Conerstones to Financial and Mangerial Accounting, Essay Example

The main aim of extending credits to customers is to ensure that a company increases on its sales and earnings. On the contrary, many companies understand that some credit customers may return all the goods or a good portion of it. As a result, a company sets up accounts of such customers, which are referred to as bad debts, or uncollectible accounts (Needles, Powers, and Susan 396). To ensure that such unlikely expenses are taken care of, a company arranges to ensure that the money from uncollectible accounts is accredited after final payments are made. This should apply for the Jerry Hasbrow case in the excerpt. Penn Office Supplies Company should make enquiring on the nature of sales to the purchaser from a local insurance company. This is essential to determine the nature of the insurance company, and, as a result classify it as an uncollectible account.

According to the sales agreement between Jerry and the purchaser, this type of sale can be classified as an uncollectible account. This is because the purchaser was expected to return the extra goods worth $1750 later in the next year. The company should estimate the value of the returned goods as loses in the next fiscal year. From this explanation, the shipment of goods on December 31 cannot be recorded as sale because the insurance company is regarded as bad debtor (Needles, Powers, and Susan 397). Jerry can only be compensated, if and only if, the insurance company pays for the full worth of the copier papers, $2000. Jerry goes against ethics and estimates for receivables for intentionally making a credit sale classified as uncollectible account. He is the person to blame for the Penn Office Supplies Company’s losses at the beginning of the fiscal year.

The effectiveness of a warranty is that it is a form of a contract, which allows for legal remedies if the promise is not followed or is not true. According to the information given in this excerpt, the terms of this warranty are implied rather than expressed. In a more specific approach, the contract between Main Street Service Company can be classified as a warranty of merchantability (Needles, Powers, and Susan 314). It requires that the goods and the seller must conform to the expectations of the buyer. In the case of Main Street Service Company and its customer, the extra $200 paid for third and fourth year warranty should not be considered as revenue for the company. In the event that the company falls into bankruptcy, the fee paid by customers is also lost.

The cash receipts from customers should not be recorded as revenue for the company; rather they should be recorded as maintenance cost for the company. On the contrary, the sales of products should be recorded as cash sales. To ensure that Main Street does not break the terms of the warranty, the $200 fees should be assumed part of the purchasing cost. As a result, the company can assume that the $1.8 million is the company’s revenue in 2009. The management recommendation is unethical since it is a breach to the warranty agreement. Classifying the warranty fee as revenue for the company is ethically wrong since customers may be hurt in the events of the company falling into bankruptcy. Additionally, the reputation of the company will be tarnished since customers will lose faith in its service delivery.

Materiality is a convention or concept with accounting or auditing that relates to the importance or significance of the amount of transaction or discrepancy (Kimmel, Weygandt, and Kieso 276). The objective of materially in financial systems is to ensure that experienced personnel express an opinion on whether or not the financial statements were prepared and conform to all financial reporting frameworks of an organization. The assessment of the value of a material is relative, and, as a result depends on the professional judgment of the auditor. Materiality is related to the importance of transactions, errors, and balances contained in a financial statement. Additionally, it defines the cutoff point or threshold after which the resultant information becomes handy in the decision-making on the financial status of an organization.

The problem about the deviation of company’s inventory and increase in the costs of goods sold concerns the management more than the auditors. The role of management in a company is to ensure that products are availed at the right amount and at the stated cost (Kimmel, Weygandt, and Kieso 279). The management fixes prices on goods in an organization to ensure that they are competitive with other similar companies. As a result, it is of great concern when the sales team decides to hike prices without consultations with the management. On the contrary, the duty of auditors is to track financial trends in an organization. This body is not concerned with inventory levels as long as an organization attains its profit margins. The amount of inventory loss, which amounts to $120,000, is material. Although it was reflected by hiking of prices, it should considered by auditors to determine the highest profit margins of the company. This will help the company to determine the effects of hiking prices on its overall returns.

Authorization refers to the approval to demand cash from ticket takers and in lieu give out tickets. Ticket taker is authorized to collect his or her ticket from the cashier to ensure all students who enter the theatre haze tickets. The usher has the authority to ensure that all are seated. Recording transactions implies the process of noting each transaction to ensure accountability for assets (Warren, Reeve, and Duchac 79). The cashier has the sole responsibility of recording each transaction to the computer to note all the sales. Documents and records provide future reference of the transactions. A ticket with serial numbers is issued on each transaction. Additionally, the ticket taker remains with half the ticket to keep records. On basis of physical control, the cashier puts the cash in a locked box. In addition, the ticket taker puts half of each ticker in a locked box. Periodic independent verification implies checking of records by an independent person to determine their credibility (Warren, Reeve, and Duchac 76). This control activity has not been implemented in this excerpt. On basis of separation of duties, all the three personnel have definite sets of duties. Sound personal practices imply the flexibility of personnel to different responsibilities and adequate supervision. There is neither supervision nor flexibility in the duties of the three personnel.

