AFM 101 Chapter 7 Solutions Manual

7/24/2019 AFM 101 Chapter 7 Solutions Manual

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Chapter 7Reporting and Interpreting

Sales Revenue, Receivables, and CashRevised: April 27, 2014

ANSWERS TO QESTIONS

1. Sales revenue is a gross amount that does not refect any adjustments.Net sales is sales revenue adjusted or the ollowing items: (a) salesreturns (the sales dollar amount o goods returned by customersbecause the goods were either unsatisactory or not desired); (b) salesallowances (dollar amounts allowed to customers or unsatisactory

merchandise) and (c) sales discounts (discounts given to customers orayment o their accounts within a seci!ed short eriod o time).

". #ross ro!t or gross margin on sales is the di$erence between net salesand cost o sales. %t reresents the average gross mar&u reali'ed on thegoods sold during the eriod. he gross margin ratio is comuted bydividing the amount o gross margin by the amount o net sales. ore*amle+ assuming net sales o ,1--+--- and cost o sales o ,-+---+the gross margin on sales would be ,/-+---. he gross margin ratiowould be ,/-+---0,1--+--- -./- (/-2). his ratio may be interretedto mean that out o each ,1-- o sales+ ,/- was reali'ed above the

amount e*ended to urchase the goods that were sold.

3. 4 credit card discount is the ee charged by the credit card comany orservices. 5hen a comany deosits its credit card receits in the ban&+ itonly receives cash or the sales amount less the credit card comany6sdiscount. he credit card discount account either decreases net sales (asa contra7revenue account) or increases selling e*ense.

/. 4 sales discount is a discount given to customers or ayment oaccounts within a seci!ed short eriod o time. Sales discounts ariseonly when goods are sold on credit and the seller e*tends credit terms

that rovide or a cash discount. or e*amle+ the credit terms may be101-+ n03-. hese terms mean that i the customer ays within 1- days+12 can be deducted rom the invoice rice o the goods. 4lternatively+ iayment is not made within the 1-7day eriod+ no discount is ermittedand the total invoice amount is due within 3- days rom the urchase+ater which the debt is ast due. o illustrate+ assume a ,1+--- sale withthese terms+ i the customer ays within 1- days+ ,88- would have beenaid. hus+ a sales discount o ,1- was granted or early ayment.

Financial Accounting, 5ce, Libby, Libby, Short, Kanaan, Gowing 2014 McGraw-Hill Ryerson Limited. All rights reserved.

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9. 4 sales allowance is an amount allowed to a customer or unsatisactorymerchandise. 4 sales allowance reduces the amount the customer mustay+ or i already aid+ a cash reund is reuired. Sales allowances mayoccur whether the sale was or cash or credit. %n contrast+ a salesdiscount is a cash discount given to a customer who has bought on creditand made ayment within the seci!ed eriod o time. (eer toe*lanation o sales discount in . ?sing the allowance method+ bad debt e*ense is recogni'ed in theeriod in which the sale related to the uncollectible account wasrecorded.

8. he write7o$ o bad debts using the allowance method decreases theasset trade receivables and the contra asset allowance or doubtulaccounts by the same amount. 4s a conseuence+ (a) net earnings areuna$ected and (b) trade receivables+ net+ is una$ected.

1-. 4n increase in the receivables turnover ratio generally indicates astercollection o receivables. 4 higher receivables turnover ratio refects an

increase in the number o times average trade receivables were recordedand collected during the eriod.

11. @ash includes money and any instrument+ such as a cheue+ moneyorder+ or ban& drat that is normally acceted by ban&s or deosit andimmediate credit to the deositor6s account. @ash euivalents are short7term+ highly liuid investments that are readily convertible into a &nownamount o cash+ and which are subject to an insigni!cant ris& o changein value.

1". he rimary characteristics o an internal control system or cash are :

(a) searation o the unctions o receiving cash rom aying cash+ (b)searation o cash7receiving and cash7aying routines+ (c) searation othe hysical handling o cash rom the accounting unction+ (d)rearation and monitoring o cash budgets+ (e) deositing all cashreceits and ma&ing all cash ayments by cheue+ () reuiring searatearoval o all cheues and electronic unds transers+ (g) reuiringmonthly+ indeendently reared reconciliation o ban& accounts+ and(h) reuiring emloyees to ta&e vacations and rotate their duties.


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13. rade receivables cannot be considered cash euivalents. hey arenormally collected within three months and thereore meet art o thede!nition o cash euivalents. Aowever+ they are not readily convertibleto cash as the conversion to cash deends on the actions o others (e.g.+the customer) and there may be a signi!cant amount o ris& that thevalue will change in that the collection may not be assured.

1/. @ash7handling and cash7recording activities should be searated toremove the oortunity or thet o cash and a cover7u by altering therecords. his searation is accomlished best by assigning theresonsibility or cash handling to individuals other than those who havethe resonsibility or record &eeing. %n act+ it is usually desirable thatthese two unctions be erormed in di$erent deartments o thebusiness.

19. he uroses o ban& reconciliation are (a) to determine the BtrueC cash

balance+ (b) to rovide data to adjust the @ash account to that balance+and (c) to rovide control over the cash account through indeendentveri!cation. Dan& reconciliation involves reconciling the balance in the@ash account at the end o the eriod with the balance shown on theban& statement (which is not the BtrueC cash balance) at the end o thatsame eriod. Seldom will these two balances be identical because otiming di$erences such as deosits in transit; that is deosits that havebeen made by the comany but not yet entered on the ban& statement+and outstanding cheues that have been written and recorded in theaccounts o the comany that have not cleared the ban&+ hence theyhave not been deducted rom the ban&6s balance. ?sually+ the

reconciliation o the two balances+ er boo&s against er ban&+ reuiresrecording o one or more items that are refected on the ban& statementbut have not been recorded in the accounting records o the comany.4n e*amle is the usual ban& service charge+ which is included on theban& statement+ but has not yet been recorded in the comany6s boo&s.

1. he totalamount o cash that should be reorted on the statement o!nancial osition is the sum o (a) the true cash balances in all cheuingaccounts (veri!ed by a ban& reconciliation o each cheuing account)+(b) cash held in all Bcash on handC (or Betty cashC) unds+ (c) any cashhysically on hand (any cash not transerred to a ban& or deosit) E

usually held or change uroses+ and (d) the balance in cash euivalentaccounts.

1=. (Dased on 4endi* =4) he ercentage o comletion method may beused or long7term construction rojects. @omanies may use theercentage o comletion method when rogress toward comletion andcosts to comlete the contract can be reasonably estimated+ and there isa !rm contract that virtually guarantees ayment.


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1>. (Dased on 4endi* =D) ?nder the gross method o recording salesdiscounts+ the amount o sales discount ta&en is only recorded at thetime the collection o the account is recorded.


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Authors! Reco""ended Solution Ti"e#Ti"e in "inutes$

Exercises ProblemsAlternateProblems

Cases andProjects

No !ime No !ime No !ime No !ime1 9 F 1 "9 G 1 3- G 1 39 G

" 19 F " 39 G " 3- G " 39 G3 "- F 3 3- G 3 3- G 3 /- G/ "- F / 3- H / 39 H / "- G9 "- G 9 9- H 9 9- H 9 /9 H "- G /- H /- H /9 H= "9 G = /- H = /- H = 39 H> 3- G > 3- H > /- H > 3- G8 19 G 8 "9 F 8 "9 F 8 I

1- 3- G 1- 39 G 1- "- G11 19 G 11 39 G 11 "9 G1" 19 G 1" /9 G 1" /9 G

13 "- G 13 "9 G1/ 3- H19 1- F1 19 G1= "- H1> "9 H18 "9 G"- 1- G"1 19 F"" "- F"3 "9 G

"/ 3- G"9 3- G" "- G

F Fasy G Goderate H HiJcult

I Hue to the nature o these cases and rojects+ it is very diJcult toestimate the amount o time students will need to comlete the assignment.4s with any oen7ended roject+ it is ossible or students to devote a largeamount o time to these assignments. 5hile students oten bene!t rom thee*tra e$ort+ we !nd that some become rustrated by the erceived diJculty

o the tas&. Kou can reduce student rustration and an*iety by ma&ing youre*ectations clear. or e*amle+ when our goal is to sharen research s&ills+we devote class time to discussing research strategies. 5hen we want thestudents to ocus on a real accounting issue+ we o$er suggestions aboutossible comanies or industries.


