Manufactured Homes: Accounting Policies, Evaluation and Current and Future Financial Position

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Accounting Policies Manufactured Homes (MH) uses the installment sales method for recognizing revenue. Using this installment sales method assumes that the customer probably will not default and there is little risk for the company. As cash is supposed to come in, revenues are matched with expenses. However, if the customer defaults, then there are many future expenses that cannot be matched with corresponding revenue. The company usually sold its installment contracts to unrelated financial institutions and was responsible for payments to the financial institution if the customer defaulted. Thus, MH bore risk for the houses it sold. MH charged its customers a portion above the market rate, and the financial institution paid MH a portion…show more content…
Although this profitability ratio was an improvement, it seems as though MH was in danger of repeating losses as produced in the fourth quarter of 1986. The industry that MH was part of was experiencing negative pricing pressures and higher rates of payment defaults. With this in mind, revenues should have been decreasing, as opposed to the increases that it experienced. This demonstrates that MH might be using aggressive accounting tactics in order to increase revenues. These tactics focus on the fact that MH's core business is failing while they are able to generate revenue and profit from the financed participation income portion of their business. In the first nine months of 1987 MH's finance subsidiary sold, with recourse, a portfolio of retail installment sales contracts with a principle balance of approximately $8.3 million to another financial institution. As a result the company recognized finance participation income of $1.7 million in the third quarter of 1987 instead of being forced to recognize it over the entire course of the mortgages. Additionally, the increase seen throughout 1986 as well as during the first nine months of 1987 stemmed from an increase in debt from their balance sheet. This increase in debt substantially increased MH's debt-to-equity ratio from 3.6 in 1985 to 4.7 in 1986. Although it dropped to 4.5 in the first nine months of 1987, the fourth

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