Question

CA4-5

identifiy the weaknesses and describe why it is a weakness and what should be done to correct the issue: On a income satement

Sales Taxes

Purchase Discounts

Recoveries of accounts written off in prior years

Delivery Expense

Loss on discontinued styles

Loss on sale of marketable securities

Loss on sale of warehouse

Federal Income Taxes

Answer 1

Identification of Weaknesses

Particulars	Explanation
Sales Tax	Sales tax should be treated in accordance with accounting principles. Sales tax should not be included in sales account or cost of goods sold. Sales tax is a liability to pay to government and hence inclusion of it in sales will inflate the sales.
Purchase Discounts	Purchase discounts can be wrongly included in other revenues like dividend income ot Interest Income. Purchase discounts should be reduced from cost of purchases always.
Recoveries of accounts written off in prior years	Recovries from accounts reveivable written off in previous years is iteself a weakness in Accounting. Such amount is always credited to allowance for doubtful accounts under allowance method of accounting
Delivery Expense	Delivery expenses should be expenses as selling expenses and should not be included in cost of goods sold. Such expenses are operating selling expenses and are related to selling overhead cost.
Loss on discontinued styles	Such losses is part of business activity and should be costs of business and hence should not be classifies as extraordinary loss.
Loss on sale of marketable securities	Such loss is also part of cost of business and should not be classifies as extraordinary loss. Marketable securities are short term securities and held for the purpose of resale only.
Loss on sale of warehouse	Such loss should not be classified as extraordinary loss. Such loss is exceptional nature of loss and is not extraordinary. It is exceptional since it is non repetitive in nature
Federal Income Taxes	Federal Income Tax is always not presented in income statement and is typical distribution of net income.