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E%ERCISES

E7&'Transaction (oint A (oint )

"a# 4irline tic&ets soldby an airline on a creditcard

Loint o sale * @omletion o fight

"b# @omuter sold by mailorder comany on a creditcard

* Shiment Helivery

"c#Sale o inventory to abusiness customer on oenaccount

* Shiment @ollection romcustomers

E7&*

e. 1

Sales revenue (,>9- M ,=-- M ,/9-)............................ , "+---ess: Sales discount (,>9- collected rom S. #reen * "2) 1=Net sales........................................................................ ,1+8>3

e. "Oan. rade receivables E S. #reen (M4)....................... >9-

Sales revenue (M

MSF)............................ >9-

Oan 1/ @ash (M4) (,>9- * 8>2)...................................... >33

Sales discounts (P SF) (,>9- * "2)............ 1=

rade receivables E S. #reen (74)................... >9-

E7&+

e. 1

Sales revenue (,1+--- M ,+--- M,"+---).................. ,8+---ess: Sales discount (,+--- collected rom Steven * "2)(1"-)

@redit card discount (,1+--- rom ami * "2). . ("-)Net sales........................................................................ , >+>-


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E7&+ #continued$

e. "

Ouly 1" @ash (M4) (,1+--- * 8>2)................................... 8>-

@redit card discount (MP SF) (,1+--- * "2) "-

Sales revenue (M MSF)............................ 1+---

Ouly 19 rade receivables E Steven (M4) ......................... +---

Sales revenue (M MSF)............................ +---

Ouly "3 @ash (M4) (,+--- * 8>2)................................... 9+>>-

Sales discounts (MP SF) (,+--- * "2)....... 1"-

rade receivables E Steven (4)..................... +---

E7&

e. 1

Sales revenue (,>-- M ,9+--- M ,+---)..................... ,11+>--ess: Sales returns and allowances (101-* ,+--- rom Havid) (--)ess: Sales discounts (801-* ,+--- rom Havid * "2)... (1->)ess: @redit card discounts (,>-- rom Drigitte * "2)... (1)Net sales........................................................................ ,11+-=

e. "

Nov. "- @ash (M4) (,>-- * 8>2)...................................... =>/

@redit card discount (MP SF) (,>-- * "2). . 1

Sales revenue (M MSF)............................ >--

Nov. "9 rade receivables E @lara (M4) ........................... 9+---

Sales revenue (M MSF)............................ 9+---

Hec. 3- @ash (M4)............................................................ 9+--- rade receivables E @lara (E4)........................ 9+---

E7&-

Farnings romransaction Net Sales #ross Lro!t Qerations

Ouly 1" M M M

Ouly 19 M M MOuly "- N N E

Ouly "1 E E EFinancial Accounting, 5ce, Libby, Libby, Short, Kanaan, Gowing 2014 McGraw-Hill Ryerson Limited. All rights reserved.

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E7&.

e. 1

he ercentages o (1) cost o sales to net sales and (") sales returns andallowances to gross sales are shown in the ollowing table or each o the si*

uarters.

Quarter Ratio ' Ratio *1st uarter+ "-1/ =32 /2"nd uarter+ "-1/ =92 923rd uarter+ "-1/ =92 2/th uarter+ "-1/ ="2 >21st uarter+ "-19 =12 82"nd uarter+ "-19 =/2 112

e. "

he ratio o cost o sales to net sales decreased slightly during the lastuarter o "-1/ and the !rst uarter o "-19. %t then increased in the seconduarter o "-19. his may indicate a change in the comany6s eJciency inurchasing goods or resale. he changes could also be related to seasonalvariations. %t could also mean that the comany has been able to increaseits sales rices relative to the cost o the items urchased. 4lternatively+ thelower cost o sales may refect the act that the comany is urchasing loweruality merchandise+ which is costing less than beore.

he dollar amount or sales returns and allowances almost uadruled inamount and triled as a ercentage o gross sales during the si* uarters.Lossible reasons or this increase include: (1) a deterioration in the uality othe merchandise urchased rom the various international suliers+ and0or(") a liberal olicy o sales returns and allowances that is intended to servethe needs o customers+ and to allow them to return any deective orunwanted merchandise within two months o urchase.

he comany should review its sales returns and allowances olicy with anattemt to reduce the ma*imum length o the eriod allowed or returns+erhas rom - days to /9 days. he comany needs to re7e*amine itssources o suly o merchandise with a view to imroving on the uality othe roducts urchased and sold so as to reduce the amount o sales returnsand allowances.


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E7&7

e. 1 S/ATE, INC0

State"ent o1 earnings 2or the 3ear Ended 4ece"ber +', *5'

A"ount

#ross sales (,"33+--- M ,/-+---)........... ,"=3+---ess: sales returns and allowances........... >+---Net sales revenue..................................... "9+---@ost o sales.............................................. 1/+---#ross margin on sales............................... 118+---Qerating e*enses: 4dministrative e*ense.......................... ,"-+--- Selling e*ense....................................... /=+"-- Dad debt e*ense................................... 1+"-- >+/--

Farnings beore income ta*...................... 9-+-- %ncome ta* e*ense (,9-+-- * 3-2).... 19+1>-Net earnings............................................. , 39+/"-

Farnings er share (,39+/"- R /+9-- shares) ,=.>=

%n this case+ earnings rom oerations is the same as earnings beore incometa*.

e. "

#ross ro!t (gross margin): ,"9+--- E ,1/+--- ,118+---.

#ross ro!t ercentage ,118+--- R ,"9+--- -./9 (or /92).

#ross ro!t (or gross margin) in dollars is the di$erence between the salesrices and the costs o urchasing or manuacturing all goods that were soldduring the eriod (sometimes called the mar&u); that is+ net revenue minusonly one o the e*enses E cost o sales. he gross ro!t ratio is the amounto each net sales dollar that was gross ro!t during the eriod. or thiscomany+ the rate was /92+ which means that ,./9 o each net sales dollar

was gross ro!t (alternatively+ /92 o each sales dollar was gross ro!t orthe eriod).


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E7&6

e. 1State"ent o1 Earnings

2or the 3ear Ended 4ece"ber +', *5'

5ood 5or& Godern urniture

evenue ................................................... ,1+3/-+--- ,>"+---@ost o sales.............................................. =/>+--- 388.---#ross ro!t .............................................. 98"+--- ">3+---Qerating e*enses.................................. 91"+--- ""3+---Farnings rom oerations.......................... >-+--- -+---Qther income (e*ense): inance income (e*ense)+ net ............. (3/+---) 3+39- Qther income ........................................ "+9-- 7-7 (31+9--)3+39-

Farnings beore income ta*...................... />+9-- 3+39-%ncome ta* e*ense.................................. 19+9-- 1"+---Net earnings............................................. , 33+--- , 91+39-

Farnings er share ,-."= ,-.=3

Number o common shares outstanding (in millions) 1"-.> million=-.- million

5ood 5or&+ earnings er share ,33+--- R 1"-.> million shares ,-."=Godern urniture+ earnings er share ,91+39- R =-.- million shares

,-.=3

e. " (dollars in thousands)

5ood 5or&:#ross ro!t ,98"+---#ross ro!t ercentage: ,98"+--- R ,1+3/-+--- -.//" (or //."2).

Godern urniture:#ross ro!t ,">3+---#ross ro!t ercentage: ,">3+--- R ,>"+--- -./19 (or /1.92).

#ross ro!t (or gross margin) is the di$erence between sales revenue andthe cost o sales during the eriod (sometimes called the mar&u). he grossro!t ercentage measures how much o every sales dollar is gross ro!t. %trefects the comany6s ability to charge remium rices and roduce goodsand services at low cost.


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5ood 5or& sold more merchandise than Godern urniture+ and achieved ahigher gross ro!t+ indicating that 5ood 5or& was able to charge higherrices than Godern urniture or the merchandise it sold and0or was able tourchase the merchandise it sold at lower cost than Godern urniture.


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E7&

4ged trade receivables

Fstimatedercentageuncollectibl

e

Fstimatedamount

uncollectible

Not yet due ,"9+--- * "2 , 9--? to 1"- days ast due 1-+--- * 1-2 1+---

Qver 1"- days ast due 9+--- * 3-2 1+9--Fstimated ending balance in 4llowance or Houbtul4ccounts

,3+---

@urrent balance in 4llowance or Houbtul 4ccounts --Dad Hebt F*ense or the year ,"+/--

E7&'5

e. 1 (amounts in millions o Swiss rancs+ @A):

Hec. 31+ "-1"

4llowance or doubtul accounts (P4M4).............. 89rade receivables (4)...................................... 89

o write o$ trade receivables determined to beuncollectible.

rade receivables (M4)............................................... 194llowance or doubtul accounts (MP44)....

19o reinstate the receivable rom a major customer.

@ash (M4)................................................................... 19

rade receivables (

4)...................................... 19o record collection rom a major customer.

Dad debt e*ense (MFSF) ................................... 31-.8

4llowance or doubtul accounts (MP4 4). . 31-.8

o record estimated bad debt e*ense.

4ged trade receivables

Fstimatedercentageuncollectibl

e

Fstimatedamount

uncollectible

Not ast due @A1-+8"9 * 12 @A1-8.3Last due 1E3- days 1+39 * 92 =.>Last due 31E- days //9 * 1-2 //.9Last due 1E8- days 1> * "-2 33.Last due 81E1"- days 89 * 3-2 ">.9Last due more than 1"-days

=8> * /-2 318."

