Concept explainers
Written Communication
You have been hired as a consultant by a parts manufacturing firm to provide advice as to the proper accounting methods the company should use in some key areas. In the area of receivables, the company president does not understand your recommendation to use the allowance method for uncollectible accounts. She stated, “Financial statements should be based on objective data rather than the guesswork required for the allowance method. Besides, since my uncollectibles are fairly constant from period to period, with significant variations occurring infrequently, the direct write-off method is just as good as the allowance method.”
Required:
Draft a one-page response in the form of a memo to the president in support of your recommendation for the company to use the allowance method.
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FINANCIAL ACCOUNTING W/ACCESS >CI<
- Choose the one correct answer The following are useful source of evidence with regard the reasonableness of the client’s accounting estimation policy regarding the collectability of accounts receivables, except: *A. Reviewing events happening after the balance sheet date but before the issuance of financial statements.B. Sending confirmation letters to customers to determine the customer’s ability to settle their accounts.C. Assessing the client’s historical experience in writing off uncollectible accounts in the prior years.D. Determining the consistency of the client’s policy with the industry practice.E. None of the abovearrow_forwardQuestion 6 Which of the following substantive procedures would most likely help an auditor determine whether accounts payable have been misstated? Examining reported purchases orders that appear to be too low. Reviewing disbursements subsequent to year end to determine if liabilities have been properly recorded on the year-end balance sheet. Searching customer returned goods that were not reported as returns. None of the answers providedarrow_forwardAs a consultant explain to your staff how the absence of Trial Balance will affect the preparation of the financisal statement? Discuss, using practical example how to the absence of double entry principles will affect the preparation of financial statement? Demonstrate, using practical example how to prepare accounts from the Sales day book and Sales return day book?arrow_forward
- The following misstatements are sometimes found in the sales and collection cycle’s account balances:a. Cash received from collections of accounts receivable in the subsequent period is recorded as current period receipts.b. The allowance for uncollectible accounts is inadequate because of the client’s failure to reflect depressed economic conditions in the allowance.c. Several accounts receivable are in dispute as a result of claims of defective merchandised. The pledging of accounts receivable to the bank for a loan is not disclosed in the financial statements.e. Goods shipped and included in the current period sales were returned in the subsequent period.f. Several accounts receivable in the accounts receivable master file are not included in the aged trial balance.g. One account receivable in the accounts receivable master file is included on the aged trial balance twice. h. Long-term interest-bearing notes receivable from affiliated companies are included in accounts receivable.i.…arrow_forwardWhich of the following statements is correct? Select one: a. Account receivable turnover is equal to net credit sales divided by average net accounts receivable. b. Buying aged receivables from businesses and then collects the payments directly from the customers is called Allowance for uncollectible accounts. c. Auto generated document numbers is a fraud preventive method which is more efficient than physical controls. d. If the same people are responsible for a series of related accounting activities is called Segregation of Duties.arrow_forwardIdentify the applicable qualitative characteristics referred to in the Conceptual Framework for Financial Reporting that is not adhered in the scenario below and indicate the respective group to which each characteristic belongs to. You are also required to indicate the sub-category (if applicable) to which the qualitative characteristic belong to. A company discovered at the end of the fiscal year that credit sales transactions from the last 2 months of the period were not recorded as the accountant was waiting for a transfer of cash or equivalent to settle the outstanding amounts. a. Faithful Representation; completeness; Enhancing b. Faithful Representation; completeness; Fundamental c. Faithful Representation; neutral; Fundamental d. Faithful Representation; free from error; Fundamentalarrow_forward
- Explain why companies must use the Allowance Method, and not the Direct Write-Off Method, when dealing with collectible accounts. Then show a journal entry writing off an account with both methods. Please be sure to include actual amounts in these problems. They can be made up amount but they need to be amounts that a company would use in these situations. PLEASE DO NOT HANDWRITE THE RESPONSE!!arrow_forwardWhile in the process of posting from the journal to the ledger a company failed to post a $500 credit to Accounts Receivable. The effect of this error will be that Group of answer choices A. Accounts Receivable will be understated. B. the error will overstate the debits listed in the journal. C. the trial balance will not balance. D. the total credits in the trial balance will be larger than the total debits.arrow_forwardConfirmation of Trade Accounts Receivable. L. King, CPA, is auditing the financial statements of Cycle Company, a client that has receivables from customers arising from the sale of goods in the normal course of business. King is aware that the confirmation of accounts receivable is a generally accepted auditing procedure.Required:a. Under what circumstances could King justify omitting the confirmation of Cycle’s accounts receivable?b. In designing confirmation requests, what factors are likely to affect King’s assessment of the reliability of confirmations that King sends?c. What alternative procedures could King consider performing when replies to positive confirmation requests are not received?arrow_forward
- When a large account receivable balance is due from one client it is logical to use the direct write-off method to adjust the bad debt expense and accounts receivable balance. Under different circumstances, another method is used called the allowance method. Discuss the best reason(s) for using the allowance method and give some examples of companies that are likely to use that method. Also explain why it would ever be appropriate to use the direct write-off method, especially since it is not GAAarrow_forwardAmounts due from customers that are expected to be collected in the current operating cycle and do not charge interest are known as: Group of answer choices sales returns & allowances cost of goods sold accounts receivable notes receivable The allowance method of estimating uncollectible accounts is widely-used because it follows this principle: Group of answer choices Matching Going-concern Revenue Recognition Costarrow_forwardHow can adjustments to the standardized financial statements be made in order to undo these distortions? Accounting distortions: Accounting distortions refer to the concept of any sort of difference between the information or evaluation made regarding the financial statement than the real-time data of the business. The most common types of accounting distortions are as follows: Data entry errors: It occurs when there are mistakes or misstatements in the data entry system of the company. For example, entering items in the wrong account, transposing numbers, leaving out or adding a digit or a decimal place, treating expenses as income, or vice versa. The error of omission: It involves an error that occurs when one fails or forgets to make any entry. For example, failure to record any notes received. The error of commission: It involves mishandling of any entry by recording it in the wrong books or with the wrong place The error of transposition: It is the error of…arrow_forward
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