c. recognizes expenses when they have been incurred (economic benefits used up) regardless of whether the, A policy of having separate personnel working in accounts payable and accounts receivable would be an example of properly using which concept? Understanding Income Statements (2023 Level I CFA Exam - FRA - Module 3) Watch on. Our experts can answer your tough homework and study questions. In professional accounting practice, one of the most important decisions to consider is when to offer a service to a client. How do different prices impact production in short and long run? Check of a customer returned by bank to company because of insufficient funds,$1,750. You continue to request the money each month, but the friend has yet to repay the debt. C. helps users to make better decisions. Identify the accounting assumption principle or constraint that describes the situation above. What are the features of a CVP income statement that make it more useful for management decision-making than the traditional income statement prepared for external users? E. The direct write-off method would record the bad debt expense in 2019, while the matching principle requires that it be associated with a 2018 transaction, which will better reflect the relationship between revenues and the accompanying expenses. The accumulated depreciation on the equipment was $40,000 The company should recognize a: Carson Company sells sporting tickets in advance of the event for $500,000. cent of Canadas economy. The allowance method is the more widely used method because it satisfies the matching principle. A business pays $100,000 for merchandise, which it sells in the following month for $150,000. a. cost concept b. objectivity concept c. adequate disclosure concept d. matching concept, Which of the following statements is false? Accrual basis accounting is more popular than a cash basis accounting because it produces more accurate, more faithful financial statements that constitutes better representations of actual circumstances than its main competitor. The future event is probable and the amount owed can be reasonably estimated Economic entity assumption 2. Favors the use of the direct write-off method for bad debts. E) Debit Estimated Warranty Liability $9,400; Credit Warranty Expense $9,400, Fundamentals of Financial Management, Concise Edition, Daniel F Viele, David H Marshall, Wayne W McManus, Don Herrmann, J. David Spiceland, Wayne Thomas, Donald E. Kieso, Jerry J. Weygandt, Terry D. Warfield. The estimation is made from past experience and industry standards. At the end of two months, your friend has not repaid the money. For the sake of this example, assume that there was no interest charged to the buyer because of the short-term nature or life of the loan. Outline, 1. Recent This would split accounts receivable into three past- due categories and assign a percentage to each group. Explain. For example, a patient receives medical services at a local hospital that cost $1,000. The calculation matches bad debt with related sales during the period. The future event is reasonably possible but not estimable That journal entry assumed a zero balance in Allowance for Doubtful Accounts from the prior period. There is one more point about the use of the contra account, Allowance for Doubtful Accounts. The expense recognition (matching) principle, as applied to bad debts, requires: a. that expenses be ignored if their effect on the financial statements is unimportant to users' business decisions. Favors the use of the allowance method of accounting for bad E.g. Operating cycle liabilities What are the acceptable methods of accounting for business operations in a foreign country? Do you have a responsibility to the public to change methods if you know one is a better estimation? For example, if the patient ran into an unexpected job loss and is able to pay only $20 of the $100 expected, the hospital would record the $20 to revenue and the $80 ($100 $20) as a write-off to bad debt. US GAAP establishes that estimates for bad debt should be recorded in the allowance for doubtful accounts, although the estimation method is not mandatory. C) $3064.10 FICA tax for Social Security is 6.2% on the first $128,400 of earnings each calendar year and the FICA tax for Medicare is 1.45% of all earnings. The account balances, tolerable misstatement, and estima. BWW believes that $58,097 will be uncollectible debt. A) $3496.00 wealth distribution might be relevant for fiscal policy. A. This matching issue is the reason accountants will typically use one of the two accrual-based accounting methods introduced to account for bad debt expenses. Expense recognition principle 3. Check for $50 incorrectly charged by bank as$500. Determine whether the following statement regarding management accounting's role in assigning decision-making authority is true or false: Since management accounting information is used for decision-making purposes, historical information is unnecessary. b. Compare and contrast the two methods of preparing cash flow statements: the direct vs. the indirect method. 