Fstimated ending balance in 4llowance or Houbtul4ccounts

@A-".8


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?nadjusted balance (3=" E 89 M 19) "8".-Dad debt e*ense or "-1" @A31-.8


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E7&'5 #continued$

e. "

Statement o !nancial osition (amounts in millions o Swiss rancs+ @A):C$rrent assets

rade receivables........................................... @A13+=>=.-

ess: 4llowance or doubtul accounts........... -".8rade receivables+ net.................................... @A13+1>/.1

E7&''

(Oournal entry amounts are in millions o Furo)

e. 1

Dad debt e*ense (MFSF) ................................ 3=-

4llowance or doubtul accounts (MP4 4)

3=-o record estimated bad debt e*ense.

4llowance or doubtul accounts (P4 M4)......... "39

rade receivables (4)................................... "39

o write o$ seci!c bad debts.

rade receivables (M4) ......................................... 13"

4llowance or doubtul accounts (MP4 E4) TTTTT

13"einstatement o accounts written o$.

@ash (M4) TTTTTTTTTTTTTTTTTTTTTTTTTTT................................................................................13" rade receivables (E4) TTTTTTTTTTTTTTTTTT..............................................................................13"@ollection on accounts written o$.

e. "

%t would have no e$ect because the asset Brade receivablesC and contra7asset B4llowance or doubtul accountsC would both decline by U1- million.Neither Bnet receivablesC nor Bnet earningsC would be a$ected.


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E7&'*

e. 1

he ercentages o uncollectible accounts or each category o ast duereceivables are comuted below:

Last due accounts

(4)%mairme

nt4llowanc

e

(D)4mount oeceivabl

es

(@) (D) R(4)

Lercentage

@urrent , E ,18+9-- E

31 E - days 1-- 9+--- ".-2

1 E 8- days 9 "+3-- ".>2

81 E 1"- days 8>9 3+/-- "8.-2

Gore than 1"- days E E E

,1+19- ,3-+"--

he ercentage o amounts that are otentially uncollectible increases thelonger the amounts remain uncollected by the @omany+ which is normalbecause the li&elihood o collection rom delinuent customers becomesmaller as time asses.

e. "

he bad debt e*ense was determined as ollows:

Dalance at Deginning o year ,1+"--

Vnown

osses due to unrecoverable receivables P

4mounts written o$ as uncollectible (1+19-) Vnown

Dalance at end o year ,1+39-

@omutedabove

he un&nown amount is ,1+39- E (,1+"-- E ,1+19-) ,1+3--

e. 3

Hec. 31+ "-1/

4llowance or doubtul accounts (P4M4).......................1+"9-

rade receivables (4).................................................. 1+"9-


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o write o$ trade receivables determined to be uncollectible.


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E7&'* #continued$

Dad debt e*ense (MFSF) .............................................1+3--

4llowance or doubtul accounts (MP4 4).............. 1+3--

o record estimated bad debt e*ense.

e. /

%t would have no e$ect because the asset Brade eceivablesC and contra7asset B4llowance or Houbtul 4ccountsC would both decline by ,1-thousands. Neither Bnet trade receivablesC nor Bnet earningsC would bea$ected.

E7&'+

e. 1

Allo8ance 1or doubt1ul accounts

3=9 Deg.

balance

5rite7o$s 9 1/ Dad debt

e*.

333 Fnd.

balance

Dad debt e*ense increases (is credited to) the allowance. Since we are

given the beginning and ending balances in the allowance+ we can solve orwrite7o$s+ which decrease (are debited to) the allowance.

e. " Trade receivables

Deg. balanceI 13+3>8 9 5rite7o$s

Net sales >+/3 +9

@ash collections

Fnd. balance

II

19+3"-

I ,13+-1/ M 3=9 II ,1/+8>= M 333

rade eceivables is increased (debited) by recording sales made on credit;the account is decreased (credited) by recording cash collections and write7o$s o bad debts. hus+ we can solve or cash collections as the missingvalue.


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E7&'

e. 1

he allowance or uncollectible accounts is increased (credited) when baddebt e*ense is recorded and decreased (debited) when uncollectibleaccounts are written o$. his case gives the beginning and ending balances

o the allowance account and the amount o uncollectible accounts thatwere written o$. hereore+ the amount o bad debt e*ense can becomuted as ollows (amounts in millions):

Allo8ance 1or ncollectible Accounts(c) 1= (a) /"

(d) 8

(b) 3/

(a) Deginning balance+ given (b) Fnding balance+ given

(c)?ncollectible accounts write7o$+ given (d) Dad debt e*ense+ inerred amount (to balance)

e. "

5or&ing caital is una$ected by the write7o$ o an uncollectible accountwhen the allowance method is used. he asset account (rade eceivables)and the contra7 asset account (4llowance or ?ncollectible 4ccounts) areboth reduced by the same amount; thereore+ the net trade receivables isunchanged.

5or&ing caital is decreased when bad debt e*ense is recorded becausethe contraEasset account (4llowance or ?ncollectible 4ccounts) is increased.rom reuirement (1)+ we &now that net trade receivables were reduced by,8 million when bad debt e*ense was recorded in year ".

Note that earnings beore ta*es were reduced by the amount o bad debte*ense that was recorded+ thereore %ncome a* F*ense and %ncome a*Layable will decrease. he decrease in %ncome a* Layable caused wor&ingcaital to increase; accordingly+ the net decrease in wor&ing caital was ,.3million ( ,8 million E ,8 million * 3-2).

e. 3

he entry to record the write7o$ o an uncollectible account did not a$ectany statement o earnings accounts; thereore+ net earnings is una$ected bythe ,8 million write7o$ in year ".

he recording o bad debt e*ense reduced earnings beore ta*es in Kear "by ,8 million and reduced ta* e*ense by ,".= million (i.e.+ ,8 million *


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3-2). hereore+ Kear " net earnings were reduced by ,.3 million (ascomuted in e. ").


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E7&'-

e. 1

@alculations or @urrent Kear:

eceivablesturnover

Net Sales ,"+-=1 8./9times

4verage Net4ccounts

eceivables

,+9>.9I

I (+98> M +938) R "

4verage age o 39 39 38 days (rounded)o receivables eceivables

urnover8./9

e. "

he receivables turnover ratio refects how many times accounts receivablewere recorded and collected+ on average+ during the eriod. he averagecollection eriod indicates the average time it ta&es a customer to ay theamount due.

E7&'.(in thousands o euros)

e. 1

@alculations or "-11:eceivables

turnover

Net Sales U"+-3"+3/

1

"./1 times

4verage Net radeeceivables

U>/3+>"9I

I (=8>+3"- M >>8+33-) R "

4verage age o 39 39 191 days(rounded)

o receivables eceivablesurnover

"./1

"-11: "./1 times; 191 days"-1-: ".98 times; 1/1 days"--8: ".1 times; 1/- days"-->: ".81 times; 1"9 days"--=: 3."3 times; 113 days

he results indicate a downward trend in the receivables turnover+ and anincrease in the average collection eriod+ which increased by more than onemonth over the !ve7year eriod.


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e. "

he receivables turnover ratio refects how many times trade receivableswere recorded and collected+ on average+ during the eriod. he averagecollection eriod indicates the average time it ta&es a customer to ay itsaccounts.


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E7&'7

e. 1

a. eceivables turnover Net sales 0 4verage net trade receivables

4er ingus: U1+383+">/ 0 W(U"8+13> M U/"+"=3) 0"X 38.- times5estOet 4irlines: ,3+/"=+/-8 0 W(,3/+1"" M ,3=+9=) 0"X 89. times

b. 4verage collection eriod 39 0 eceivables turnover

4er ingus: 39 0 38.- 8 days (rounded)5estOet 4irlines: 39 0 89. / days (rounded)

e. "

5estOet6s trade receivables aear to be the more liuid asset as they arecollected every / days on average+ whereas it ta&es 4er ingus8 days onaverage to collect rom its assengers or travel agents.

e. 3

he di$erent currencies do not a$ect the interretation o the ratios. atiosocus on the relationshi o the numbers to each other and are thus nota$ected by currency.E7&'6

e. 1

he decrease in the trade receivables balance would increase cash fow romoerations or the current year. his haens because the @omanycollected more cash rom customers than the credit sales made during the

year.

e. "

(a)%ncreasing sales revenue leads to higher trade receivables balancesbecause credit sales are creating new receivables aster than receivablescan be collected.

(b)@ash collections rom the rior eriodYs credit sales are lower than thenew credit sales revenue because o the increase in sales revenue. Notethat in the ne*t eriod+ cash collections will also rise. Aowever i creditsales continue to rise+ trade receivables will also continue to increase.

e. 3

eceivables turnover Net sales 0 4verage net trade receivables ,1->+/"8 0 W(,9+38 M ,9+81-)0"X 18." times

4verage collection eriod 39 0 eceivables turnover 39 0 18." 18days


7-22


23/97

he comuted numbers hel investors in assessing how uic&ly thecomany collects receivables rom its customers in order to meet its currentobligations to suliers o goods and services. hese numbers can becomared to the average turnover ratio and average collection eriod orthe industry. he average collection eriod would also serve as a chec& onthe comany credit olicy.


