ch05ifasol.docx
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CHAPTER5
5-1Ifeventualpaymentonthecontractisreasonablycertain,$10millionshouldberecognizedasrevenueeachyear.Foragovernmentcontract,thisisgenerallythepreferredmethod.Incontrast,ifthereisconcernaboutrealizationofthepayment,all$50millionmightbedeferredandnotrecognizeduntilthetimeofcompletionofthecontractwhenreceiptofpaymentoccurs.
5-2Someaccountswillneverbecollected.Therefore,theaverageamountcollectedoncreditsalesislessthanthetotalamountofthesales.Forcashsales,thetotalamountofthesaleiscollected.
5-3Thesellerofanitemrecognizesasalesreturn(allowance),whichisdeductedfromsalesrevenue.Thebuyerofanitemreceivesapurchasereturn(allowance),whichisdeductedfromtheamountspentforanitem.
5-4Tradediscountsaretraditionalwaysofdeterminingnetsalesprices.Themethodbeginswithagross,orlist,priceandappliesspecifiedreductionsthereto.Tradediscountsoftenrewardhighvolumecustomers.Cashdiscountsarerelativelysmallreductionsofsellingpricesthatareintendedtospurpromptpayment.
5-5Tradediscountsareusedtoarriveatinvoiceprices,whicharethenroutinelyrecordedaspurchasesandsalesoccur.Reportstoshareholdersdonotordinarilyshowtradediscounts,butreportstomanagersoftendoiftheinformationisdeemedhelpful.
5-6Retailersdopaytheirbanksasmallpercentageofrevenuewhenacreditcardisused.However,offeringsuchacreditservicecanincreasesales.Ifretailersoffertheirowncredittheybearthecostofrunningacreditdepartmentandalsoforfeitsomerevenuethroughbaddebts.ThefeespaidtoVisaorMasterCardbyamerchantmaybemuchlessthanthecostsofrunninga“store”card.
5-7Cashequivalentsarehighlyliquidshort-terminvestmentsthatcanbeconvertedeasilyintocashwithlittledelay.Moneymarketfundsandtreasurybillsareexamples.
5-8Ifacompensatingbalanceisrequired,aborrowerdoesnothaveuseoftheentireamountborrowed.Forexample,borrowing$1,000at12%interestwitharequired10%compensatingbalancemeansthatonly$900canbewithdrawnforuse.Interestof$120ispaidfor$900ofusablefunds,aneffectiverateof120÷900=13.3%.
5-9Althoughthecashbalancemaybesmall,thecashflowformostcompaniesislarge.Goodcashmanagementmayindeedbeveryimportanttothegenerationofprofits.Inaddition,cashisespeciallyattractivetothievesandembezzlers.Safeguardsaregenerallyworthmorethancompaniesspendtodevelopandimplementthem.
5-10Goodinternalcontrolrequiresthattransactionsberungintotheregistersothatregistertotalscanbecomparedtocashlevels.Thesepracticesengagethecustomersas"auditors"toassurethetransactionisrecorded.
5-11Oftenbookandbankbalancesdisagree,generallyduetodifferencesintiming.Forexample,depositsmayhavebeenrecordedinthebooksbutstillbeintransittothebank.Orchecksmayhavebeenwrittenanddeductedonthebooksbutnotyetreceivedandpaidbythebank.Orthebankmayhavechargedaservicechargethatisnotyetrecordedonthebooks.
5-12Internalcontrolproceduresusedtosafeguardcashinclude:
∙Reconcilebankstatementsregularlyonatimelybasis.
∙Differentindividualsshouldreceiveanddisbursecash.
∙Individualshandlingcashshouldnothaveaccesstoaccountingrecords.
∙Cashreceiptsshouldbeimmediatelyrecordedanddeposited.
∙Disbursementsshouldbeonseriallynumberedchecks.
∙Disbursementsshouldbeauthorizedbysomeoneotherthanthecheckwriter.
5-13No.Althoughinternalcontrolsdoguardagainstdishonestactions,theyalsohelpensureaccurateaccountingrecords.Goodcontrolscanhelpuncoverhonestaccountingerrorsaswellasdishonestactions.
5-14Ifthegrossmarginincreaseresultingfromadditionalsalesexceedsthecostsofofferingcredit,thecompanyiswelladvisedtooffercredit.Foracompanytomanagecreditinternally,costsincludethecostofcreatingandoperatingacreditdepartment,trainingsalesstafftoselloncredit,andlossesduetonon-payment.Foracompanytoacceptbankcreditcards,costsincludetraining,plusafeepaidpertransaction,occasionallossesduetoclericalerror,andpossiblysomespecialequipment.
5-15Oftenthefeechargedbycreditcardcompaniesdropsasvolumeincreases,sodealingwithonecardonhighervolumeislessexpensive.Also,somecardschargehigherfeestostoresthanothers.AmericanExpressisanexpensivecard.ButAmericanExpressalsohasahigherincomelevelcardholdingpopulationandmorecorporateaccounts.HigherpricedestablishmentsorrestaurantscateringtobusinesspatronsaremorelikelytoacceptAmericanExpress.Finally,coverageandacceptancevaryfromnationtonation.