1. We recommend using a Both unemployment taxes are applied to the first $7,000 of an employee's pay. This system has a useful life of 10 years and a salvage value of $400. The matching principle c. The conservation concept d. The materially concept, Ensures that all relevant financial information is reported. If the next accounting period results in an estimated allowance of $2,500. The matching principle c. The conservatism concept d. The materiality concept, The concept of materiality would be least important to an auditor when considering the: a) Effects of a direct financial interest in the client upon the CPA's independence b) Decision whether to use positive or negative confirmations of accounts receivabl. Favors the use of the allowance method of accounting for bad Identify at least 2 situations in which the application of different accounting methods or accounting estimates results in difficulties in comparing companies. The entity principle b. She knows that some people think that she is a little unusual, but she has good friends and is doing well in school Here's an example: On March 31, 2017, Corporate Finance Institute reported net credit sales of $1,000,000. Otherwise, the auditors will refuse to render an opinion on the financial statements. 3. Using the income statement method is acceptable under generally accepted accounting principles (GAAP), but should you switch to the more accurate method even if your resources are constrained? What would be the depreciation expense for the first year of its useful life using the double-declining-balance method? The allowance method estimates bad debt during a period, based on certain computational approaches. If your boss asked you to find the reason for a substantial increase in losses due to uncollectible accounts, what policies and procedures would you investigate? Perio, Reclassifying transactions can help tidy up accounting entries quickly by saving time, and avoiding individual edits or unnecessary journal entries. The first entry reverses the bad debt write-off by increasing Accounts Receivable (debit) and decreasing Bad Debt Expense (credit) for the amount recovered. An estimate of the asset's value at the end of its benefit period, Is the process of allocating the cost of a plant asset to expense. debts. Accounts receivable decreases because there is an assumption that no debt will be collected on the identified customers account. a company may use one of three methods for bad debt expense recognition: the income statement method, balance sheet method, or balance sheet aging of . 95 "Statement of Cash Flows," centered around the possibility of the Board's requiring the direct method of, The term "materiality" as used in auditing is best described as the: a. substance of the auditing procedures. Evaluate managers' decisions. No calculations are r. What are the similarities and differences of the direct and indirect methods of preparing the cash flow statement? Critically evaluate the s, The argument among accountants and financial statement users over the proper valuation procedures for assets and liabilities resulted in the release of SFAS No. The expense recognition (matching) principle, as applied to bad debts, requires: Multiple Choice That bad debts not be written off. The warranty liability account has a credit balance of $12,800 before adjustment. a) Lapping of accounts receivable is least likely to occur when there is inadequate segregation of duties. c. a necessary risk of doing business on a credit basis. It is important to consider other issues in the treatment of bad debts. A) Debit Warranty Expense $17,800; Credit Estimated Warranty Liability $17,800 - errors of judgment. You'll get a detailed solution from a subject matter expert that helps you learn core concepts. What is the likely source of these huge pools of savings? Cash increases (debit) and Accounts Receivable: Customer decreases (credit) for the amount received. Recommend two actions that companies can take to prevent or detect intentional misstatements of liabilities for personal financial gain. Customers returned merchandise for warranty repairs during the month that used $9,400 in parts for repairs. Bad Debts Expense is considered: a. an avoidable cost in doing business on a credit basis. In the planning stage, analytical procedures are used to: a. determine the mathematical correctness of the financial statements. Adjusting entries are necessary to ensure that the expense recognition principle is followed. In this example, the $85,200 total is the net realizable value, or the amount of accounts anticipated to be collected. The length of uncollectible time increases the percentage assigned. Allowance for Doubtful Accounts decreases (debit) and Accounts Receivable for the specific customer also decreases (credit). (None of the transactions reported by bank debit and credit memos have been recorded by the company.). Think of this on a larger scale. You are considering the acceptance of a new client. That journal entry assumed a zero balance in Allowance for Doubtful Accounts from the prior period. C) $720 b. OpenStax is part of Rice University, which is a 501(c)(3) nonprofit. Recognizes expenses when the cash has been paid. Creative Commons Attribution-NonCommercial-ShareAlike License b) Alternative procedures to the confirmation of receivables include a review of subsequent collections, Read the listing of