7-23


24/97

E7&'

a. his is not a good ractice because the credit manager has theoortunity to mishandle the cash received rom customers whilemaniulating the customers6 records. or e*amle+ he or she may oc&etcheues received rom customers and retend that ayments were not

received. Aowever+ the issuance o eriodic statements to the customersmay reveal any mishandling o customers6 ayments+ i the customerscontact a erson other than the credit manager to as& about thedi$erence or i the statements are reviewed by someone in theaccounting deartment. 4 more serious roblem would be to oc&et theamount received and write the customer6s account o$ as uncollectible.

b. he is a very good ractice as there will be no cash let in the hands oemloyees who may be temted to use it or their own bene!t.

c. his ractice is good as it revents situations that are noted in a) above.

d. his is not a good ractice. he invoices should not be stamed BaidCuntil the cheues have been issued to the roer arty and signed.Qtherwise+ it is ossible or the treasurer to issue a cheue to anotherarty. urthermore+ it is recommended that the cheues be signed by twoindividuals and that the signed cheues be reviewed to ensure roerayment beore the invoice is stamed BaidC.

e. his is not a good ractice. he cheues should be re7numbered in orderto &ee trac& o the cheues that have been issued and to account orthe missing cheues.

. his is not a good ractice. he adjusted balances should be eual i theban& reconciliation is reared accurately. % the adjusted balances aredi$erent+ then the erson rearing the ban& reconciliation would havemade an error that needs to be identi!ed and corrected.

E79*5

@ash is the most liuid asset or any organi'ation. Saeguarding cash beginswith documentation. 5ithout documentation there is no aroriate way to

rotect cash rom thet+ raud or loss. he act that cash receits or goodssold are only given to those who as& or them is a wea&ness in the controlor cash. he cashier who receives money rom customers may be atrustworthy amily member. Dut+ this ractice may lead to the temtation ooc&eting some o the cash received. or this reason+ it is recommendedthat receits be given to customers at all times. urthermore+ it isrecommended that all cash receits be deosited in the ban& or saetyuroses+ and that ayments or arm sulies be made by cheues+ bycredit card or by debit card instead o &eeing large amounts o cash on


7-24


25/97

hand. %t is also imortant that all invoices received rom suliers o armroducts be &et to document the cash outfow rom the business.


7-25


26/97

E7&*'

%nclude:@ash on hand (,=-- M ,1-- M ,"-- M ,"--)....... ,1+"--Letty cash ...................................................... 3--Dan& accounts:

@ity Dan& ...................................................... ,9>+--

National Dan& (locations 4+ D+ and @).............. 9+1-- 3+=--@redit Suisse E 37Gonth @erti!cate o Heosit...... 9+>--otal cash and cash euivalents reorted on

"-1/ statement o !nancial osition................... ,=1+---

Ho not include:ransaban& E 7month @erti!cate oHeosit (reort as short7term investment)............ /+9--

@ash euivalents include investments with original maturities (generally) othree months or less that are readily convertible to cash and whose value is

unli&ely to change. ?nder this de!nition the 7month certi!cate o deositdoes not ualiy as a cash euivalent.

4 more conservative aroach would be to recogni'e only treasury bills andmoney mar&et unds as cash euivalents+ and e*clude the 37monthcerti!cate o deosit. 4lternatively i the 7month certi!cate can be cashedearly it could be included as a cash euivalent.


7-26


27/97

E7&**

e. 1

:O/TAN CO;(AN3)an< Reconciliation, =une +5, *5'-

Company's Books Bank Statement

Fnding balance er @ash4ccount (,+8-- M

,1>+1-- E ,18+---)TTTTTTTTTTT..

,+---

Fnding balance er ban& statementTTTTTTTTTTT

,+--

Additions> Additions>

None Heosit in

transitTTTTTTTT.

1+8--I

=+8-4eductions> 4eductions>

Dan& servicechargeTTTTTT

/- QutstandingcheuesTTTTT

"+---

Fnding correct cashbalance

,9+8- Fnding correct cashbalance

,9+8-

I,1>+1-- E ,1+"-- ,1+8--.

e. "

Dan& service charge e*ense (MFSF)...................... /-

@ash (4).............................................................. /-

o record deduction rom ban& account or service charges.

e. 3

he balance in the @ash account ater the above entry has been osted isthe same as the correct cash balance er the ban& reconciliation; ,9+8-.

e. /

Statement o !nancial osition (Oune 3-+ "-19):@urrent assets:

@ash (,9+8- M ,3--).............................................. ,+"-


7-27


28/97


7-28


29/97

E7&*+

e. 1RSSE// CO;(AN3

)an< Reconciliation, Septe"ber +5, *5'

Company's Books Bank Statement

Fnding balance er @ashaccount (,+9-- M,">+1-- E ,">+8--)...

,9+=--

Fnding balance erban& statement.........

,9+==-

Additions> Additions>

None Heosit in transitI. 1+"--I

+8=-

4eductions> 4eductions>

Dan& service charges ,-

NS cheue E Detty Drown......

1=- "3-

Qutstanding cheues (,">+8-- E ,"=+/--)

1+9--Fnding correct cashbalance.....................

,9+/=- Fnding correct cashbalance......................

,9+/=-

I,">+1-- E ,"+8-- ,1+"--.

e. "

(1) Dan& service charge e*ense (MFSF).................... -

@ash (4)............................................................ -

o record ban& service charges deducted rom ban& balance.

(") rade receivables (Detty Drown) (M4).......................... 1=-

@ash (4)............................................................ 1=-

o record customer cheue returned due to insuJcient unds.

e. 3

he balance in the @ash account ater the above entries have been osted isthe same as the correct cash balance er the ban& reconciliation+ ,9+/=-.

e. /

Statement o !nancial osition (Setember 3-+ "-1/): @urrent assets:Financial Accounting, 5ce, Libby, Libby, Short, Kanaan, Gowing 2014 McGraw-Hill Ryerson Limited. All rights reserved.

7-29


30/97

@ash (,9+/=- M ,/--)...................................................... ,9+>=-


7-30


31/97

E7*

e. 1Gini Gart @ororation%an& Reconciliation

Oune 3-@ash balance er ban& ,1+33-

4dd: (1) Heosit in transit 1-1+/8-

ess: (") Qutstanding cheues ("/-)4djusted cash balance er ban& ,1+"9-

@ash balance er boo&s , /884dd: (/) Note collected by ban& and interest ,/- >/-

1+338ess: (3) Dan& service charge , (8)

(9) NS @heue (>-) (>8)4djusted cash balance er boo&s ,1+"9-

e. "

(1) @ash (M4)................................................................ >/-

Notes receivable (4)..................................... >--

%nterest revenue (MMSF)......................... /-Note receivable and interest collected. (his entry assumes

that no revious entry was made to accrue interest revenue.)

(") rade receivables (M4)............................................ >-

@ash (4)....................................................... >-@ustomerYs cheue returned; insuJcient unds.

(3) Dan& service charge e*ense (MF SF)............... 8

@ash (4)....................................................... 8

Dan& service charges deducted rom ban& statement.

e. 3

Lrearation o a ban& reconciliation is imortant or three reasons: (a) to

determine the BtrueC cash balance+ (b) to rovide data to adjust the @ashaccount to that balance+ and (c) to rovide control over the cash accountthrough indeendent veri!cation.

e. /

he amount o cash that should be reorted on the statement o !nancialosition is ,1+"9-.


7-31


32/97

E7&*- #Appendi? 7A$

e. 12014 201' 201(

evenue ................................ ,"+/--+--- ,+---+--- ,3+--+---F*enses ............................... "+---+--- 9+---+--- 3+---+---Net earnings .......................... , /--+--- ,1+---+--- , --+---

@omutations:"-1/: (,"+---+--- R ,1-+---+---) * ,1"+---+--- ,"+/--+---"-19: (,9+---+--- R ,1-+---+---) * ,1"+---+--- ,+---+---"-1: (,3+---+--- R ,1-+---+---) * ,1"+---+--- ,3+--+---

e. "

% costs cannot be reliably estimated+ net earnings would only be recogni'edwhen the roject is comlete.

2014 201' 201(

Net earnings .......................... , - , - ,"+---+---

E7&*. #Appendi? 7)$

November "-+ "-1/@ash (M4)........................................................... //1

@redit card discount (MPSF)....................... 8

Sales revenue (MMSF)........................ /9-

o record credit card sale.

November "9+ "-1/:rade receivables E @ustomer @hristine (M4)..... "+>--

Sales revenue (MMSF)........................ "+>--o record a credit sale.

November ">+ "-1/:rade receivables E @ustomer Haoud (M4)......... =+"--

Sales revenue (MMSF)........................ =+"--

o record a credit sale.

