### Finance And Accounts Case Study Term Paper

Length: 5 pages Sources: 1 Subject: Economics Type: Term Paper Paper: #74930406 Related Topics: Conformity, Finance, Finance Economics, Economics And Finance
##### Excerpt from Term Paper :

¶ … Aging Method:

Determine Rogal's bad debt expense for 2004.

Age (Days)

Amount

% Estimated Uncollectible

Total

Assume that on January 1, 2005, \$10,000 of specific receivables are identified as uncollectible and are written off. Does this write-off affect 2005's income before taxes?

The write-off does not affect the income before taxes of the year 2005. This is because the uncollectible amount is removed from the accounts receivable account of Rogal. This write-off to bad account has an impact on the accounts only on the statement of financial position by debiting the doubtful accounts and crediting the accounts receivable. The loss or the expense is not reported or relayed on the income statement since the bad debt write-off takes into account under the changing entries for calculated bad debts expense (Tracy, 2006).

Assume that on January 1, 2005, \$10,000 of specific receivables are identified as uncollectible and are written off, and that no collections on accounts or sales on account were made on that day. Compute the balance of net accounts receivable on January 1, 2005 (after the write-off) and compare it to the balance of net accounts receivable as of December 31, 2004 (immediately before the write-off)

The balance of net accounts receivable as of 31 December 2004

384, 000 -- 13,760 = 370,240

The balance of net accounts receivable on 1 January 2005

370, 240 -- 10,000 = 360,240

b. Suppose that instead of aging, Rogal uses the percent-of-sales method to estimate bad debt expense. Suppose Rogal estimates that one-half of one percent of credit sales are uncollectible. Determine the December 31, 2004 balance in the allowance for doubtful accounts account

0.01 / 2 x 384,000 = 1,920

c. Briefly explain why accountant don't just wait until specific accounts become uncollectible before recognizing any bad debt expense

The accountants don't just wait until specific accounts become uncollectible before recognizing any bad debt expense because when sales are made, the revenue is recognized immediately. This aspect is considered for the accounting books to reflect a true view for the decision makers to undertake a rational assessment of the financial health and future opportunities (Tracy, 2006).

Problem 9-4 (p 192)

a. Compute the value of the ending inventory at December 31, 2003, under FIFO, LIFO, and average cost flow assumptions. LTM uses the periodic method of inventory valuation.

Units Available for Sale = 44,000

Units Sold = 41,000

Units in Ending Inventory = 3,000

Cost of Goods Sold

Units

Unit Cost

Total

Sales from 1 Jan Inventory

5,000

30

150,000

Sales from 6 Feb Purchases

20,000

34

680,000

Sales from 18 Jul Purchases

17,000

36

612,000

Sales from 20 Oct Purchases

2,000

38

76,000

44,000

1,518,000

FIFO

Ending Inventory

Units

Unit Cost

Total

Inventory from 20 Oct Purchases

3,000

38

114,000

LIFO

Ending Inventory

Units

Unit Cost

Total

Inventory from 20 Oct Purchases

3,000

30

9,000

Average Cost

Ending Inventory

Units

Unit Cost

Total

Inventory from 20 Oct Purchases

3,000

60

180,000

b. Compute the gross profit generated during 2003 using FIFO and LIFO

i. FIFO

Sales Revenue

Units

Unit Cost

Total

Sales from 1 Jan Inventory

5,000

30

150,000

Sales from 6 Feb Purchases

20,000

34

680,000

Sales from 18 Jul Purchases

16,000

36

576,000

1,406,000

Cost of Goods Sold

Units

Unit Cost

Total

Sales from 1 Jan Inventory

5,000

30

150,000

Sales from 6 Feb Purchases

20,000

34

680,000

Sales from 18 Jul Purchases

17,000

36

612,000

Sales from 20 Oct Purchases

2,000

38

76,000

1,518,000

Ending Inventory

3,000

38

114,000

1,404,000

Gross Profit

2,000

ii. LIFO

Sales Revenue

Units

Unit Cost

Total

Sales from 1 Jan Inventory

5,000

30

150,000

Sales from 6 Feb Purchases

20,000

34

680,000

Sales from 18 Jul Purchases

16,000

36

576,000

1,406,000

Cost of Goods Sold

Units

Unit Cost

Total

Sales from 1 Jan Inventory

5,000

30

150,000

Sales from 6 Feb Purchases

20,000

34

680,000

Sales from 18 Jul Purchases

17,000

36

612,000

Sales from 20 Oct Purchases

2,000

38

76,000

1,518,000

Ending Inventory

...