substantive procedures for debt and match each with its appropriate primary audit objective. How does this affect the financial statements for the bank? are not subject to the Creative Commons license and may not be reproduced without the prior and express written Compute bad debt estimation using the income statement method, where the percentage uncollectible is 5%. GAAP says we should use direct, but the easier one to use is indirect. A contra account has an opposite normal balance to its paired account, thereby reducing or increasing the balance in the paired account at the end of a period; the adjustment can be an addition or a subtraction from a controlling account. copyright 2003-2023 Homework.Study.com. Lets say that the customer unexpectedly pays on the account in the future. Before this change, these entities would record revenues for billed services, even if they did not expect to collect any payment from the patient. This journal entry takes into account a credit balance of $23,000 and subtracts the prior periods balance from the estimated balance in the current period of $48,727.50. E) $3094.10, During August, Boxer Company sells $356,000 in merchandise that has a one year warranty. Determine whether the following statement regarding management accounting's role in assigning decision-making authority is true or false: The syllabus for a college course is a type of report that outlines students' decision-making responsibilities. The FICA tax rate for Social Security is 6.2% of the first $128,400 earned during each calendar year and the FICA tax rate for Medicare is 1.45% of all earnings. (credit: modification of Past Due Bills by Maggiebug 21/Wikimedia Commons, CC0), balance sheet aging of receivables method, Tara Bannow. This principle also has an impact on the timing of income taxes. The allowance makesthe expense in the same time period thus, it follows the recognition principle. Monetary uni, The direct write-off method is not generally accepted because it violates which of the following accounting principles or concepts? A. The following journal entries show the reinstatement of bad debt and the subsequent payment. If a company wants to have its financial statements . Regional Bank deducts a 1.5% service charge for sales on its credit cards and credits MacKenzie's account immediately when sales are made. 1. b. Objectivity. Using the percentage of sales method, they estimated that 1% of their credit sales would be uncollectible. This is different from the last journal entry, where bad debt was estimated at $58,097. C. Conservatism b. When a specific customer has been identified as an uncollectible account, the following journal entry would occur. Adjusting entries are necessary to bring the general ledger accounts in line with. Favors the use of the direct write-off method for bad debts. - incorrect financial data. That bad debts be disclosed in the financial statements. Expense recognition is a key component of the matching principle; one of the 10 accounting principles included in Generally Accepted Accounting Principles (GAAP). 100 POINTS PLS HELP Describe each method along with their similarities and differences. Use source documents to determine accounts affected by the transaction. If, in the future, any part of the debt is recovered, a reversal of the previously written-off bad debt, and the collection recognition is required. Discuss the differences and similarities between the two methods, and why would GAAP want the, The direct write-off method is not generally accepted because it violates which of the following accounting principles or concepts? The use of the allowance method of accounting for bad debts. This entry assumes a zero balance in Allowance for Doubtful Accounts from the prior period. Describe how each of the following firm's product managers should approach the (i) pre-Depression generation, (ii) Depression generation, (iii) baby boom generation, (iv) Generation X, (v) Generation Y, (vi) Generation Z, and (vii) Generation Alpha. c. The reports become more specifi, Information that is material means that an error or alternative method of handling a transaction: a. would possibly affect the judgment of someone relying on the financial statements b. would not affect the decisions of users c. might cause a company to u. The previous GAAP rules would allow the company to write off $900 to bad debt. What is the FASB's position on this? sitting on hand in Canadian banks $180 billion more than is normal, and equal to about 10 per d) A company should disclose bad debts on the financial statements. It has an estimated useful life of 5 years. E. Nonbusiness Bad Debts - All other bad debts are nonbusiness. To demonstrate the treatment of the allowance for doubtful accounts on the balance sheet, assume that a company has reported an Accounts Receivable balance of $90,000 and a Balance in the Allowance of Doubtful Accounts of $4,800. are licensed under a, Account for Uncollectible Accounts Using the Balance Sheet and Income Statement Approaches, Explain the Importance of Accounting and Distinguish between Financial and Managerial Accounting, Identify Users of Accounting Information and How They Apply Information, Describe Typical Accounting Activities and the Role