Problem 5 – Conceptual questions: You will need more space to answer these quest
ID: 2444688 • Letter: P
Question
Problem 5
– Conceptual questions:
You will need more space to answer these questions then what is provided
. 1. Explain how the accounting for bad debts can be used for earnings management.
2. Indicate three reasons why a company might sell its receivables to another company.
3. Moon Hardware is planning to factor some of its receivables. The cash received will be used to pay for inventory purchases. The factor has indicated that it will require “recourse” on the sold receivables. Explain to the controller of Moon Hardware what “recourse” is and how the recourse will be reflected in Moon’s financial statements after the sale of the receivables.
4. What is the accounts receivable turnover ratio, and what type of information does it provide?
Explanation / Answer
Accounting for bad debts can be used for earnings management by Changing the percentage os sales recorded as the bad debt expense.
The unwanted adjustment of the rate either up or down allows the company to adjust the earnings to fulfill the desired targed of the organisation.
2. The company might sell its receivables to another company due to the following reasons:-
a. The company is having shortage of funds and it requires the funds.
b. The company believes that it may not receive the accounts receivable.
c. The company purchases something from the other company and it is not having funds to pay off.
4. Accounts Receivable Turnover Ratio = Net credit Sales/ Average Accounts Receivable
Average Accounts Receivable = Opening accounts Receivable+ Closing Accounts Receivable/2
It provides the information about the ability of the company to issue credit to its customers.