Question

• Discussion Question 1: As a manager or owner, what insight can accounting information about accounts receivable and bad debts provide you to help make business decisions?
• Discussion Question 2: Which depreciation method would choose if you acquired new machinery with a 10-year life in which expect to use it more in the earlier years of its useful life? Why?

Answer 1

1. It is obvious that no large companies are able to recover all its receivables outstanding. There may be some defaulting due to one or several reasons. As a manager or user of financial statement one can look into the information pertaining to sales and it's relation to accounts receivable and analyse how efficient is the organisation efficient in turning over the receivables into liquid cash. Relation of bad debts with the accounts receivables gives insights to what percentage of receivables are likely to be defaulted viz what's the increase in this from past to the present accounting period.

2. Since the usage is higher in the earlier years of its useful life, the owner can make choices between two viz, DOUBLE DECLINING METHOD or SUM OF YEARS DIGIT METHOD. Both these methods charge a hefty sum of depreciation at the earlier years of the useful life of the asset gradually dropping it at the end of the life to its salvage value if any. Amongst the two methods, DOUBLE DECLINING METHOD charges a higher rate as a the rate of depreication is fixed for entire life. Whereas the deprecation rate under SUM OF YEARS falls as a useful life increases, thus resulting in falling deprecation. Hence, using DOUBLE DECLINING METHOD is recommended.