Accounting – John Warren
1. a. total assets turnover for the recent two year for both companies:
Asset turnover is a financial ratio that estimates the effective use of assets of a company to generate income and revenue. Asset turnover = (total revenue or sales)/ (assets)
The assets turnover for the year 2005 and 2006 for both Kreme and Tastycake are as follows
In 2005 the kreme company has an asset turnover ratio of 1.54 while the tasty cake company has an asset turnover ratio of 1.43. In 2006 the kreme company has an asset turnover ratio of 1.19 while the tasty cake company has a turnover ratio of 1.39.
b. Which company is more efficient?
The company that is more efficient in generating more sales through the use o0f its assets according to the year 2005 was the Kreme company, in 2005 the turnover for tasty cake was 1.43 which was lower than the Kreme company which was 1.54, therefore the company that produces is more efficient in the year 2005 was Kreme.
In 2006 the tasty cake company has a higher asset turnover than the Kreme Company; the Kreme asset turnover ratio is equal to 1.197 which is lower compared to the Tasty cake company whose value of turnover is 1.39. Therefore in the year 2006 the tasty cake company has a higher turnover ratio as compared to the other company.
The Kreme Company employs more assets in it production process, despite is high capital it is not as efficient as the tasty cake company which uses much less capital and it still achieves a higher asset turnover ratio in 2006. Therefore the tasty cake company is more efficient in generating net sales as compared to the Kreme Company.
2. Bad Debts expense is estimated to be $59,000 and Receivable amount to $1,750,000, less a $43,000 allowance for Doubtful accounts.
Bad debts can be defined as the portion of the receivables that are cannot be collected, the bad debt is applied to debtor’s accounts. For this reason the bad debts are usually considered as an expense in accounting. Allowance for doubtful debts or bad debts is the value which is recorded in the books of account in order to estimate the net realizable receivables as a result of the risk that is involved if debtors fail to pay for their debts.
Bad debt is therefore an expense while the allowance for doubtful or bad debts is an account that is held for the purpose of estimating the net receivables.
When sales are made then we estimate the bad debts and make a contra entry in the books of account, this is done by making a contra entry in the books of account in the account receivables and also in the allowance of doubtful debts, because the bad debts are an expense then we right off the amount at the end of the accounting period by making a contra entry in the books of account.
In our case the bad debts expenses amounted to 59,000 while the allowance for doubtful debts amounted to 43,000. 43,000 is the amount which is set aside as a portion of that amount which is not likely to be collected, this amount is estimated in order to give a realistic measure of the amount of that will be received. The bad debt expenses are the result of the doubtful debts, this is already an expense that has resulted from the doubtful debts, these can no longer be collected and therefore they have been written off.
3. Accumulated depreciation – Machinery account value balance;
The balance in the accumulated depreciation does not show the fund to replace the machine when it wears out. Depreciation is the expense on assets as a result of use in the production process and as a result of aging. Depreciation is calculated on all assets and this is an expense as a result of the use of the machine. Accumulated depreciation is the total depreciation that has been imposed on assets over the years.
In the machine account we record the accumulated depreciation in order to get the net book value of the asset, the net book value of an asset is the purchase value minus the accumulated depreciation, the net book value shows the estimated salvage value of the machine although the salvage value may not equal the book value, the book value however never falls below the salvage value.
Therefore the balance of the accumulated depreciation minus the machine value will show the net book value of an asset. This is the value of the machine that is recorded in the balance sheet as the value of the asset as at the accounting period. Therefore the accumulated depreciation is the summation of the depreciation over the years which are added at the end of every accounting period, the balance on the accumulated depreciation will therefore show the estimated value of the machine and this will give us the appropriate salvage value.
The salvage value is the amount which the firm may appropriately dispose the machine without making a loss. Therefore the balance is use to estimate the appropriate amount which an asset should be disposed off.
4. a. lowering the estimate for doubtful accounts
When we lower the estimated doubt full debts then the bad debt expense estimation will be lower, for this reason the expenses on the income statement will not be high and therefore the company will report higher profits than it would if the doubtful accounts would have been left intact. As a result of this therefore the income statement will report a higher profit.
When it comes to the balance sheet, a decline in the doubtful accounts will result into higher levels of receivable accounts, however the balance sheet will still balance but the level of current assets will be higher.
