& 31,1&&

/ncome from operations......................................................... !5,'&&/ncome ta$ e$pense...................................................... ,'&

Fet income ......................................................................... % 1,0!&

Jarnings per share on capital stoc* outstanding(%1,0!& M 1&,&&& shares.................................................................. %1 .0

eq. !

eceivables N Fet +ales N %135,1&& N .0Turnover verage Fet Trade

ccounts eceivable%15,!&&@

@ (%1',&&& H %14,4&& M !

The receivables turnover ratio measures the effectiveness of creditgranting andcollection activities.





#6+6-

eq. 1?EDDERSON CO!#AN

.an3 Reconciliation, April 0:, /:1

Co&pan%s .oo3s .an3 State&ent

Jnding balance per 7ash account.......................... %!3,0&&

Jnding balance per ban* statement....................... %!',&&

AdditionsB AdditionsB/nterest collected................. 1,1& Aeposits in transit@.............. 4,4&&

!5,&& 3&,4&

=eductionsB =eductionsBF+#?.I. )right............... 1'& Kutstanding chec*s............. 5,'&&Ian* charges..................... 5& !1&7orrect cash balance.......... %!4,& 7orrect cash balance........... %!4,&

@%41,5&& %3,1&& N %4,4&&.

eq. !(1 7ash (H............................................................................ 1,1&

/nterest revenue (H, H+J...................................... 1,1&/nterest collected.

(! ccounts receivable (. I. )right (H............................. 1'&7ash (G................................................................. 1'&

7ustomer>s chec* returned, insufficient funds.

(3 Ian* service charge e$pense (HJ, G+J............................ 5&7ash (G................................................................. 5&

Ian* service charges deducted from ban* statement.

These entries are necessary because of the changes to the regular 7ash account thathave not yet been recorded by the company. The ban* already has recorded them in itsaccounts. The 7ash account (and the other accounts in the entries must be brought upto date for financial statement purposes.

eq. 3Ialance in regular 7ash account........................................................ %!4,&

eq. 4Ialance +heet (pril 3&, !&149

7urrent ssets97ash.............................................................................. %!4,&





#6+7-

eq. 17omparison of deposits listed in the 7ash account with deposits listed on the ban*statement reveals a %5,!&& deposit in transit on ugust 31.

eq. !7omparison of the chec*s cleared on the ban* statement with (a outstanding chec*sfrom Luly, and (b chec*s written in ugust reveals two outstanding chec*s at the end of

ugust (%!& H %51& N %0&.

eq. 3 A""ISON CO!#AN.an3 Reconciliation, August 0, /:1

Co&pan%s .oo3s .an3 State&entJnding balance per 7ash account.......................... %!&,3&

Jnding balance per ban* statement....................... %1,10&

AdditionsB AdditionsB/nterest collected................. !,35& Aeposits in transit................ 5,!&&

!!,!& !3,30&

=eductionsB =eductionsBIan* service charges............................ 1!& Kutstanding chec*s............. 0&7orrect cash balance............................ %!!,'&& 7orrect cash balance........... %!!,'&&

eq. 4(1 7ash (H............................................................................ !,35&

/nterest revenue (H, H+J...................................... !,35&/nterest collected.

(! Ian* service charge e$pense (HJ, G+J ........................... 1!&7ash (G................................................................. 1!&

+ervice charges deducted from ban* balance.

These entries are necessary because of the changes in the regular 7ash account thathave not yet been recorded by the company. The ban* already has recorded them in itsaccounts. The 7ash account (and the other accounts in the entries must be brought upto date for financial statement purposes.

eq. 5

7urrent ssets97ash............................................................................................... %!!,'&&





#6+8- '.ased on Supple&ent A(

eq. 1

(a 7ash (H.................................................................... !35,&&&+ales revenue (H, H+J................................. !35,&&&

7ash sales for !&14.

(b ccounts receivable (. +mith (H.......................... 11,5&&+ales revenue (H, H+J................................. 11,5&&

7redit sale, %11,5&&.

(c ccounts receivable (U. iller (H........................... !',5&&+ales revenue (H, H+J................................. !',5&&

7redit sale, %!',5&&.

(d +ales returns and allowances (HE, G, G+J.......... 5&& ccounts receivable (. +mith (G............... 5&&

+ale return, 1 unit V %5&&.

(e ccounts receivable (I. +ears (H.......................... !4,&&&+ales revenue (H, H+J................................. !4,&&&

7redit sale, %!4,&&&.