5-16Theallowancemethodusesestimatesofbaddebtexpensesduringtheperiodofsale.Incontrast,thespecificwrite-offmethoddoesnotrecognizebaddebtexpenseuntilactualwrite-offsoccur.
5-17Correctentry:
Allowanceforuncollectibleaccounts14,321
Accountsreceivable14,321
Correctingentry:
Allowanceforuncollectibleaccounts14,321
Baddebtsexpense14,321
5-18TheAllowanceforUncollectibleAccountshasnosubsidiaryledgerbecausetheindividualuncollectibleaccountsareunknown.Itisareductionofthetotalamountreceivable.
5-19Threepopularwaystoestimatebaddebtexpenseare(a)percentageofsales,(b)percentageofendingaccountsreceivable,and(c)agingofaccounts.
5-20Agingisananalysisoftheelementsofindividualaccountsreceivableaccordingtothetimeelapsedafterthedatesofbilling.
5-21Awrite-offshouldbereversedsothatthecustomercanmorelikelyrestorehisotherwisepoorcreditratingwiththecompany.Withoutareversalofthewrite-off,thecustomer'sindividualsubsidiaryaccountreceivablewillnotshowtheultimatepayment.
5-22Theaveragecollectionperiodiscalculatedbydividing365bytheaccountsreceivableturnover.
5-23Thepercentageofsalesapproachfocusesonhistoricalexperiencetoestimatebaddebtexpense;thebalanceintheallowanceaccountisabyproduct.Theagingofaccountsreceivableapproachuseshistoricalexperiencetoestimatetheproperbalanceintheallowanceaccountandbaddebtexpenseisabyproduct.
5-24Administrativecontrolemphasizesmanagementplanningandevaluation.Accountingcontrolcomprisesthemethodsandproceduresthatarelargelyconcernedwiththeauthorizationoftransactions,thesafeguardingofassets,andtheaccuracyofthefinancialrecords.
5-25Outsideauditorsmayadviseandcheck,butmanagementhasprimaryresponsibilityforthedesignandoperationofanorganization'sinternalcontrolsystem.
5-26Theprimaryresponsibilityoftheauditcommitteeisfiscalvigilance,includingtheoverseeingofaccountingcontrolsandpolicies.
5-27Checklistforjudgingtheeffectivenessofinternalcontrol:
1.
2.
Reliablepersonnelwithclearresponsibilities.
Separationofduties.
6
7.
Physicalsafeguards.
Bonding,vacations,androtationofduties.
3.
Properauthorization.
8.
Independentcheck.
4.
Adequatedocuments.
9.
Cost-benefitanalysis.
5.
Properprocedures.
5-28Incompetentordishonestindividualscanundermineasystem,nomatterhowstrongitsothercharacteristics.
5-29Nooneshouldhavecompletecontrolofboththephysicalandrecordkeepingaspectsofatransaction.
5-30Costofgoodsavailableforsaleincludesbeginninginventorypluspurchases.Atyear-endthesecostsmusteitherbeininventoryorincludedincostofgoodssold.Thelargertheendinginventoryis,thesmallercostofgoodssoldwillbe.WhenPharMorexecutivesoverstateendinginventory,theyunderstatecostofgoodssoldandtherebyoverstateearnings.
5-31Theperpetualinventorysystemismorecostlytomaintain,butprovidesaddedinformationoninventorylevelsthatcanaidmanagersininventorymanagement.Inthisinstance,thebenefitsofperpetualinventoryareminimizedbecausetheoperatingcycleissequential.First,everythingismanufactured,andthenitissold.Theperiodicinventorysystemispreferredinthisinstance.
5-32
Whenevertheinventoryisoverstated,costofgoodssoldwillbeunderstated.Inthiscase,theeventoccurredovermultipleyearsandineachofthoseyearsthecostofgoodssoldwouldbetoolowbytheamountofthatyear’sincreaseintheoverstatement.Whencostofgoodssoldistoolow,grossmarginandoperatingearningsaretoohigh.Thecumulativeeffectwillbesplitonthebalancesheetwithpartreflectedinexcesstaxesandpartinretainedearnings.
5-33Theperpetualsystemispreferredforlowvolume,highvalueitems.Itprovidesusefulplanninginformation.TheZenBootistsellslowervalueitemswithhighvolumesduringasingleseason.Thecostsofimplementingaperpetualsystemarelikelytooutweighthebenefits.Usetheperiodicsystem.
5-34(15-20min.)
1.(a)TherewouldbenoentryonJuly17.Thecriteriaforrevenuerecognitionwerenotyetmet.
(b)8/12–Delivery
Accountsreceivable20,000
Salesrevenue20,000
Torecordsalesof5,000
books@$40each
5-34(continued)
(c)9/10–Payment
Thecashdiscountwas
2%x$20,000=$400.
Cash19,600
Cashdiscountonsales400
Accountsreceivable20,000
Torecordcashpaymentsreceived
(d)12/18–Returns
Thisentrydiffersslightlyfromtheoneinthetextbecausepaymenthasalreadybeenmade.Insteadofdecreasingaccountsreceivableforthemerchandisereturned,acashrefundequaltotheamountactuallypaidforthebooks,$2,400–(2%x$2,400)=$2,352,ismade.
Salesreturnsandallowances2,352
Cash2,352
Torecordthecashrefu
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