Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281



Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem

Ryan Company has as a goal that its earnings per share should increase by at least 3% each year; this goal has been attained every year over the past decade. As a result, the market price per share of Ryan’s common stock also has increased each year. Last year (2018), Ryan’s earnings per share was $3. This year, however, is a different story. Because of decreasing sales, preliminary computations at the end of 2019 show that earnings per share will be only $2.99 per share.

You are the accountant for Ryan. Ryan’s controller, Jim Nastic, has come to you with some suggestions. He says, “I’ve noticed that the decrease in revenues has been primarily related to credit sales. Since we have fewer credit sales, I believe we are justified in reducing our bad debts expense from 4% to 2% of net sales. I also think that because of the decreased sales, we won’t use our factory equipment as much, so we can extend its estimated remaining life from 10 to 15 years for computing our straight-line depreciation expense. Based on my calculations, if we make these changes, Ryan’s 2019 earnings per share will be $3.06. This will sure make our shareholders happy, not to mention our CEO. You may even get a promotion. What do you think?”


From financial reporting and ethical perspectives, prepare a response to Jim regarding his suggestions.

To determine

Prepare a response for Person J from financial and ethical perspective regarding the suggestion provided by Person J.


Earnings per share (EPS):

The amount of net income available to each shareholder per common share outstanding is referred to as earnings per share (EPS).

As per financial perspective, in regard to the bad debts is determined using the net sales method is ascertained by multiplying the historical uncollectible percentage of net credit sales with net credit sales during the  year . The historical percentage acts  as a evidence for the occurrence of the historical uncollectible. The depreciation is determined using the straight line method to ascertain the expected benefits arrived from the asset during the constant period of its life. Activity method is used when the expected life of the asset is affected by the primarily by the amount of asset used. The expense allocation is said to be systematic and rational allocation when estimated service of the asset changes when new information arises justifies change in estimate.

The Company R change in the credit sales does not have an impact on the estimated uncollectible present and it decreases the amount of sales occurred because the customer strict to thee credit policies before credit  sales  being allowed...

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