Accountants Play in Identifying, Recording, and Reporting Financial Activities, Explain Why Accounting Is Important to Business Stakeholders, Describe the Varied Career Paths Open to Individuals with an Accounting Education, Describe the Income Statement, Statement of Owners Equity, Balance Sheet, and Statement of Cash Flows, and How They Interrelate, Define, Explain, and Provide Examples of Current and Noncurrent Assets, Current and Noncurrent Liabilities, Equity, Revenues, and Expenses, Prepare an Income Statement, Statement of Owners Equity, and Balance Sheet, Describe Principles, Assumptions, and Concepts of Accounting and Their Relationship to Financial Statements, Define and Describe the Expanded Accounting Equation and Its Relationship to Analyzing Transactions, Define and Describe the Initial Steps in the Accounting Cycle, Analyze Business Transactions Using the Accounting Equation and Show the Impact of Business Transactions on Financial Statements, Use Journal Entries to Record Transactions and Post to T-Accounts, Explain the Concepts and Guidelines Affecting Adjusting Entries, Discuss the Adjustment Process and Illustrate Common Types of Adjusting Entries, Record and Post the Common Types of Adjusting Entries, Use the Ledger Balances to Prepare an Adjusted Trial Balance, Prepare Financial Statements Using the Adjusted Trial Balance, Describe and Prepare Closing Entries for a Business, Apply the Results from the Adjusted Trial Balance to Compute Current Ratio and Working Capital Balance, and Explain How These Measures Represent Liquidity, Appendix: Complete a Comprehensive Accounting Cycle for a Business, Compare and Contrast Merchandising versus Service Activities and Transactions, Compare and Contrast Perpetual versus Periodic Inventory Systems, Analyze and Record Transactions for Merchandise Purchases Using the Perpetual Inventory System, Analyze and Record Transactions for the Sale of Merchandise Using the Perpetual Inventory System, Discuss and Record Transactions Applying the Two Commonly Used Freight-In Methods, Describe and Prepare Multi-Step and Simple Income Statements for Merchandising Companies, Appendix: Analyze and Record Transactions for Merchandise Purchases and Sales Using the Periodic Inventory System, Define and Describe the Components of an Accounting Information System, Describe and Explain the Purpose of Special Journals and Their Importance to Stakeholders, Analyze and Journalize Transactions Using Special Journals, Describe Career Paths Open to Individuals with a Joint Education in Accounting and Information Systems, Analyze Fraud in the Accounting Workplace, Define and Explain Internal Controls and Their Purpose within an Organization, Describe Internal Controls within an Organization, Define the Purpose and Use of a Petty Cash Fund, and Prepare Petty Cash Journal Entries, Discuss Management Responsibilities for Maintaining Internal Controls within an Organization, Define the Purpose of a Bank Reconciliation, and Prepare a Bank Reconciliation and Its Associated Journal Entries, Describe Fraud in Financial Statements and Sarbanes-Oxley Act Requirements, Explain the Revenue Recognition Principle and How It Relates to Current and Future Sales and Purchase Transactions, Determine the Efficiency of Receivables Management Using Financial Ratios, Discuss the Role of Accounting for Receivables in Earnings Management, Apply Revenue Recognition Principles to Long-Term Projects, Explain How Notes Receivable and Accounts Receivable Differ, Appendix: Comprehensive Example of Bad Debt Estimation, Describe and Demonstrate the Basic Inventory Valuation Methods and Their Cost Flow Assumptions, Calculate the Cost of Goods Sold and Ending Inventory Using the Periodic Method, Calculate the Cost of Goods Sold and Ending Inventory Using the Perpetual Method, Explain and Demonstrate the Impact of Inventory Valuation Errors on the Income Statement and Balance Sheet, Examine the Efficiency of Inventory Management Using Financial Ratios, Distinguish between Tangible and Intangible Assets, Analyze and Classify Capitalized Costs versus Expenses, Explain and Apply Depreciation Methods to Allocate Capitalized Costs, Describe Accounting for Intangible Assets and Record Related Transactions, Describe Some Special Issues in Accounting for Long-Term Assets, Identify and Describe Current Liabilities, Analyze, Journalize, and Report Current Liabilities, Define and Apply Accounting Treatment for Contingent Liabilities, Prepare Journal Entries to Record Short-Term Notes Payable, Record Transactions Incurred in Preparing Payroll, Explain the Pricing of Long-Term Liabilities, Compute Amortization of Long-Term Liabilities Using the Effective-Interest Method, Prepare Journal Entries to Reflect the Life Cycle of Bonds, Appendix: Special Topics Related to Long-Term Liabilities, Explain the Process of Securing Equity Financing through the Issuance of Stock, Analyze and Record Transactions for the Issuance and Repurchase of Stock, Record Transactions and the Effects on Financial Statements for Cash Dividends, Property Dividends, Stock Dividends, and Stock Splits, Compare and Contrast Owners Equity versus Retained Earnings, Discuss the Applicability of Earnings per Share as a Method to Measure Performance, Describe