November 3-+ "-1/:

Sales returns and allowances (MPSF)........ --rade receivables E @ustomer Haoud (E4) --

o record return o deective goods ,=+"-- * 101" ,--.


7-32


33/97

E7&*. #Continued$

Hecember + "-1/:@ash (M4)........................................................... +/>

Sales discounts (MP SF).............................. 13"

rade receivables E @ustomer Haoud (E4) +--o record collection within the discount eriod+

-.8> Z (,=+"-- E ,--) ,+/8>

Hecember 3-+ "-1/:@ash (M4)........................................................... "+>--

rade receivables E @ustomer @hristine (E4)"+>--o record collection ater the discount eriod.

(RO)/E;S

(7&'

@ase 4

Decause the ast ood restaurant collects cash when the couon boo&s aresold+ cash collection is not an issue in this case. %n order to determine i therevenue has been earned+ the student must be careul in analy'ing what therestaurant actually sold. Students who ocus on the sale o the couon boo&oten conclude that the earning rocess is comlete with the delivery o theboo& to the customer. %n reality+ the restaurant has a signi!cant additionalservice to erorm; it has to serve a meal. he correct oint or revenue

recognition in this case is when the customer uses the couon or when thecouon e*ires and the restaurant has no urther obligation.

@ase D

%n this case there is reason to believe that


34/97

accounting eriod+ but ollowing this ractice enhances the uality o the!nancial statements.


7-34


35/97

(7&*

e. 1

SalesRevenue

Sales4iscounts

#ta-III

otal M,31/+--- M,"+9- M,/+--- M,8>-

I W(,11+9-- E 9--) * "2X ,""-II W(,8>+--- 0 .8>) * .-"X "+---

III Dalance o 4llowance or Houbtul 4ccounts (,/8+9-- * /2)

,1+8>-Dalance o account beore adjustment (,/+--- E ,3+---)1+---.......................................................................Dad debt e*ense

, 8>-..............................................................

rade eceivables

Dal.+ Oanuary 1+ "-19 119+--

-

Sale to . 4gostino (b) 11+9-- 9-- eturn by . 4gostino (d)

Sale to V. Dlac& (c) "9+--- 11+--- @ollection rom . 4gostino ()

Sale to D. 4ssa (e) "+--- 1--+--

-

@ollections within discount

eriod (g)

Sale to . ong (i) 1=+9-- "9+--- @ollection rom V. Dlac& (h)

+--- @ollection rom customers (&)

3+--- 5rite o$ o uncollectible account

(l)


7-35


36/97

Dal.+ Hecember 31+ "-19 /8+9--


7-36


37/97

(7&* #continued$

e. "

Statement o earnings (artial):Sales revenue..................................................,31/+---

ess: Sales returns and allowances............... (/+---)Sales discounts..................................... ("+9-)

Net sales revenue............................................ ,3-=+39-T.Qerating e*enses:

Dad debt e*ense........................................ 8>-

(7&+

Statement o Farnings %tems KF4 1 KF4 "NoteESee below NoteESee below

#ross sales revenue....................... ,1-+---I ,"3"+---ISales returns and allowances......... g. 1-+--- 1>+---INet sales revenue.......................... e. 19-+--- a. "1/+---@ost o sales................................... . (>2I) 1-"+--- c. 1/8+>--#ross ro!t..................................... d. />+--- b. (3-2I)......................................................./+"--Qerating e*enses....................... 1>+---I d........................................................ //+"--Farnings beore income ta*es........ b. 3-+--- "-+---I%ncome ta* e*ense ("-2)I........... c. +--- e. /+---Net earnings................................... a. , "/+--- . , 1+---

Farnings er share (1-+--- sharesI) ,"./-I g........................................................,1.-

I4mounts given.

Note @omutations in order

Kear 1a. ,"./- * 1-+--- shares ,"/+---b. ,"/+--- R (1.-- E -."-) ,3-+---c. ,3-+--- * ."- ,+---d. ,3-+--- M ,1>+--- ,/>+---

e. ,/>+--- R (1.-- E -.>) ,19-+---. ,19-+--- * .> ,1-"+---g. ,1-+--- E ,19-+--- ,1-+---

Kear "a. ,"3"+--- E ,1>+--- ,"1/+---b. ,"1/+--- * .3- ,/+"--c. ,"1/+--- E ,/+"-- ,1/8+>--d. ,/+"-- E ,"-+--- ,//+"--


7-37


38/97

e. ,"-+--- * ."- ,/+---. ,"-+--- E ,/+--- ,1+---g. ,1+--- R 1-+--- shares ,1.-

(7& (Hollars in thousands)

e. 1Dad debt e*ense (MFSF)........................................ /

4llowance or doubtul accounts (MP4 E4)........... /

Fstimate o end7o7eriod bad debt e*ense.

here was no write7o$ o bad debts in Kear 1.

e. "

Allo8ance 1or 3ear * Allo8ance 1or 3ear +

13

"

Deg. bal. ">

3

Deg. bal.

5rite7o$s 3 1>

=

Dad debt

e*.

5rite7o$s "-

1

/" Dad debt

e*.

">

3

Fnd. bal. 1"

/

Fnd. Dal.

he solution is acilitated by solving or the missing value in the 7account.

(7&-

e. 1Aging Analysis of Trade Receivables

@ustomerotal

eceivables(a)

Not KetHue

(b) ? toQne KearLast Hue

(c) Gore hanQne Kear Last

Hue

D.

DrownTT....

, +--- ,+---

H. Hi

ellaT.....

9+--- , 9+---

N. #iddaT....

T

=+--- , =+---

S.

VavourisTT

"-+--- /+--- 1+---

. LatelT...

T...

=+--- =+---


7-38


39/97

otalsTT.

TT

,/9+--- ,1>+--- ,"1+--- ,+---

LercentT.

TT.

1--2 /-2 /.=2 13.32

%t is assumed that collections are alied to the oldest invoices !rst.

e. "

Estimated Amounts Uncollectible

4ge4mount oeceivable

Fstimatedoss ate

Fstimated?ncollectible

a. Not yet due ,1>+--- 12 , 1>-b. ? to one year ast due "1+--- 92 1+-9-c. Gore than one year ast

due +--- 3-2 1+>--

otal ,/9+--- ,3+-3-


7-39


40/97

(7&- #continued$

e. 3

Dad debt e*ense (MFSF)............................... "+-1-

4llowance or doubtul accounts (MP4E4) "+-1-

o adjust or estimated bad debt e*ense:Dalance needed in the allowance account ,3+-3-Dalance currently in the account...... 1+-"-4djustment needed+ i.e.+ increase.... ,"+-1-

e. /

)tatement o* Earnin+s:Qerating e*enses:

Dad debt e*ense................................................. ,"+-1-

)tatement o* nancial position:@urrent assets:

rade receivables.................................................. ,/9+---ess: 4llowance or doubtul accounts................ (3+-3- )Net trade receivables........................................... ,/1+8=-


7-40


41/97

(7&.

e. 1

4ril1-

No journal entry as there is no e*change yet.

4ril3-

rade receivables (M4) ...................................... 19-+---

Sales revenue (M MSF)....................... 19-+---

Sold 19 machines to Kuri %nc.

Gay 1 rade receivables (M4) ...................................... 1"-+---

Sales revenue (M MSF)....................... 1"-+---

Sold 1" machines to Leter6s 4licances.

Gay 9 @ash (M4) .......................................................... 1/=+---

Sales discounts (MPE) W,19-+--- * "2X.... 3+---

rade receivables (E4)............................... 19-+---@ollected rom Kuri %nc. within the discounteriod.

Gay = rade receivables (M4) ...................................... 1--+---

Sales revenue (M MSF)....................... 1--+---

Sold 1- machines to @heng td.

May 10 4llowance or doubtul accounts (EP4 M4)..... 1"+---

rade receivables (E4) ............................... 1"+---

5rite o$ o uncollectible accounts.

Gay 19 @ash (M4) .......................................................... 1--+---

Sales allowances and returns (MP E) ........ "-+---

rade receivables (E4) ............................... 1"-+---Leter6s 4liances returned two machines andaid the amount due.

Oune 1 @ash (M4) .......................................................... >-+--- rade receivables (E4) ............................... >-+---@ollection rom @heng td. Qn account.

Oune 3- rade receivables (M4) ...................................... 3+---

4llowance or doubtul accounts (MP4 E4)......................................................................

3+---

einstatement o accounts written o$ on Gay1-.

@ash (M4) .......................................................... 3+--- rade receivables (E4) ............................... 3+---


7-41


42/97

@ollection on accounts written o$ on Gay 1-.


7-42


43/97

(7&. #continued$

e. "

he ollowing time line shows the various transactions related to tradereceivables and hel in rearing the aging o trade receivables schedule.