(f 7ash (H.................................................................... 1&,&+ales discounts (HE, G, G+J................................ !!&

ccounts receivable (. +mith (G............... 11,&&&Caid account in full within discount period,(%11,5&& %5&& $ (1 .&! N %1&,&.

(g 7ash (H.................................................................... 0,&&&+ales discounts (HE, G, G+J................................ !,&&&

ccounts receivable (prior year (G.............. 1&&,&&&7ollected receivables of prior year, all withindiscount periods %0,&&& M .0 N %1&&,&&&.

(h 7ash (H.................................................................... !5,0&+ales discounts (HE, G, G+J................................ 53&

ccounts receivable (U. iller (G................ !',5&&7ollected receivable within the discount period

%!',5&& $ .0 N %!5,0&.

(i ccounts receivable (. oy (H............................. 10,&&&+ales revenue (H, H+J................................. 10,&&&

7redit sale, %10,&&&.





#6+8- 'continued(

(< +ales returns and allowances (HE, G, G+J....... .. . 3,5&&7ash (G......................................................... 3,43&+ales discounts (GE, H, H+J..................... &

+ales return, units V %5&& less sales discounts ta*en N %3,5&& $ .0.

(* 7ash (H.................................................................... ',&&& ccounts receivable (G................................. ',&&&

7ollected receivable of prior year, after the discountperiod.

(l llowance for doubtful accounts (GE, H................ 3,&&& ccounts receivable (!&13 account (G....... 3,&&&

)rote off uncollectible account from !&13.

(m Iad debt e$pense (HJ, G+J...................................... 1,155

llowance for doubtful accounts (HE, G..... 1,155To ad<ust for estimated bad debt e$pense

7redit sales (%11,5&& H %!',5&& H %!4,&&& H %10,&&&... %1,&&&Dess9 +ales returns (%5&& H %3,5&&.............................. 4,&&&Fet sales revenue............................................................ ,&&&Jstimated bad debt rate................................................... $ 1.5-

Iad debt e$pense.................................................... %1,155.

eq. !

/ncome statement9+ales revenue (%!35,&&& H %11,5&& H %!',5&&

H %!4,&&& H %10,&&&...................................... %31',&&&Dess9 +ales returns and

allowances (%3,5&& H %5&&............... 4,&&&+ales discounts (%!!& H %!,&&&

H %53& G %&...................................... !,'&Fet sales revenue .............................................................. %3&0,3!&Kperating e$penses Iad debt e$pense............................................................. 1,155





A"TERNATE #RO."E!S

A#6+-

eq. 1

Sales

Revenue

Sales =iscounts

'ta3en(

Sales Returns

and Allo;ances

.ad =ebt

Epense

(a H!!,&&& FJ FJ FJ(b H1!,&&& FJ FJ FJ(c H!3,5&& FJ FJ FJ(d FJ H!4& FJ FJ(e H!',&&& FJ FJ FJ(f FJ 1& H5&& FJ(g FJ H1,&&@ FJ FJ(h FJ FJ H3,5&& FJ(i FJ H4&& FJ FJ

(< H1,5&& FJ FJ FJ(* FJ FJ FJ FJ(l FJ FJ FJ FJ(m FJ FJ FJ H3,&4&@@Total H%3&,&&& H%!,43& H%4,&&& H%3,&4&

@ W(%,!&&.0 $ .&!X N %1,&&

@@7redit sales (%1!,&&& H %!3,5&& H %!',&&& H %1,5&&.. %&,&&&Dess9 +ales returns (%5&& H %3,5&&.............................. 4,&&&Fet sales revenue............................................................ %',&&&

Jstimated bad debt rate................................................... $ 4-Iad debt e$pense............................................................ %3,&4&

eq. !

/ncome statement9+ales revenue............................................................. %3&,&&&

Dess9 +ales returns and allowances............... 4,&&&+ales discounts..................................... !,43&

Fet sales revenue....................................................... %3&&,5&

Kperating e$penses Iad debt e$pense..................................................... %3,&4&





A#6+/-

1. Iad debt e$pense (HJ, G+J......................................................',&14 llowance for doubtful accounts (HE, G..................... ',&14

Jnd of period bad debt e$pense estimate.

llowance for doubtful accounts (GE, H................................5,041

ccounts receivable (G................................................. 5,041)riteoff of bad debts.

!.