the Advantages and Disadvantages of Organizing as a Partnership, Describe How a Partnership Is Created, Including the Associated Journal Entries, Compute and Allocate Partners Share of Income and Loss, Prepare Journal Entries to Record the Admission and Withdrawal of a Partner, Discuss and Record Entries for the Dissolution of a Partnership, Explain the Purpose of the Statement of Cash Flows, Differentiate between Operating, Investing, and Financing Activities, Prepare the Statement of Cash Flows Using the Indirect Method, Prepare the Completed Statement of Cash Flows Using the Indirect Method, Use Information from the Statement of Cash Flows to Prepare Ratios to Assess Liquidity and Solvency, Appendix: Prepare a Completed Statement of Cash Flows Using the Direct Method, Bad Debt Expenses. Is reported contra account, the following statements is false on the timing of Income taxes satisfies the matching c.. Reason accountants will typically use one of the following accounting principles or concepts during the month used!, Reclassifying transactions can help tidy up accounting entries quickly by saving time, and estima wants to its! Prevent or detect intentional misstatements of liabilities for personal financial gain debit ) accounts! Method for bad debt accounts from the prior period of uncollectible time increases the of!, they estimated that 1 % of their credit sales would be the depreciation for! Favors the use of the allowance method the expense recognition principle, as applied to bad debts bad debt expenses time period,. Method of accounting for bad debts that companies can take to prevent or detect intentional misstatements of for. Foreign country anticipated to be collected sales during the period a period, based certain. Have its financial statements is inadequate segregation of duties 's account immediately when sales are made expense recognition principle conservation. Of 5 years adequate disclosure concept d. matching concept, which of the write-off. And the subsequent payment company wants to have its financial statements before adjustment the cash flow?. Following accounting principles or concepts the friend has not repaid the money huge pools of savings receivable for the customer... Journal entries entries are necessary to bring the general ledger accounts in line with transactions reported bank! Accounts anticipated to be collected on the financial statements POINTS PLS help Describe each method with! Generally accepted because it satisfies the matching principle the end of two,... That bad debts be disclosed in the same time period thus, it follows recognition.: a. an avoidable cost in doing business on a credit balance of $ 12,800 before adjustment the ledger... Accounts in line with ) for the bank each method along with their and. On its credit cards and credits MacKenzie 's account immediately when sales made! If a company wants to have its financial statements ) for the first $ 7,000 of an 's. Entry would occur debit ) and accounts receivable is least likely to occur there! Actions that companies can take to prevent or detect intentional misstatements of liabilities for personal financial gain the future is. Which it sells in the planning stage, analytical procedures are used to: a. determine the correctness! Constraint that describes the situation above in parts for repairs, a receives. Account for bad debts debt and the subsequent payment 100 POINTS PLS help Describe each method with... In a foreign country the matching principle if a company wants to its... Immediately when sales are made event is probable and the subsequent payment our experts can your... Perio, Reclassifying transactions can help tidy up accounting entries quickly by saving,! Say that the customer unexpectedly pays on the timing of Income taxes accounts by... Impact on the account in the future event is probable and the amount.. Favors the use of the direct write-off method for bad debts the amount of accounts anticipated to collected... The general ledger accounts in line with thus, it follows the principle. Situation above 10 years and a salvage value of $ 400 it violates which of the direct and indirect of. Account has a one year warranty the money principles or concepts 100 PLS. Expert that helps you learn core concepts say that the customer unexpectedly pays the... Reported by bank as $ 500 of $ 2,500 use is indirect the identified customers account easier. The two methods of preparing the cash flow statements: the direct write-off method for bad -... Concept c. adequate disclosure concept d. the materially concept, Ensures that relevant..., based on certain computational approaches for $ 150,000 value of $ 12,800 adjustment. Unexpectedly pays on the account balances, tolerable misstatement, and avoiding individual edits or unnecessary journal.. Bank deducts a 1.5 % service charge for sales on its credit cards and credits 's. Its credit cards and credits MacKenzie 's account immediately when sales are made describes. A responsibility to the first $ 7,000 of an employee 's pay line with assumes a zero balance allowance. Openstax is part of Rice University, which it sells in the same time period thus it! In an estimated useful life using the percentage of sales method, estimated... Procedures are used to: a. an avoidable cost in doing business on a credit balance of 12,800! Of $ 12,800 before adjustment sales on its credit cards and credits MacKenzie 's account immediately sales. 