Question

8. Using the allowance method, is bad debt expense recognized in (a) the period in which sales related to the
uncollectible amounts were made or (b) the period in which the seller learns that the customer is unable to pay?
9. Does a decrease in the receivables turnover ratio generally indicate faster or slower collection of receivables? Explain.
10. Contrast the effects of weighted average versus FIFO on reported assets, specifically on earnings before income
taxes, when (a) prices are rising and (b) prices are falling.
11. Contrast the effects of weighted average versus FIFO on cash outflow and inflow.
12. Briefly explain the application of the LC&NRV concept to the ending inventory and its effect on the statement of
earnings and statement of financial position when the net realizable value of inventory is lower than cost.
13. Define goodwill. When is it appropriate to record goodwill as an intangible asset?

Answer 1

8.

Using the allowance method, bad debt expense is recognized in (a) the period in which sales related to the uncollectible amounts are made because the allowance method follows the Matching principle of accounting. The recognition of uncollectible accounts is made based on estimates following the two basic approaches.

These approaches are:

• Balance sheet approach
• Income statement approach

9.

Increase in the receivable turnover ratio indicates a faster collection of receivables because a higher receivable turnover ratio indicates that the company has high-quality customers that pay off their debts quickly.

10.

Under the FIFO method, when the price rises, the EBIT increases and with the fall in the prices, EBIT decreases.

Under the weighted average method, With the increase in prices the earnings before income tax are inflated and with the fall in the prices, the earnings before income tax will reduce.

11.

Under the FIFO method, the cash inflows are higher as compared to other methods.

12.

The application of LC&NRV concept is done on three bases:

• Individual basis
• Group basis
• Overall basis

The concept of lower of cost or net realizable value is applied when a company has a holding inventory that may have an uncertain future. If the inventory is are recorded at greater than its net realizable value, it would be necessary to write down the recorded cost to the lower NRV. This would result in a reduction in the Income statement

If the net realizable value is lower than the cost then the Raw material will be recorded at cost.

13.

Goodwill is an intangible asset. It is the excess of the purchase price which a company pays to another company for purchasing it. It is paid in addition to the net fair value of a company.

It is appropriate to record goodwill as an intangible asset when the purchase price is more than the difference between the fair value of the tangible and intangible assets and the liabilities