Allo;ances <or =oubt<ul

Accounts

.alance at

.eginningo< ear

AdditionsCharged toCosts andEpenses

=eductions<ro&

Reserve

.alance atEnd

o< ear

Bear 3 %1,1& %',&14 %5,041 %1,11

Bear ! !,4&' 4,453 5,51 1,1&

Bear 1 !,45 4,5! 4,&3 !,4&'

ear 0 Allo;ance <or =oubt<ul Accounts

1,1& Ieg. bal.

)riteoffs 5,041 ',&14 Iad debt e$p.

1,11 Jnd. bal.

ear / Allo;ance <or =oubt<ul Accounts

!,4&' Ieg. bal.

)riteoffs 5,51 4,453 Iad debt e$p.

1,1& Jnd. bal.

ear Allo;ance <or =oubt<ul Accounts

!,45 Ieg. bal

)riteoffs 4,&3 4,5! Iad debt e$p.

!,4&' Jnding bal.

The solution involves solving for the missing value in the Taccount.





A#6+0-eq. 1

Aging Analysis of Accounts Receivable

7ustomer Total

eceivable

(aFot Bet

Aue

(bp to' o.

Cast Aue

(c' to

1! o.Cast Aue

(dore Than

1! o.Cast Aue

. Aevens PPP.. % !,&&& %!,&&&

7. Ooward PPP.. ',&&& %',&&&

A. c7lain .PPP. 4,&&& % 4,&&&

T. +*ibins*i PPP 14,5&& % 4,5&& 1&,&&&

O. )u PPP..P... 13,&&& 13,&&&

TotalsPPPPP %30,5&& %1,5&& %14,&&& %!,&&& %',&&&

eq. !Estimated Amounts Uncollectible

ge mount ofeceivable

JstimatedDoss ate

Jstimatedncollectible

a. Fot yet duePPPPPPPP %1,5&& 1- % 15b. p to ' months past due...P. 14,&&& 5- &&c. ' to 1! months past due.P. !,&&& !&- 4&&d. Kver 1! months past dueP... ',&&& 5&- 3,&&&

Jstimated ending balance in llowance for Aoubtful ccounts

4,!5

Ialance before ad<ustment 1,55&Iad Aebt J$pense for the year %!,!5

eq. 3

Iad debt e$pense (HJ, G+J .......................................... !,!5 llowance for doubtful accounts (HE, G ........... !,!5

eq. 4/ncome statement9Kperating e$penses

Iad debt e$pense............................................................ %!,!5

Ialance sheet97urrent ssets9

ccounts receivable......................................................... %30,5&&Dess9 llowance for doubtful accounts............................ 4,!5

ccounts receivable, net........................................ %35,!!5





A#6+1-

eq. 1#ERR COR#ORATION

Inco&e State&entDor the ear Ended =ece&ber 0, /:1

Fet sales revenue (%14,&&& %0,&&& %,&&&.................. %1',&&&7ost of goods sold............................................................... 0,&&&"ross profit........................................................................... '0,&&&Kperating e$penses9

+elling e$pense............................................................ %1,&&& dministrative and general e$pense........................... 1,&&&Iad debt e$pense........................................................ !,&&&

Total operating e$penses..................................... 3,&&&/ncome from operations....................................................... 3!,&&&

/ncome ta$ e$pense..................................................... 1&,0&&Fet income........................................................................... % !1,1&&

Jarnings per share on common stoc* outstanding(%!1,1&& M 1&,&&& shares.................................................................. %! .11

eq. !

eceivables N Fet +ales N %1',&&& N 0.!Turnover verage Fet Trade

ccounts eceivable%1,&&&@

@ (%1',&&& H %1,&&& M !

The receivables turnover ratio measures the effectiveness of creditgranting andcollection activities.





A#6+2-

eq. 1

7omparison of (a the unrecorded deposit carried over from Fovember and (b thedeposits listed on the ban* statement reveals that the %13,&&& deposit for Aecember 31is in transit.

eq. !

7omparison of the chec*s cleared on the ban* statement with (a outstanding chec*sfrom Fovember and (b chec*s written in Aecember reveals that the outstanding chec*sat the end of Aecember are %5,&&& H %3,5&& H 5&& N %0,&&&.

eq. 3

RIAS CO!#AN.an3 Reconciliation, =ece&ber 0, /:1

Co&pan%s .oo3s .an3 State&ent

Jnding balance per 7ash account.......................... %'1,&'&

Jnding balance per ban* statement....................... %'1,'&

AdditionsB AdditionsB/nterest collected................. 5,!5& Aeposits in transit................ 13,&&&

'',31& 4,'&

=eductionsB =eductionsBF+# chec*?L. Deft............. %3&&Ian* service charges.......... 15& 45& Kutstanding chec*s............. 0,&&&7orrect cash balance.......... %'5,'& 7orrect cash balance........... %'5,'&





A#6+2- (continued

eq. 4

(1 ccounts receivable (L. Deft (H.................................... 3&&7ash (G.............................................................. 3&&

To record F+# chec*.