March 31 April 30 May 1 May 5 May 7 May 10 May 15 June 1 June 30__|_________|_____ ___|___ ____|_________|_______|______ _|____ ___|________|____$60,000 $150,000 $120,000 ($150,000) $100,000 ($12,000) ($20,000) ($80,000) $3,000

($100,000) ($3,000)

Balance Yuri Peter Yuri Cheng Write-off Peter Cheng Recovery

4ge #rou

4mounteceivabl

e

FstimatedLercent

?ncollectible

Esti"atedncollectib

leNot yet due ,

-

92 , -

1E3- days ast due W,1--+--- E,>-+--- X

"-+--- 1-2 "+---

31E- days ast due - 192 -Gore than - days ast due />+---I "-2 8+--

otal ,>+--- ,11+--

I ,-+--- (beginning balance) E ,1"+--- (write o$)

Allo8ance 1or 4oubt1ul Accounts

Deg. bal. 19+---

5rite7o$s 1"+--- ecoveries 3+---

Dad debt

e*.

9+--

Fnd. bal. 11+--

4djusting journal entry:

Oune 3- Dad debt e*ense (MF ESF) .......................... 9+--

4llowance or doubtul accounts (MP4

E4)......................................................................

9+--

ecording o estimated bad debt e*ense orthe eriod.

e. 3

eceivables turnover ratio Net credit sales 0 4verage net trade receivables


7-43


44/97

Net credit sales @redit sales E Sales discounts E Sales returns andallowances

he 7accounts below show the balances o e$ects o transcations on salesand trade receivables


7-44


45/97

(7&. #continued$

Sales

Dalance+ Garch

31

--+--

-

4ril 3- 19-+--

-

Gay 1 1"-+--

-

Gay = 1--+--

-

Dalance+ Oune

3-

8=-+--

-

Trade ReceivablesDalance+ Garch

31

-+---

4ril 3- 19-+--

-

Gay 9 19-+--

-

Gay 1 1"-+--

-

Gay 1- 1"+---

Gay = 1--+--

-

Gay 19 1"-+--

-

Oune 3- 3+--- Oune 1 >-+---

Oune 3- 3+---

Dalance+ Oune 3- >+---

Net credit sales ,8=-+--- E ,3+--- E ,"-+--- ,8/=+---

eceivables turnover ratio ,8/=+---0W(,-+--- E ,19+---) M (,>+--- E,11+--)X0"X

,8/=+---0,9-+=-- 1>.>

4verage collection eriod 390eceivables turnover ratio 3901>.> 18.9days

he average collection eriod refects the average time it ta&es a customerto ay the amount due. %n this case+ the calculation suggests that it ta&es%ceVreme6s customers on average 18.9 days to ay the amount due.


7-45


46/97

e. /

%ceVreme6s customers ay+ on average+ ater "- days ater the urchasedate+ which is within the credit o 3- days . hey aear to be aying o$the amounts due aster than Lino6s customers+ but slower than Oulia6scustomers.


7-46


47/97

(7&7

e. 1

Hec. 9 @ash (M4) .......................................................... 18+---rade receivables (M4) ...................................... />+---

Sales revenue (M MSF)....................... =+---

Sale o merchandise artly cash and the reston account+ terms "01-+ n03-.

@ost o sales (MF ESF).................................... 99+---

Gerchandise %nventory (E4)...................... 99+---

Hec.1"

@ash (M4) .......................................................... "3+9"-

Sales discounts (MP E) W,"/+--- * "2X..... />-

rade receivables (E4)............................... "/+---@ollected cash or hal the credit sales o Hec.

9.

Hec."-

@ash (M4) .......................................................... 8-+---

rade receivables (E4) ............................... 8-+---@ollection on sales made in November.

Hec."

4llowance or doubtul accounts (EP4 M4)..... 3+---

rade receivables (E4) ............................... 3+---5rite o$ o a customer6s uncollectibe account.

e. "

4ge #rou

4mounteceivabl

e

FstimatedLercent

?ncollectible

Esti"atedncollectib

le@urrent ,/"+--- 12 ,/"-1E3- days ast due 31+9-- "2 3-31E- days ast due 9+--- 1-2 9--Gore than - days ast due +9-- 3-2 1+89-

otal ,>9+--- ,3+9--

he amount o bad debt e*ense is the di$erence in the balance o the4llowance or Houbtul 4ccounts beore and ater the adjustment.Dad debt e*ense ,3+9-- E (,/+9-- E ,3+---) ,3+9-- E ,1+9-- ,"+---

4djusting journal entry:

Hec. Dad debt e*ense (MF ESF) .......................... "+---


7-47


48/97

31

4llowance or doubtul accounts (MP4 E4)......................................................................

"+---

ecording o estimated bad debt e*ense orthe eriod.


7-48


49/97

(7&7 #continued$

e. 3

#ross ro!t ercentage #ross Lro!t 0 Net Sales (Sales E Sales discount E @QS) 0 (Sales E Sales

discount) (,=+--- E ,/>- E ,39+---) 0 (,=+--- E ,/>-)

,31+9"- 0 ,+9"- /=.3>2

his ratio measures how much gross ro!t is generated rom every salesdollar. %t refects the ability to charge remium rices and urchase orroduce goods and services at low cost.

eceivable turnover ratio Net credit sales 0 4verage net trade receivables ,/=+9"- I0 ,119+9--II -./1 times (or Hecember

only)

I Net credit sales @redit sales E Sales discount ,/>+--- E ,/>- ,/=+9"-

II 4verage net trade receivables 4verage o beginning and ending values o net receivables

W(,19/+--- E ,/+9--) M (,>9+--- E ,3+9--)X0" ,119+9--

his ratio measures how many times trade accounts receivable are recordedand collected during the eriod. his monthly ratio corresonds to an annualratio o /.8" (-./1 * 1")+ assuming that the sales and collection activities aretyical monthly activities.

(7&6

e. 1he beginning balance o trade receivables will increase by the amount ocredit sales+ and will decrease when cash is collected rom customers orwhen accounts are written o$ as uncollectible. 4ccordingly+ the balance orade receivables at Hecember 31+ "-19 is determined as ollows:

Deginning balance , 9--+---M @redit sales 1+---+---E @ollections rom customers (1+1--+---)E 5rite7o$ o uncollectible accounts (3-+---) Fnding balance , 3=-+---

e. "

4llowance or doubtul accounts (P4 M4)..... . 3-+---

rade receivables (E4)................................. 3-+---o record the write7o$ o trade receivables as uncollectible.

Dad debt e*ense (MF SF)............................. "=+"--

4llowance or doubtul accounts (MP4 "=+"--


7-49


50/97

4)

o adjust the balance o the 4llowance or doubtul accounts and recordbad debt e*ense or the year. Fnding balance o 4llowance account ,3=-+--- * 2 ,""+"-- @r ?nadjusted balance o the 4llowance account (,"9+--- E ,3-+---) 9+--- Hr

4mount o adjustment needed ,"=+"-- @r

(7&6 #continued$

e. 3

[ital %nc.Lartial Statement o inancial Losition

4s at Hecember 31+ "-19

@urrent 4ssetsT.rade receivables ,3=-+---ess: 4llowance or doubtul accounts ( ""+"--)Net ,3/=+>--

Q

rade receivables (net o allowance o ,""+"--),3/=+>--

e. /

he method being roosed by the boo&&eeer is called the direct write7o$method. he reasoning o the boo&&eeer is uite aealing in the sensethat it saves him and others time and e$ort in estimating the amount oreceivables that may not be collected in the uture. his simlistic aroachwould be accetable i the amounts that are written o$ annually arerelatively small or i they are close to the amount that would be considereduncollectible under the allowance method.

he main de!ciency o the direct write7o$ method is its inconsistency with

the matching rocess which reuires that e*enses be matched to therelated revenues during the same eriod. % a trade receivable is written7o$in a eriod that ollows the eriod o sale+ then the matching rocess wouldhave not been observed. he direct method also results in an overstatemento trade receivables+ which should be reorted at their estimated reali'ablevalue. Decause most businesses have some amounts that will not becollected+ a rovision or uncollectible accounts should be made. or thisreason+ accountants estimate the amount that may not be collectible in the


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uture+ with ull &nowledge that the estimated amount may not be an e*actamount. Aowever+ the estimated bad debt e*ense comlies with thematching rocess. %n that resect+ it is reerable to be imrecisely rightthan recisely wrong.


7-51


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(7&

e.1)I/4ERS CO;(AN3, INC0

State"ent o1 Earnings2or the 3ear Ended 4ece"ber +', *5'

#ross sales revenue.................................................. ,1/9+--

ess: Sales discounts......................................... +/--Sales returns and allowances................... 9+--

Net sales revenue...................................................... 133+--@ost o sales..............................................................

