I would like help on all questions, but mainly explain question \"A\", \"D\", an
ID: 2540241 • Letter: I
Question
I would like help on all questions, but mainly explain question "A", "D", and "E".
You are the chief accountant for ZM Corp., which is located in Illinois. In November 2017, that state had the second highest unemployment rate in the Midwest: 4.9% (down from 6.1% in January 2015)l For the past few years, you have noticed that the company's bad debt rate has been about 7% of year-end accounts receivable. That rate of bad debts has severely affected the company's profitability...especially since management has steadily been lowering the standards for granting credit to customers Your salary structure (as well as that of other corporate managers) allows for a bonus when net income is equal to or greater than a specific percentage of net sales. Unfortunately, that profit metric has not been reached in four years. However, the CEO and CFO (who is retiring after the first quarter of 2018) realized that a change in the bad debts percentage would allow them and you to obtain bonuses in 2017. If bad debts were computed at 2% of year-end A/R rather than 7%, everyone would receive a reasonable (but not extreme) bonus for 2017. The CEO justifies the use of that rate by concluding that, since unemployment in Illinois has been decreasing over the past few years, so will bad debts Is a change in a bad debts estimate permissible under generally accepted accounting principles? If yes, explain how such a change is effected. If no, explain why such a change would not be allowed. (1 pt.) a. b. Would making such a change in the bad debts estimate violate any basic accounting concepts? Explain your yes or no answer. (2 pts.) Provide at least two alternatives to help improve the company's profit performance. (1/2 pt. for each, up to 1 pt.) c.Explanation / Answer
A. No. Change in bad debts estimates is not permissible as per GAAP (Generally Accepted Accouting Principles). GAAP specifically states in its one of the 3 rule on bad debts estimates. The rule " Percentage to Total Credit sales method" states that past history of companys' bad debts rate over past few years should be considered. This is as per basic law of conservative accouting.
D. Reducing bad debts is illegal and such overstatement of recievables results in better cashflows which will misguide the investors and other stakeholders of the organisation which attracts the legal implication under various sections of investing body as well.
Yes, its unethical to underste bad debts to 2% keeping in view of past bad debt rates of over 7% year on year. The books of accounts are signed by CFO keeping in view the confidentiality of the accuracy. This statement is overrided with the understatement of bad debts and its unethical.
E. As an employee we need to avoid overstating accounts receivables by understating the bad debts for the due favouritism of CEO or CFO. The undue inflation of current assets will further inflate the balance sheet which is not vaiable for the organisation future to sustain. The understatement of bad debt rate to the extent of 5% needs lot of justification to audit parties and other boards.