Question

These only need to be short essay answers, I have answered a few already. This is due oct. 31st at 11:59 pm ESSAY: RECEIVABLES:

Define Accounts Receivable.

Accounts Receivable is an account where businesses can keep track of services they have pervaded without the payment from a client. For example, hospitals would use this when journaling the action when a patient is treated without payment. Account Receivables are journaled as increasing with a debit.

All of #2 essay questions follow the Perpetual Net Sales Method:

2. Explain the reason for using the perpetual net sales method of recording sales versus the gross sales   

     method.

     Explain how a sale would be recorded with a discount on the seller’s books (two journals). Give an

     example.

     Explain how a company records the payment of an invoice if the payment is received after the invoice   

     discount date has past. Give an example.

3. Explain why accounts receivable needs to be analyzed at year-end and adjusted for.

     Explain the allowance method for bad debt. Give an example.

     Explain why the write-off of a bad account does not change the book value of accounts receivables.

4. Explain how you would calculate and record an adjustment to a note receivable at year-end if it was  

     not paid off in the current year and the note matures in the following year. Give an example.

ESSAY: INVENTORY:

5. Explain the various categories of a multi-step income statement.

There are a few different categories of a multi-step income statement. These categories are Net Sales, Cost of goods sold, gross margin/ gross profit, operating expenses (selling expenses and administrative expenses), Income from operations, other revenues and expenses, and net income. A short explanation of each:

Net Sales: Revenues generated by products sold/ services performed

Cost of goods sold: Expenses companies have to pay in order to receive inventory to then sell.

Gross Margin/Gross profit: Can be referred to the “company’s markup”.

Operating expenses: These are expenses necessary to stay in business.

Income from operation: amount of income earned directly by the business’ operations

Other Revenues and expenses: These include revenues and expenses not related to the sale of a product or service provided.

Net income: Income earned after all revenues are added then subtracted by all expenses.

     Explain the financial statement effects and tax effects of each of the inventory cost flow assumptions.

ESSAY: CURRENT LIABILITIES:

6. Distinguish between current and long-term liabilities. Give an example.

     Explain what a deferred liability is. Give an example.

     Explain the difference between an employee payroll deduction and employer benefits. Give an

     example.

     Explain the rules regarding when and how a contingency is recorded. Give an example.

     Explain when product warranty is recorded and why it is recorded when it is. Give an example

Answer 1

Answer 2 :

A) A perpetual net sales method is a method in which the purchases are recorded directly in the inventory account instead of register of sales and purchases. When the goods asre sold, the cost goods sold are reduced from the inventory and entered in cost of good sold account. The profit can be calculated as Sales - Cost of goods sold. A gross sale method is the normal method in which the purchases as recorded as and when they are made. The go to the dedicated expense account in profit and loss account. If we look at it in a macrosopic view the perpetual sales method is much clear and gives more detailed information as compared to gross sale method.

B) A discount on sales is a reduction in the sales price that is offered by the seller to buyer under certain special offers or sales or if there is a shortage of cash on the buyer's side. The discounts are normally connected to the payment terms. For example if the sales term mention for payments as 1% 10/ net 30, it means a 1% discount is offered if you pay within 10 days of invoice date. Now suppose an item of $100 is sold and the payment is made on 5th day from the date of invoice, the sales entry would then be recorded as :

Cash A/c Dr. $ 99 .00

Discount A/c Dr. $ 1.00

To Cash sales A/c Cr. $ 100.00

C) As explained above the discount depends on the payment terms. For example, an item of $100 is sold and the payment terms in the invoice is mentioned as 2% 10/ net 30. Now, if the payment for the invoice is made within 10 days of the invoice you get a discount of 2% on the sale value and beyond that period of 10 days if you pay, you have to pay the full value. Suppose if the buyer pays on the 12th day of the invoice date that means he has missed the discount date of the invoice, so the entry would be :

Cash A/c Dr. $ 100.00

To Sundry Debtor A/c $ 100

3 A) Accounts receivable is basically a balance sheet item of the company on the assets side of the balannce sheet which shows the amounts that the company is legally authorised to receive such payment within or after the credit period allowed. Such amount is recorded against the credit sales made during the year. It happens that all the amount may not be collected during the year and it may also include balances from previous years that are still not collected and there are chances that it would be not be collected in the future as well. Therefore, to reach a particular figure for which the company can be sure to the nearest extent and not to overstate the accounts receivable figure it is better to review it at the year end and adjust it.

B) Under the allowance method of bad debts, a reasonable assumption out of accounts receivable regarding non collection of debts is made based on past performance and collection patterns. A reasonable proportion of outstanding collections is made and a corrsponding amount of allowance is set aside for the same. When the debts actually turn bad this allowance is used to write them off. This allowance for doubtful debts shall be disclosed on the balance sheet and since it is contra to account receivable it can be shown as an adjustment on the balance sheet.

C) The total account receivable account shall remain the same even after adjustment of the bad debt, we shall understand this with an example. Lets say the sales are for $ 1,000 so we have,

Account receivable A/c Dr. $ 1000

To Credit Sales A/c $ 1000

Now lets assume that as per past experience the bad debts are normally 10% of sales so the allowance entry shall be

Bad Debts A/c Dr. $ 100

To Allowance for bad debts $ 100

here the total account receivable balance would be $ 1000 - $ 100 = $ 900

Now, we get the information that $ 90 is reuiqred to be adjusted as bad debt so we have the entry as

Allowance for bad debt A/c Dr. $ 90

To Accounts Receivable A/c $ 90

Now the balances are Allowance for bad debt a/c - $ 10

Accoutnts receivable A/c $ 910

Net balance of Accounts receviable = $ 910 - $ 10 = $ 900

Hence the balance of accounts receivable would remain same.