Horngrenfinancial accounting9esolutions6.docx

Horngrenfinancial accounting9esolutions6.docx

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Horngrenfinancialaccounting9esolutions6

CHAPTER6

6-1Ifeventualpaymentonthecontractisreasonablycertain,$10millionshouldberecognizedasrevenueeachyear.Foragovernmentcontract,thisisgenerallythepreferredmethod.Incontrast,ifthereisconcernaboutrealizationofthepaymentfromanon-governmentalcustomer,all$50millionmightbedeferredandnotrecognizeduntilthetimeofreceiptofpaymentsasthecontractiscompleted.

6-2Someaccountswillneverbecollected.Therefore,theaverageamountcollectedoncreditsalesislessthanthetotalamountofthesales.Forcashsales,thetotalamountofthesaleiscollected.

6-3Thesellerofanitemrecognizesasalesreturn（allowance）,whichisdeductedfromsalesrevenue.Thebuyerofanitemreceivesapurchasereturn（allowance）,whichisdeductedfromtheamountspentforanitem.

6-4Tradediscountsaretraditionalwaysofdeterminingnetsalesprices.Themethodbeginswithagross,orlist,priceandappliesspecifiedreductionsthereto.Tradediscountsoftenrewardhighvolumecustomersbygivingthemlowerunitcosts.Cashdiscountsarerelativelysmallreductionsofsellingpricesthatareintendedtospurpromptpayment.

6-5Tradediscountsareusedtoarriveatinvoiceprices,whicharethenroutinelyrecordedaspurchasesandsalesoccur.Reportstoshareholdersdonotordinarilyshowtradediscounts,butreportstomanagersoftendoiftheinformationisdeemedhelpful.

6-6Retailersdopaytheirbanksasmallpercentageofrevenuewhenacreditcardisused.However,offeringsuchacreditservicecanincreasesales.Ifretailersoffertheirowncredittheybearthecostofrunningacreditdepartmentandalsoforfeitsomerevenuethroughbaddebts.ThefeespaidtoVisaorMasterCardbyamerchantmaybemuchlessthanthecostsofrunningadedicated“store”creditcard.

6-7Cashequivalentsarehighlyliquidshort-terminvestmentsthatcanbeconvertedeasilyintocashwithlittledelay.Moneymarketfundsandtreasurybillsareexamples.

6-8True.Ifacompensatingbalanceisrequired,aborrowerdoesnothaveuseoftheentireamountborrowed.Forexample,borrowing$1,000at12%interestwitharequired10%compensatingbalancemeansthatonly$900canbewithdrawnforuse.Interestof$120ispaidfor$900ofusablefunds,aneffectiverateof120÷900=13.3%.

6-9Althoughthecashbalancemaybesmall,thecashflowformostcompaniesislarge.Goodcashmanagementmayindeedbeveryimportanttothegenerationofprofits.Inaddition,cashisespeciallyattractivetothievesandembezzlers.Safeguardsaregenerallyworthmorethancompaniesspendtodevelopandimplementthem.

6-10Goodinternalcontrolrequiresthattransactionsberungintotheregistersothatregistertotalscanbecomparedtocashlevels.Thesepracticesengagethecustomersas"auditors"toassurethetransactionisrecorded.

6-11Oftenbookandbankbalancesdisagree,generallyduetodifferencesintiming.Forexample,depositsmayhavebeenrecordedinthebooksbutstillbeintransittothebank.Orchecksmayhavebeenwrittenanddeductedonthebooksbutnotyetreceivedandpaidbythebank.Orthebankmayhavechargedaservicechargethatisnotyetrecordedonthebooks.

6-12Internalcontrolproceduresusedtosafeguardcashinclude:

∙Reconcilebankstatementsregularlyonatimelybasis.

∙Differentindividualsshouldreceiveanddisbursecash.

∙Individualshandlingcashshouldnothaveaccesstoaccountingrecords.

∙Cashreceiptsshouldbeimmediatelyrecordedanddeposited.

∙Disbursementsshouldbeonseriallynumberedchecks.

∙Disbursementsshouldbeauthorizedbysomeoneotherthanthecheckwriter.

6-13No.Althoughinternalcontrolsdoguardagainstdishonestactions,theyalsohelpensureaccurateaccountingrecords.Goodcontrolscanhelpuncoverhonestaccountingerrorsaswellasdishonestactions.

6-14Ifthegrossmarginincreaseresultingfromadditionalsalesexceedsthecostsofofferingcredit,thecompanyiswelladvisedtooffercredit.Foracompanytomanagecreditinternally,costsincludethecostofcreatingandoperatingacreditdepartment,trainingsalesstafftoselloncredit,andlossesduetonon-payment.Foracompanytoacceptbankcreditcards,costsincludetraining,plusafeepaidpertransaction,occasionallossesduetoclericalerror,andpossiblysomespecialequipment.

6-15Oftenthefeechargedbycreditcardcompaniesdropsasvolumeincreases,sodealingwithonecardonhighervolumeislessexpensive.Also,somecardschargehigherfeestostoresthanothers.AmericanExpressisanexpensivecard.ButAmericanExpressalsohasahigherincomelevelcardholdingpopulationandmorecorporateaccounts.HigherpricedestablishmentsorrestaurantscateringtobusinesspatronsaremorelikelytoacceptAmericanExpress.Finally,coverageandacceptancevaryfromnationtonation.