=>+/--#ross ro!t ............................................................... 99+"--Qerating e*enses:

Selling e*enses.................................................,13+--4dministrative e*enses.................................... 1/+/--Dad debt e*ense.............................................. 1+-- "8+--

Farnings beore income ta*....................................... "9+--

%ncome ta* e*ense........................................... =+>-Net earnings.............................................................. ,1=+8"-

Farnings er share: (,1=+8"- R 1-+--- shares).......................... ,1 .=8

%n this case earnings rom oerations is the same as earnings beore incometa*.

e. "

#ross Lro!t

Lercentage

#ross Lro!t ,99+"--

-./1 (/12)

Net Sales ,133+--

he gross ro!t ercentage shows the e*cess o sales rices over the coststo urchase or roduce the goods or services sold+ measured as aercentage.

rade eceivables Net Sales ,133+--

>.=8

urnover atio 4vg Netrade

eceivables

,19+"--

4verage net trade receivable (,1+--- M ,1/+/--) R "

he trade receivables turnover ratio refects how many times tradereceivables were both recorded and collected+ on average+ during the timeeriod. he higher the result is+ the aster the collection o receivables.


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53/97


7-53


54/97

(7&'5

e. 1

(a) ,9- * 1" months , --(b) ,1" * (9" wee&s * 9 days er wee&) 3+1"-(c)+ (d) rade receivables collections (,3-- M ,>--) 1+1--

otal aro*imate amount stolen ,/+>"-

e. "

Dasic recommendations:

(1) %nstall a tight system o internal control+ including the ollowing:a. 4rove all sales returns and account write7o$s ersonally and

review the accounts.b. ?se a cash register to record all sales and reconcile the reort to the

sales recorded.

c. Heosit all cash daily.d. Ga&e all ayments by cheue. @onsider a searate cash7on7hand

system or small e*ense ayments and eriodically chec& thereceits.e. %nstitute a system o sot chec&s o the emloyees6 wor&.

(") 4rrange or an annual indeendent audit on a continuing basis or areview o the internal controls that are ut in lace.


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(79''

e. 1

Hear Gs. Vostas+

his memo addresses your inuiry about the di$erence between the balance

o the @ash in Dan& account in the comany6s records and the balanceshown on the ban& statement. he balance in the comany6s @ash accountis based on the transactions that a$ected this account during the month oOune. Similarly+ the balance o cash shown on the ban& statement refectsthe transactions that the ban& recorded in the comany6s ban& account.

%t is normal that the balances o these two accounts be di$erent becausesome o the cash transactions that a$ect the comany6s ban& account maynot have been recorded by the ban& as at Oune 3-. or e*amle+ anovernight deosit o ,1+--- in the ban& account on Oune 3- will not berecorded by the ban& until Ouly 1+ but we would have recorded that deositin the comany6s cash account. his would cause a di$erence in the

account balances by ,1+--- that is only temorary.4nother e*amle is that the ban& charges our comany seci!c ees or

the services it rovides. he total amount o these service charges isrecorded by the ban& as they occur. Dut+ we may not be aware o thesecharges until we receive the ban& statement. 5e then record them in thecash account in Ouly+ whereas the ban& would have recorded them already inthe comany6s account in Oune. hese timing di$erences need to bereviewed on a regular basis to ensure that there are no errors that havebeen made inadvertently either by the ban&6s emloyees or the comany6semloyees.

e."

@OSTAS 2ASIONS /T40)an< Reconciliation, =une +5

Co"panB!s )oo- "+->- Heosits in transit.......... 1+1/9

>+98> 11+"

4eductions> 4eductions>Dan& service charges (,"9 M 38).... / Qutstanding cheues...... 3+9-/NS cheue E ami @ossette.......... ">@orrection o amount deosited......

8-Fnding correct cash balance........... ,>+19> Fnding correct cash

balance.........................,>+19>


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56/97


7-56


57/97

(7&'' #continued$(1) @ash in ban& (M4)................................................... "+->-

Note receivable (E4)...................................... "+---

%nterest revenue (M MSF)........................ >-

Note receivable lus interest collected (by ban&).

(") rade receivable (ami @ossette) (M4)................... ">@ash (E4)....................................................... ">

@ustomerYs cheue returned due to insuJcient unds.

(3) rade receivable (ami @ossette) (M4) ................. /@ash in ban& (E4)........................................... /

Service charges to be collected rom the customer.

(/) @ash on hand (M4).................................................. 8-@ash in ban& (E4)........................................... 8-

Dan& deosit o ,"+3/- recorded incorrectly as ,"+/3-.


7-57


58/97

(7&'*

e. 1O(@INS CO;(AN3

)an< Reconciliation, April +5, *5'-

Co"panB!s )oo Additions>Note receivable collected ,1+11-%nterest collected............ =-

1+1>-Heosits in transitI.........

9+/--"9+->- ">+89-

4eductions> 4eductions>NS\4.D. 5right............ 1- Qutstanding cheues...... /+1--Dan& charges.................. =-

"3-

Fnding correct cashbalance...........................

,"/+>9- Fnding correct cashbalance...........................

,"/+>9-

I,/1+9-- 7 ,3+1-- ,9+/--.

e. "

(1) @ash (M4)................................................................ 1+1>-Notes receivable (E4)..................................... 1+11-

%nterest revenue (M MSF)........................ =-Note receivable and interest collected. (his entry assumesthat no revious entry was made to accrue interest revenue.)

(") rade receivable (4. D. 5right) (M4)....................... 1-@ash (E4)....................................................... 1-

@ustomerYs cheue returned due to insuJcient unds.

(3) Dan& service charge e*ense (MF7SF)................ =-

@ash (E4)....................................................... =-Dan& service charges deducted rom ban& statement.

hese entries are necessary because the changes to the regular @ashaccount have not yet been recorded by the comany. he ban& has alreadyrecorded these items in its own accounts. he @ash account (and the other

accounts shown in the above entries) must be brought u to date or!nancial statement uroses.

e. 3

Dalance in @ash in ban& account+ i.e.+ ending correct cash balance..............................................................................................,"/+>9-Dalance in @ash on hand account......................................... 1--

e. /


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Statement o !nancial osition (4ril 3-+ "-19):@urrent assets:

@ash (,"/+>9- M ,1--).......................................... ,"/+89-(7E'+ #Appendi? 7)$

e. 1

a. @ash (M4) .......................................................... "3/+--- Sales revenue (M MSF)....................... "3/+--

-Sold merchandise or cash.

b. rade receivables (M4) ...................................... 11+9--

Sales revenue (M MSF)....................... 11+9--

Sold merchandise to . 4gostino on oenaccount.

c. rade receivables (M4) ...................................... "9+---

Sales revenue (M MSF)....................... "9+---

Sold merchandise to V. Dlac& on oen account.

d. Sales returns and allowances (MP E)......... 9--

rade receivables (E4) ............................... 9--o record the return o one unit urchased by .4gostino.

e. rade receivables (M4) ...................................... "+---

Sales revenue (M MSF)....................... "+---

Sold merchandise to D. 4ssa on oen account.

. @ash (M4) .......................................................... 1-+=>-

Sales discounts (MP E) .............................. ""-

rade receivables (E4) ............................... 11+---@ollection in ull rom . 4gostino within thediscount eriod.

g. @ash (M4) .......................................................... 8>+---

Sales discounts (MP E) .............................. "+---

rade receivables (E4) ............................... 1--+--

-@ollections on account within the discount eriod.

h. @ash (M4) .......................................................... "/+9--

Sales discounts (MP E) .............................. 9--

rade receivables (E4) ............................... "9+---@ollection rom V. Dlac& in ull within the discounteriod.


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60/97

i. rade receivables (M4) ...................................... 1=+9--

Sales revenue (M MSF)....................... 1=+9--

Sold merchandise to . ong on oen account.


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61/97

(7E'+ #continued$

j. Sales returns and allowances (MP E)......... 3+9--

Sales discounts (EP M) ..................... =-

@ash (E4) .................................................. 3+/3-o record the return o seven deective units by V.Dlac& (= * ,9-- * 8>2).

&. @ash (M4) .......................................................... +--- rade receivables (E4) ............................... +---@ollection on account ater the discount eriod.

l. 4llowance or doubtul accounts (P4 M4)..... 3+---

rade receivables (E4)............................... 3+---o record the write7o$ o trade receivables as uncollectible.

m. Dad debt e*ense (MF SF)........................... 8>-


4)......................................................................

8>-

o adjust the balance o the 4llowance or doubtul accounts andrecord bad debt e*ense or the year.

Dalance o 4llowance or Houbtul 4ccounts (,/8+9-- * /2) ,1+8>-Dalance o account beore adjustment (,/+--- E ,3+---) 1+---Dad debt e*ense......................................................... , 8>-

rade eceivables

Dal.+ Oanuary 1+ "-19 119+--

-

Sale to . 4gostino (b) 11+9-- 9-- eturn by . 4gostino (d)

Sale to V. Dlac& (c) "9+--- 11+--- @ollection rom . 4gostino ()

Sale to D. 4ssa (e) "+--- 1--+--

-

@ollections within discount eriod

(g)

Sale to . ong (i) 1=+9-- "9+--- @ollection rom V. Dlac& (h)

+--- @ollection rom customers (&)

3+--- 5rite o$ o uncollectible account

(l)

Dal.+ Hecember 31+ "-19 /8+9--

e. "

Statement o earnings (artial):Sales revenue............................................................ ,31/+---

Sales discounts................................................... ("+9-)


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62/97

Sales returns and allowances............................. (/+--- )Net sales revenue...................................................... 3-=+39-T.Qerating e*enses:

Dad debt e*ense.............................................. 8>-


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63/97

A/TERNATE (RO)/E;S

A(79'

@ase 4

evenue should not be recogni'ed until the seller delivers the good orservice to the urchaser. he seller has not yet manuactured theeuiment let alone delivered it. he commitment by the urchaser is notaccomanied by ayment thereore no cash has been received. Aad cashbeen received rom the urchaser+ it should have been recorded as deerredrevenue.