Compute the gross profit percentage generated during 2003 using FIFO and LIFO

i. FIFO

2,000 / 1,406,000 x 100 = 0.14%

ii. LIFO

-22,000 / 1,406,000 x 100 = -1.56%

d. Name a practical reason for LTM to use FIFO

The main reason why LTM should employ FIFO is because the company will not have to deal with inventory that is deemed outdated that cannot be sold anymore. This is because the method ensures that the oldest inventory items are used or retailed before they become obsolete.

e. Name a practical reason for LTM to use LIFO

The reason why LTM should use LIFO is that it brings about less taxable income and therefore less income tax payments for the company. This implies that in the long run or when the costs increase significantly, the lower income tax payments will be substantial

f. If LTM were considering a switch from FIFO to LIFO, it would have to be concerned with the LIFO conformity rule. Explain.

Switching from FIFO to LIFO would have to be concerned with the LIFO conformity rule. That is so, because once the method is employed in calculating the tax return of the company, then no other method can be used to value the inventory in order to calculate income, profit or loss of the company in the same year which is given to the shareholders or owners and creditors of the company.

g. Assume LTM uses LIFO and the same number of units were sold. Would the company benefit from purchasing 1,000 units at a cost of \$40 each on December 31, 2003? Explain

Sales Revenue

Units

Unit Cost

Total

Sales from 1 Jan Inventory

5,000

30

150,000

Sales from 6 Feb Purchases

20,000

34

680,000

Sales from 18 Jul Purchases

16,000

36

576,000

1,406,000

Cost of Goods Sold

Units

Unit Cost

Total

Sales from 1 Jan Inventory

5,000

30

150,000

Sales from 6 Feb Purchases

20,000

34

680,000

Sales from 18 Jul Purchases

17,000

36

612,000

Sales from 20 Oct Purchases

2,000

38

76,000

1,518,000

Ending Inventory

3,000

40

120,000

Purchases

1,000

40

40,000

1,388,000

Gross Profit

-32,000

The company would definitely benefit because the ending inventory would be valued at a higher price of \$40 and not \$38 as before

h. Would your answer to part (g) be the same if LTM used FIFO? Explain

Sales Revenue

Units

Unit Cost

Total

Sales from 1 Jan Inventory

5,000

30

150,000

Sales from 6 Feb Purchases

20,000

34

680,000

Sales from 18 Jul Purchases

16,000

36

576,000

1,406,000

Cost of Goods Sold

Units

Unit Cost

Total

Sales from 1 Jan Inventory

5,000

30

150,000

Sales from 6 Feb Purchases

20,000

34

680,000

Sales from 18 Jul Purchases

17,000

36

612,000

Sales from 31 Dec Purchase

1,000

40

40,000

Sales from 20 Oct Purchases

2,000

38

76,000

1,558,000

Ending Inventory

3,000

38

114,000

1,404,000

Gross Profit

-38,000

The company would not really benefit as the ending inventory would still be valued at \$38

i. If LTM decides to switch from average cost to FIFO, assuming the cost behavior patterns in evidence during the year, would its income be higher or lower than if it had stayed with average cost? Explain

The company's income would be much higher if it had stayed with the average cost. This is because the average cost is \$60, which is a much higher amount when compared to the other prices used in FIFO

j. Assume LTM was required to make a lower of cost or market adjustment of \$4,000 to its year-end inventory. Prepare journal entries showing two alternative approaches for this write-down

i. FIFO

Dr: Uncollectible Account 4,000 x 38 =152,000

Cr: Inventory 152,000

ii. LIFO

Dr: Uncollectible Account 2,000 x 30 = 60,000

2,000 x 34 = 68,000

Cr: Inventory 128,000

k. Would the entries made in part (j) result in any differences in LTM's income statement for 2003? Explain

The write-off does not affect the income before taxes of the year 2003. This is because the uncollectible amount is removed from the accounts receivable account of the company. This write-off to bad account has an impact only on the accounts of the statement of financial position by debiting the doubtful accounts and crediting the accounts receivable.

l. If the inventory written down in part (j) increased in value \$6,000 in 2004, what should LTM do under generally accepted accounting principles? Explain

The company in accordance with the generally accepted accounting principles should report such information as it has an impact on the accounts receivable account. These aspects are taken into consideration for the accounting books to reflect a true view for the decision makers to undertake a rational assessment of the financial health and future opportunities (Tracy, 2006).

Problem 10-2 (p 227)

a. Determine the amount that Norris would have been willing to pay for the security on January 1, 2003.

500,000 = 104%

100/104 x 500,000 = \$480,769

b. Assume that interest rates remain…

###### Sources Used in Documents:

References

Tracy, J.A. (2006). Accounting Workbook For Dummies. Hoboken: Wiley Publishing, Inc.

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