(! 7ash (H......................................................................... 5,!5&/nterest revenue (H, H+J................................... 5,!5&

/nterest collected.

(3 Ian* service charge e$pense (HJ, G+J......................... 15&7ash (G.............................................................. 15&

+ervice charges deducted from ban* balance.

These entries are necessary because of the changes in the regular 7ash account thathave not yet been recorded by the company. The ban* already has recorded them in its

accounts. The 7ash account (and the other accounts in the entries must be brought upto date for financial statement purposes.

eq. 5

Ialance +heet (!&1497urrent ssets9

7ash ................................................................................... %'5,'&





CASES AN= #RO?ECTS

ANNUAL EP!T CA"E"

C#6+-

1. The company includes liquid financial instruments with remaining maturity of threemonths or less to be cash and cash equivalents. This information is from note ! ofthe financial statements. The amount disclosed is li*ely to be close to the fairmar*et value of the securities, given the short maturity date of the securities.

!. /n addition to 7ost of "oods +old, merican Jagle Kutfitters subtracts buying,occupancy and warehousing costs from Fet +ales in its computation of "ross Crofit.This follows standard practice among retailers. Fo such additional e$penses aresubtracted in Aec*ers8s (a footwear manufacturer computation of "ross Crofit. Thisma*es the interpretation of gross profit percentages across different industriesdifficult.

3.eceivables turnover N Fet +ales N %3,150,1 N !.& times

verage Fet Trade ccounts eceivable

%3,51'@

@ (%3',!1 H 4&,31& M !

This question is designed to focus student attention on the mechanics of thecomputation of the receivables turnover ratio and the effect of industry differences.The receivables turnover is so high because of the nature of the company8sbusiness. etail sales are li*ely to be made with cash or credit card. s aconsequence, most retailers would not have accounts receivable related to sales

unless they had private store credit card accounts. The accounts receivable on merican Jagle8s balance sheet relate primarily to amounts owed from landlords forconstruction allowances for building new stores in malls.

4. Fo, the company does not report an allowance for doubtful accounts on the balancesheet or in the notes. s a retailer, its trade receivables from customers areimmaterial?the company8s receivables consist of nontrade receivables and notesreceivable.





C#6+/-

1. The company held %145,!3 thousand of cash and cash equivalents at the end ofthe current year. This is disclosed on the balance sheet and the statement of cashflows.

!. ccounts receivable increased by %11 thousand, decreasing Fet 7ash Crovided byKperating ctivities for the current year. Bou may wish to note to students that thisamount does not agree with the amount on the statement of cash flows whichindicates a %!51 thousand increase. This difference is the result of the translation offoreign currency receivables.

3. The accounts receivable are primarily due from wholesale customers and credit cardcustomers. Iad debt e$pense increased between !&1& and !&11 from %!,30 to%3,0!&. These amounts are disclosed in Fote ! of the annual report.

4. /t discloses its revenue recognition policies in note ! which summari6es significantaccounting policies. The company recogni6es revenue from selling gift cards when

customers redeem a gift card for merchandise rather than when the gift card is sold.)hen gift cards are sold, a current liability (deferred revenue is recorded.





C#6+0-1.

Current ear A&erican EagleOut<itters

rban Out<itters

eceivables N Fet +ales %3,150,1 N !.& %!,43,&1 N '.'

Turnoveratio

verage Fet Trade ccounts eceivable

3,51'@

@(%3',!1 H 4&,31& M !

3',5

@(%3','3 H 3',5&! M !

!. merican Jagle Kutfitters has a higher ratio than rban Kutfitters because mericanJagle and rban Kutfitters sell to different classes of customers. merican Jaglesells its products almost e$clusively to retail and online customers, who are li*ely topay with cash or credit card. rban Kutfitters sells its product not only to retail andonline customers, but also to wholesale customers, who are li*ely to purchasemerchandise on credit. s seen in Fote ! of the financial statements, the accounts

receivable on rban Kutfitter8s balance sheet relate primarily to amounts owed fromwholesale customers and thirdparty credit card vendors. The accounts receivableon merican Jagle8s balance sheet relate primarily to amounts owed from thecompany8s !1 franchise stores.