From the framework of this system, a cashier cannot issue a ticket to a friend without cash. This is because cash has to be entered first into the system before a ticket is issued. Similarly, if a ticket were issued without cash, it would lack the serial number from the system. The ticket taker can allow students to enter the theatre without tickets. Such students will be caught since they do not have stubs to present to the usher.

Caldwell’s actions are very unethical. Her actions are referred to as earning manipulation. If Caldwell Interior is a public company, an increase in its earnings can push the stock prices up for a given period. On the contrary, its financial status is declining, which implies that the future of the company is undefined. Caldwell’s bad debts uncollectible accounts cannot be used to estimate the future success of the company. Some companies with uncollectible account may fail to honor the terms of debt or may return a fraction of good (Rich, Jones, and Heitger 175). This is the reason why uncollectible accounts are only referred to as revenue after all the debt is paid; otherwise, they are regarded as loses to a company.

In the event that Caldwell’s plans are successful, the bank is the party that would be “harmed.” Underestimating the uncollectible accounts means the financial systems of the company would be altered to show a growth in earnings. Reasonably, the cumulative bad debts will not reflect in the company’s balance sheet, its inventory, or its income statements. The company may not be in a position to pay for the bank loan due to the decline in its performance, which implies that the bank would be “harmed.” It is important to estimate losses resulting from uncollectible accounts accurately to determine the financial capability of a company. A company can determine its success or failure because excessive uncollectible accounts lead to collapse of companies. Additionally, clear information on bad debts can be useful in determining the amount of funds to solicit from financial bodies to prevent falling into bankruptcy (Kimmel, Weygandt, and Kieso 276).

The decision of Chief Financial Officer, CFO, will generate more negative effects to the company than that of the controller. Allocating one-third of the total cost, which translates to $6,000,000, to land may have negative implications on the growth of the business. When the value of land is high, the taxation of income increases since the deductible sum of money is higher. This will lead to the highest net tax after the depreciation period of 20 years. On the other hand, the controller assigns the lowest value to land to reduce on the income taxes. The relative implication of the controller’s suggestion is that it saves on annual tax by 30%. On basis of ethics, the company should implement the controller’s decision since it saves finances for the company. It allocates the least value to land to reduce the avenues for income taxation. The effectiveness of this allocation is that the annual tax saving rate is $32,000 per year, which is equivalent to 30%.

This decision will favor the controller since her decision saves on the company’s funds. As a result, land will be allocated one-fifth of the total cost, rather than the one-third suggestion proposed by CFO. This means that the CFO will be affected by this decision negatively. His decision is refuted on basis of the following reasons; firstly, the high value allocated to land will be prone to income taxation, and, secondly, it will increase on annual tax savings in comparison with the controller’s suggestion.

Advantages of issuing common stocks as opposed to bonds

Firstly, common stocks are has the capacity to deliver extremely large gains, as opposed to Certificate of Deposits and bonds. Annual Returns of Investment of over 100% can be realized. Secondly, the offer of stocks is limited legal liability as opposed to bonds that offer unlimited legal liability (Rich, Jones, and Heitger 175). Passive stockholders are protected from any form of liability that may result from the actions of the company beyond its financial investment. Thirdly, most of its stocks are liquid, which is the similar to those of bonds. Stocks can be bought or sold quickly at fair prices. Finally, stocks are beneficial to the owner in two ways by dividends and capital gains. Each stock share represents fractional ownership of a company. If the income of the company increases, the value of each share increases by the same margin.

Disadvantages of issuing common stocks as opposed to bonds

Issuing share stocks implies that each investor has fraction of ownership of the company. As a result, the top management is answerable to all shareholders. The management is compelled to reveal secretive information that should not be revealed to competitors. Besides, since shareholders own a piece of the company, they have an obligation in demand justifications and explanations of all major business decisions (Rich, Jones, and Heitger 175). This may slow down the growth of a business since comprehensive consultation has to be performed with all shareholders. Finally, if a company agrees to pay dividends to shareholders, the latter have a share in the dividends no matter the financial status of the company. If a company fails to meet all the terms of shareholding, the overall image of the company and its stock price is tainted.

Works Cited

Kimmel, Paul, Weygandt, Jerry, and Kieso, Donald. Financial Accounting: Tools for Business Decision Making. New Jersey: Wiley, 2010. Print.

Rich, Jay, Jones, Jeff and Heitger, Dan. Conerstones to Financial and Mangerial Accounting. London: Routledeg, 2013. Print.

Warren, Carl, Reeve, James and Duchac, Jonathan. Corporate Financial Accounting. USA: Cengage Learning, 2013. Print.

Needles, Belverd, Powers, Marian and Crosson, Susan. Principles of Accounting: Chapters 1-13. USA: Cengage Learning, 2013. Print.