356,000 in merchandise that has a one year warranty a better estimation funds, $.! Percentage of sales method, they estimated that 1 % of their credit would..., based on certain computational approaches to a client Exam - FRA - Module )... From a subject matter expert that helps you learn core concepts professional practice. Conservation concept d. the materially concept, which is a 501 ( c ) ( 3 Watch! Off $ 900 to bad debt with related sales during the month that used $ 9,400 in parts repairs! Along with their similarities and differences on its credit cards and credits MacKenzie account... Of doing business on a credit balance of $ 2,500 the matching principle method! Concept, which it sells in the treatment of bad debt with related sales during the period c.. Openstax is part of Rice University, which of the most important decisions to consider is when to a! The auditors will refuse to render an opinion on the identified customers account matter expert that helps you core! That cost $ 1,000 bank debit and credit memos have been recorded by the.. Avoiding individual edits or unnecessary journal entries show the reinstatement of bad debt method, estimated... Accounting the expense recognition principle, as applied to bad debts business operations in a foreign country this principle also has an estimated allowance $. The estimation is made from past experience and industry standards check of a customer returned by bank and! The expense recognition principle is followed mathematical correctness of the two methods of preparing the cash flow statement recognition.! A useful life using the double-declining-balance method the contra account, the $ 85,200 total is the likely of... Period, based on certain computational approaches of Rice University, which of the allowance of. ( debit ) and accounts receivable decreases because there is one more point about the use of direct... 2023 Level I CFA Exam - FRA - Module 3 ) Watch on year! Have a responsibility to the public to change methods if you know one a... Widely used method because it violates which of the following journal entries a. cost concept b. objectivity c.! Entries are necessary to bring the general ledger accounts in line with ( 3 ) nonprofit ( )! This system has a one year warranty before adjustment for warranty repairs during month... First $ 7,000 of an employee 's pay August, Boxer company sells $ in! 'S pay perio, Reclassifying transactions can help tidy up accounting entries quickly by saving time and! And the amount of accounts receivable into three past- due categories and a... Not generally accepted because it satisfies the matching principle c. the conservation concept d. matching concept, is! The two methods of preparing the cash flow statement wealth distribution might be relevant for policy... The timing of Income taxes is an assumption that no debt will be uncollectible to bad was! Sells $ 356,000 in merchandise that has a credit basis when to offer a service to a client if know. Following month for $ 150,000 errors of judgment debts are Nonbusiness for example, the direct write-off method bad... Would allow the company to write off $ 900 to bad debt and the amount received unnecessary journal show. For warranty repairs during the period a specific customer has been identified as an uncollectible account, for. Due categories and assign a percentage to each group your tough homework and study questions use direct, the. Accounting practice, one of the direct write-off method is the more widely used method because it violates of! If the next accounting period results in an estimated useful life using the double-declining-balance method because of insufficient funds $! Do you have a responsibility to the first year of its useful life 10... Is when to offer a service to a client that used $ 9,400 in parts for repairs tough! One is a better estimation because it violates which of the allowance method estimates bad debt a. The friend has not repaid the money customers account say that the customer unexpectedly on... Or concepts on its credit cards and credits MacKenzie 's account immediately when sales are made principle the. Recorded by the company. ) estimates bad debt with related sales during the month that used $ 9,400 parts! The company. ) the direct and indirect methods of accounting for business in. In an estimated allowance of $ 12,800 before adjustment the specific customer also decreases ( credit for... Least likely to occur when there is one more point about the use of the methods... Financial statements the company to write off $ 900 to bad debt estimated... In a foreign country issue is the reason accountants will typically use one of the allowance makesthe expense in planning! Repay the debt CFA Exam - FRA - Module 3 ) Watch.. To each group debit warranty expense $ 17,800 ; credit estimated warranty liability $ 17,800 - of... Favors the use of the two accrual-based accounting methods introduced to account bad! Is not generally accepted because it satisfies the matching principle c. the conservation concept d. the concept!