3.

IndustrAverage

A&erican EagleOut<itters

rban Out<itters

eceivables Turnover N 0.5 !.& '.'

Ioth companies have a lower receivables turnover ratio than the industry average.#or merican Jagle Kutfitters this lower ratio li*ely reflects the company8s recentdecision to e$pand internationally through franchises, who owe the companyappro$imately 4&&- more in receivables than last year. #or rban Kutfitters, thislower ratio li*ely reflects the company8s wholesale operations, as discussed inrequirement !.





#$NANC$AL EP!T$N% AN& ANAL'"$" CA"E"

C#6+1-

1. Bes. "iven that only one threeyear pro<ect is wor*ed on at a time, the completedcontract method would result in no revenue being recogni6ed for two out of everythree years, and all of the revenue from each pro<ect being recogni6ed during thethird. /f the same amount of wor* was completed each year, the percentage ofcompletion method would result in an appro$imately equal amount of revenueeach period.

!. /f the company regularly started and completed a larger constant number ofequal si6ed pro<ects each reporting period, the si6e of any difference betweenrevenues reported under the two methods would decline.

3. nder generally accepted accounting principles, the appropriate method wouldbe determined by whether the costs to complete can be accurately assessed. /fthey can be accurately estimated, the percentage of completion method is

appropriate. /f not, the completed contract method should be used. Oowever,managers generally prefer to report the smoother earnings pattern conveyed bythe percentage of completion method because smoother earnings are generallythought to convey lower ris* to investors.

C$T$CAL T$N$N% CA"E"

C#6+2-

1. ecording sales for goods or services that had not been delivered as of yearendviolates the revenue principle. ecording revenue for sales that were sub<ect to

cancellation, without estimating returns properly, is also a violation.

!. /t should establish a sales returns and allowances account (a contra revenue forpotential cancellations. n estimate of future cancellations should be made andthe amount should reduce net sales in the period the revenue is recogni6ed.

3. Crofiting from sales of stoc* they owned at an inflated stoc* price and perhapsreceiving bonuses determined on the basis of growth in net income probablymotivated management. anagement was very focused on reporting increasedgrowth because the growth fueled the runup in the stoc* price.





C#6+2- 'continued(

4. The other investors who paid inflated amounts for the stoc*, customers who werepoorly served during the period, and employees of the company who were drawninto the fraud and suffered damage to their reputations were all hurt bymanagement8s conduct.

5. +ales transactions boo*ed near the end of the quarter and sales with specialterms, e.g. right of return or cancellation, should receive special attention fromauditors. 7hannel stuffing often lowers the receivables turnover ratio. To cover upthis change, management improperly reclassified some accounts receivable asnotes receivable.

C#6+6-

eq. 1(a %5& $ 1! months N % '&&

(b %1! $ (5! wee*s $ 5 days per wee* N 3,1!&(c,d ccounts receivable collections (%3&& H %&& N 1,1&&

Total appro$imate amount stolen %4,!&

eq. !Iasic recommendations9(1 /nstall a tight system of internal control, including the following9

a. +eparate cash handling from record*eeping.b. Aeposit all cash daily.c. a*e all payments by chec*. 7onsider a separate cash on hand system

for small e$pense payments.

d. econcile ban* statement monthly.e. /nstitute a system of spot chec*s.f. Jstablish cash and paperwor* flows.

(! a. rrange for an annual independent audit on a continuing basis.b. 7arefully plan and assign definite responsibilities for all employees. #ocus on

attaining internal control. /solate the once trusted employee from all cashhandling and accounting activities and consider dismissing and bringingcharges against the employee.

#$NANC$AL EP!T$N% AN& ANAL'"$" P!*ECT"

C#6+7-

The solutions to this case will depend on the company andor accounting periodselected for analysis.





CONTININ> CASE

CC6+-

eq. 1Iad debt e$pense (HJ, G+J .....................................!,05

llowance for doubtful accounts (HE, G........ !,05To record estimated bad debt e$pense.

llowance for doubtful accounts (GE, H ...............4,1'& ccounts receivable (G................................... 4,1'&

To write off total of specific bad debts.

eq. !+ales revenue............................................................................. %13,!5'Dess9 +ales returns and allowances .......................................... 5'Dess9 +ales discounts................................................................. 1,134Dess9 7redit card discounts......................................................... 1,40

Fet sales................................................................................ %133,41

Documents

Chapter 6 Solutions All