6-16Theallowancemethodusesestimatesofbaddebtexpensesduringtheperiodofsale.Incontrast,thespecificwrite-offmethoddoesnotrecognizebaddebtexpenseuntilactualwrite-offsoccur.

6-17Correctentry:

Allowanceforuncollectibleaccounts14,321

Accountsreceivable14,321

Correctingentry:

Allowanceforuncollectibleaccounts14,321

Baddebtsexpense14,321

6-18TheAllowanceforUncollectibleAccountshasnosubsidiaryledgerbecausetheindividualuncollectibleaccountsareunknown.Itisareductionofthetotalamountreceivable.

6-19Threepopularwaystoestimatebaddebtexpenseare（a）percentageofsales,（b）percentageofendingaccountsreceivable,and（c）agingofaccounts.

6-20Agingisananalysisoftheelementsofindividualaccountsreceivableaccordingtothetimeelapsedafterthedatesofbilling.

6-21Awrite-offshouldbereversedsothatthecustomercanmorelikelyrestorehisotherwisepoorcreditratingwiththecompany.Withoutareversalofthewrite-off,thecustomer'sindividualsubsidiaryaccountreceivablewillnotshowtheultimatepayment.

6-22Theaveragecollectionperiodiscalculatedbydividing365bytheaccountsreceivableturnover.

6-23Thepercentageofsalesapproachfocusesonhistoricalexperiencetoestimatebaddebtexpense;thebalanceintheallowanceaccountisabyproduct.Theagingofaccountsreceivableapproachuseshistoricalexperiencetoestimatetheproperbalanceintheallowanceaccountandbaddebtexpenseisabyproduct.

6-24Administrativecontrolsemphasizemanagementplanningandevaluation.Accountingcontrolscomprisethemethodsandproceduresthatarelargelyconcernedwiththeauthorizationoftransactions,thesafeguardingofassets,andtheaccuracyofthefinancialrecords.

6-25Outsideauditorsmayadviseandcheck,butmanagementhasprimaryresponsibilityforthedesignandoperationofanorganization'sinternalcontrolsystem.

6-26Theprimaryresponsibilityoftheauditcommitteeisfiscalvigilance,includingtheoverseeingofaccountingcontrolsandpolicies.

6-27Checklistforjudgingtheeffectivenessofinternalcontrol:

1.

Reliablepersonnelwithclearresponsibilities.

6

Physicalsafeguards.

2.

Separationofduties.

7.

Bonding,vacations,androtationofduties.

3.

Properauthorization.

8.

Independentcheck.

4.

Adequatedocuments.

9.

Cost-benefitanalysis.

5.

Properprocedures.

6-28Incompetentordishonestindividualscanundermineasystem,nomatterhowstrongitsothercharacteristics.

6-29Nooneshouldhavecompletecontrolofboththephysicalandrecordkeepingaspectsofatransaction.

5-29

5-30

5-31

6-30Therevenueforthespecialpromotionshouldhavebeenspreadoverfourmonths,nottwo.Thiscallstheprofitcalculationintoquestion.Whiletheremaybecollectionconcernsforafreenewspaper,the$70,000ofA/Rdoesnotseemexcessiveifmeasuredattheendofthesecondmonthofbusiness.Itisquitereasonablefortheretobesomethinglikeamonthofrevenueinreceivables,dependingonstandardpaymentterms.

6-31Aclassifiedincomestatementcanprovideameasureofgrossprofitandcouldbeconstructedtogiveresultsseparatelyforvariousproductlines.Ingeneral,ifwedropprices,saleswillincreaseandthegrossprofitpercentagewillfall.Totalprofitsmayriseorfalldependingontherelationshipbetweentheincreaseinsalesandthedecreaseinthegrossmarginpercentage.Preparingaclassifiedincomestatementwithseparaterevenueandgrossprofitfordifferentproductlineshelpsuslearnwhetherindividualmanagersaremakinggooddecisions.

6-32Deliverytothecustomermeansthesellingcompanyhascompleteditsresponsibility,butthecustomermuststillpay.Foraccountingpurposes,werecognizerevenueifultimatepaymentislikely,andweusetheallowanceaccounttoreduceaccountsreceivableforourexpectationsaboutthedollaramountsthatwillultimatelyprovetobeuncollectiblebaddebts.

6-33Bothcash-collectionandaccrual-basissaleslevelsarerelevantinevaluatingoursalesstaff.Wedonotwanthighersalesunlesstheycanbecollected.Wegenerallyintegratetheconceptsbyfocusingongrowthinaccrual-basissaleswhileassuringthataccountsreceivablebalancesgrowonlyproportionally（notfaster）.Thisisequivalenttosayingthatthefrequencyofbaddebtexpenseoruncollectiblesperdollarofsalesremainsconstant.

6-34（16-20min.）

1.（a）TherewouldbenoentryonJuly17.Thecriteriaforrevenuerecognitionwerenotyetmet.

（b）8/12–Delivery

Accountsreceivable40,000

Salesrevenue40,000

Torecordsalesof1,000

books@$40each

6-34（continued）

（c）9/10–Payment

Thecashdiscountwas

2%x$40,000=$800.

Cash39,200

Cashdiscountonsales800

Accountsrece