Therefore decreasing the amount of doubtful accounts will result into a higher profit report in the income statement due to lower expenses reported and at the same time the current assets in the balance sheet will be higher but the balance sheet will still balance.
b. to adjust the allowance for Doubtful accounts is within her right as a manager
The decision to lower the allowance for doubtful debts is unethical to the manager. This is because the accountant is supposed to estimate the level of doubtful debts and not to reduce them in order to report higher levels of profits in the income statement. the balance sheet will not reflect the current situation of the company and therefore the accountant results will be biased.
c. internal control
The best type of internal control is the provision of laws and regulations and in our case the best control measure is giving a specific percentage of the debts that should be referred to as bad debts, this way the outcomes of the bad debts provision will be predictable by simply checking the account receivables.
5. a. depreciation methods
The reason why Choi chose to assume that the assets were to be depreciated on the following month is for the simple reason that she wants to reduce the level of depreciation expenses for the assets so that her business would report at least higher profits, through this therefore there are two depreciation methods which are the straight line depreciation method and the declining balance method, the straight line method usually reports a consistent amount of depreciation while the declining balance method depict that as a asset ages then the level of depreciation declines, therefore the best method to apply is the declining balance method which Choi should apply to reduce expenses.
b. ethical violation or a legitimate decision
The rule that choi will use is an ethical method of calculating depreciation, this is because the depreciation methods to be used are acceptable in accounting and both methods are used differently to calculate depreciation. Therefore this is an ethical method because the decision is made in choosing an appropriate depreciation computational method.
c. How will Choi’s depreciation rule affect the profit margin of her business?
The depreciation method will affect the profit of the business, the depreciation expense of the business will be lower and therefore profit levels will be higher, the imposition of depreciation on assets at the next month will lead to decline in the expenses in terms of depreciation for the present month therefore this will result to higher profit margins.
The use of the declining balance depreciation method will aid Choi in that the depreciation of the assets will decline in the future as the value of asset will decline every time the depreciation is deducted. Through this therefore the business will report higher profits in the future.
6. Explain how a line of credit differs from a short-term note payable
A line of credit is an agreement that is made between a lender which in most cases is a bank and the firm and in this case the credit provided is unsecured and the credit is rendered for a specific period of time, the amount given can be withdrawn at once or through a number of withdrawals in the specific time agreed on.
A short term note payable is a list of interest bearing debts from a financial institution which in most cases is a bank. This list will give the interest paid to these debts and also they give information on when the debt is due and also all the terms of the debt or credit provided.
One major difference between the short term note payable and the credit line is that the short term note payable is a note that provides information about current liabilities that a company has while the credit line is actually the credit provided by a bank.
The credit line is an unsecured credit provided by the bank and the short term note payable will give information about the credit line and the terms of condition associated with it.
Therefore the credit line is actually a form of credit which a bank will offer a company while the short term note payable is a form of note that is written by the company showing information regarding the short term liabilities that a company holds, the terms and the dates that the debts are to be paid. The short term note payable therefore will record the credit line and this is why the two are different.
7. a. ethical dilemma
The warranty accruals will create an ethical dilemma for Bly, this is because he is paid depending on the amount of sales minus the warranty expenses, warranty accruals are those expenses with regard to warranty that have not be accounted for or have not been paid for in the current period and therefore if in the future they are paid then Bly will have to receive less.
The ethical dilemma is evident where Bly is in a position where by he is not in a position to either set higher warranty provisions to avoid warranty accruals or failure to that result into high warranty expenses and warranty accruals resulting into negative bonus at the end of the year. Therefore these results into the ethical dilemma that Bly is faced with.
b. warranty expenses percentage
Bly should choose a higher warranty expense which will be higher than 10% but not higher than 15%, this is because the expenses maybe higher in the current year which may result into high accruals in the next year. If he chooses lower levels of percentage warranty expenses the warranty expense would be higher in the current year which may result into negative bonus in the coming year. Therefore to be safe it would be best to aim higher in order to be conservative and at the same time avoid accrued warranty expenses in the coming year.
Therefore the best level to set the warranty expenses is that which is higher than 10% but less than 15%, this is because for the lat ten years there has been only an increase from 3%to 10% and this shows that if the warranty were to fluctuate they will not fluctuate to very high levels.
Larry Walther (2002) Principles of Accounting, McGraw Hill Press, New Yor