@ase D

evenue should not be recogni'ed unless the seller is reasonably con!dentthat the urchaser will ay in ull. %t is clear that many members who signu do not ay or their membershi. he 1-7day delay is &nown as aBcooling o$ eriodC and must be rovided by law+ although the time eriod

can be shorter than 1- days. he comany can ta&e a somewhat aggressivearoach and recogni'e a ercentage o revenue when members sign+ or amore conservative aroach and deer the recognition o revenue until thecancellation eriod has e*ired. Qnce the cancellation eriod has ended+Scenic rails %nc. can remain somewhat aggressive and recogni'e the ullamount o the membershi ee as revenue or it can be more conservative.he more conservative aroach would be to use either a ercentage orevenue or a ercentage o trade receivables to create an allowance orthose who will ail to ay the ull membershi ee during the si*7monthayment eriod. he comany should use its e*erience to choose thearoriate method and the aroriate ercentage that would resent

airly the results o its oerations to users.

@ase @

Fducational oys6 current ractice could be based on its e*erience wherebyew distributors return unsold merchandise and thereore the amount isimmaterial. % the returns are considered as a material amount+ thenFducational oys is essentially recogni'ing the roducts delivered to itsdistributors as i they were sold. %n substance+ these roducts can still beconsidered inventory or Fducational oys that is located at its distributors6warehouses or showrooms. his ractice+ commonly &nown as BchannelingC+does not conorm to #44L.

%n essence the toys are being sold on consignment and there is little toguide us to understanding how robable it is that Fducational oys willreceive ull ayment. 4n imroved aroach is or Fducational oys toestablish an allowance or sales returns. 4nother alternative would be orFducational oys to not recogni'e revenue at all until its distributors havemade the sales. 4lthough the correct treatment is a matter o judgement+ itis clear rom the acts o this case that there is only a very narrow set o


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circumstances under which Fducational oys6 current ractice would beaccetable under current !nancial reorting standards.


7-64


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A(7&*

e. 1

SalesRevenue

Sales4iscounts

#ta+--- N N N

(b) M1"+--- N N N(c) M"3+-- N N N

(d) N M1"- N N

(e) M"+--- N N N

() N E1 M1+-- N

(g) N M8--I

N N

(h) N N M1+"-- N

(i) N M""/ N N

(j) M1>+/-- N N N

(&) N N N N(l) N N N N

(m) N N N M13+"-II

otal M,3->+--- M,1+""> M,"+>-- M,13+"-

I W(,>8+1--0.88) * .-1X ,8--

IIrade receivables ,11+--- M,"">+--- M ,1"+--- M ,"3+-- E ,1"+---M"+--- E ,8-+--- E ,1+"-- E ,""+/-- M 1>+/-- E ,"+--- ,"="+/--

Fstimated bad debt e*ense ,"="+/-- * 92 ,13+"-

e. "

Statement o earnings (artial):Sales revenue.................................................. ,3->+---

ess: Sales discounts................................... (1+"">)Sales returns and allowances............. ("+>-- )

Net sales revenue............................................ ,3-3+8="T.Qerating e*enses:

Dad debt e*ense...................................... 13+"-


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A(7&+

Kear 1:

Sales discounts , 3+--- (,"1-+--- E ,"-=+---)

@ost o sales ,1"/+"-- W,"-=+--- * (1 E /-2)X

Farnings beore income ta*es , /-+--- (,"-=+--- * /-2 E ,/"+>--)%ncome ta* e*ense , 1"+--- (,/-+--- * 3-2)

Farnings beore discontinued oerations , ">+--- (,/-+--- E ,1"+---)

Net earnings , 1>+--- (,">+--- E ,1-+---)

Farnings er share ,"."90share (,1>+--- R >+---)

Kear ":

Net sales revenue ,"9-+--- (,"99+--- E ,9+---)

#ross margin ,1--+--- (,"9-+--- * /-2)

Qerating e*enses , 3-+--- (,1--+--- E ,=-+---)

%ncome ta* e*ense , "1+--- (,=-+--- * 3-2)

Farnings beore discontinued oerations , /8+--- (,=-+--- E ,"1+---)

Net earnings , 91+9-- (,/8+--- M ,"+9--)

Farnings er share ,.//0share (,91+9-- R >+---)


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A(7& (Hollars in millions)

e. 1

Allo8ance 1or

4oubt1ulAccounts

)alance at)eginning

o1 (eriod

Chargedto )ad

4ebtE?pense

Write9OsCharged

toAllo8ance

)alance atEnd

o1 (eriod

Kear 3 ,1-+3/ ,"+918 ,"+93 ,1-+3/=

Kear " 13+99/ "+-/8 9+"38 1-+3/

Kear 1 11+3-9 /+=9> "+9-8 13+99/

Kear 1 Allo8ance 1or 4oubt1ul Accounts

11+3-9 Deg. Dal

5rite7o$s "+9-8 /+=9> Dad debtse*ense

13+99/ Fnd. bal.

Kear " Allo8ance 1or 4oubt1ul Accounts

13+99/ Deg. bal.

5rite7o$s 9+"38 "+-/8 Dad debtse*ense

1-+3/ Fnd. bal.

Kear 3 Allo8ance 1or 4oubt1ul Accounts

1-+3/ Deg. bal.

5rite7o$s "+93 "+918 Dad debts e*.

1-+3/= Fnd. bal.

he solution is acilitated by solving or the missing value in the 7account.

e. "

Dad debt e*ense (MFSF)......................................../+=9>

4llowance or doubtul accounts (MP4 74)........ /+=9>Fnd o eriod bad debt e*ense estimate.

4llowance or doubtul accounts (P4 M4)................ "+9-8

rade receivables (E4)........................................... "+9-85rite7o$ o bad debts.


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A(7&-

e. 1Aging Analysis of Trade receivables

@ustomer

otal

eceivable

(a)

Not Ket

Hue

(b)? to

Gonths

Last Hue

(c) to

1" Gonths

Last Hue

(d)Gore hanQne Kear

Last Hue. 4ouad TTT.. , "+--- ,"+---

@. @hronis

TTT..

+--- ,+---

H. Gc@lain .

TTT.

/+--- , /+---

. S&ibins&i TTT 1/+9-- , /+9-- 1-+---

A. 5u TTT..T... 13+--- 13+---

otalsTTTTT ,38+9-- ,1=+9-- ,1/+--- ,"+--- ,+---

Lercent

TTTT

1--2 //.32 39./2 9.1

2

19."2

e. "Estimated Amounts Uncollectible

4ge4mount oeceivable

Fstimatedoss ate

Fstimated?ncollectible

a. Not yetdueTTTTTTTT

,1=+9-- 12 , 1=9

b. ? to months astdue...T.

1/+--- 92 =--

c. to 1" months ast due.T.

"+--- "-2 /--

d. Gore than one year astdue

+--- 9-2 3+---

otalTTTTTTTTT..

,38+9-- ,/+"=9

e. 3

Dad debt e*ense (MF SF) ............................. 9+>"9

4llowance or doubtul accounts (MP4 4) 9+>"9o adjust or estimated bad debt loss:

Dalance needed in the allowance account ,/+"=9 @rDalance currently in the account........ 1+9 9- Hr4djustment needed+ i.e.+ increase...... ,9+>"9 @r

e. /

)tatement o* earnin+s:


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69/97

Qerating e*enses:Dad debt e*ense................................................. ,9+>"9

)tatement o* nancial position:@urrent assets:

rade receivables.................................................. ,38+9--ess: 4llowance or doubtul accounts................ (/+"=9 )

@arrying value...................................................... ,39+""9


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70/97

A(7&.

e. 1

Oct. 8 4llowance or doubtul accounts (P4 M4)..... 1+9--

rade receivables (E4) ............................... 1+9--5rite o$ o uncollectible accounts.

Nov. 9 @ash (M4) .......................................................... =+39-

Sales discounts (MPE) W,=+9-- * "2X........ 19-

rade receivables (4)............................... =+9--

@ollected romGachine* within the discounteriod.

Nov. 1 @ash (M4) .......................................................... /+---

Sales returns and allowances (MPE) ......... 1+---

rade receivables (4)............................... 9+---

4llen %nc. returned two moulds and aid theamount due.

Hec."-

rade receivables (M4) ...................................... 9--


E4).....................................

Documents

AFM 101 Chapter 7 Solutions Manual