GM506 diss 2
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Inflation can have a considerable impact on the statistical examination of the balance sheet, income statement, and ratios (Block et al., 2022). According to Block
et al. (2022), inflation will affect several financial metrics, including investment return and debt-to-asset ratio. The fundamental problem with reporting revenue during times of inflation is that it is frequently done in current dollars, even though inventory or other products may have been purchased for less money (Block et al., 2022). Profit therefore can be more reliant on rising costs than on successful outcomes.
Examining how effectively assets have been used to generate profits is the main advantage of an ROI (return on investment) and doing so pushes a company to employ its resources as effectively as possible. Additionally, it makes sure that assets are only purchased when they have the potential to generate returns. A high asset turnover ratio demonstrates effective utilization of the assets on the balance sheet, while a high-profit margin suggests great cost control (Block et al., 2022). These measures can be used to assess a company's potential for higher profitability and how well-organized it is (Block et al., 2022).
The inventory turnover ratio counts the number of times a company's inventory is sold and replaced, whereas the fixed asset turnover ratio gauges how effectively a company uses its assets (Block et al., 2022). Inventory turnover during a time of strong inflation will reveal erroneous reports. A business will display profit because of inflation costs, but it won't display the rise in inventory replacement costs. This has repeatedly occurred in my industry (Florida production homebuilding).
Inflation affects the total debt-to-asset ratio in several different ways. According to Block et al. (2022), the debt-to-total assets ratio shows what percentage of a company's assets are owned by shareholders as opposed to creditors. The key tactic is to alter the primary tax rate for investors' marginal tax rates. Debt utilization ratios, per Block et al. (2022), display the firm's overall level of debt with its asset base and future earnings. The long-term assets, inventories, and accounts receivable turnover rate of the company are displayed to the analyst using these asset ratios (Block et al., 2022).
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Related Questions
Can you explain how using LIFO for inventory valuation might affect financial reporting during inflation compared to FIFO, and why companies might prefer one method over the other?
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which one is correct please confirm?
QUESTION 9
In using the percentage of sales forecasting method, the assumption is that ______________.
a.
there is a direct relationship between notes payable and sales
b.
accounts payable will not increase proportionally with sales
c.
there is a direct relationship between long-term debt and sales
d.
inventories will increase proportionately with sales
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Inflation can have significant effects on income statements and balance sheets, and therefore on the calculation of ratios. Discuss the possible impact of inflation on the following ratios, and explain the direction of the impact based on your assumptions.
Return on investment
Inventory turnover
Fixed asset turnover
Debt-to-assets ratio
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Accrual accounting requires estimates of future outcomes. For example, the reserve for bad debts is a forecast of the amount of current receivables that will ultimately prove uncollectible.
Required:
Identify and explain three reasons why accounting information might deviate from the underlying economic reality. Cite examples of transactions that might give rise to each of the reasons.
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Contrast the effects that LIFO vs. FIFO would have on ending inventory, net income and cash flow in a period in which prices are rising?
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What is a question that should be asked about accounts payable when forecasting?
a.)
What are the costs associated with storing goods?
b.)
How much bad debt should be anticipated?
c.)
How much cash is needed on hand to meet current liabilities?
d.)
How quickly can we replenish goods?
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Question Which of the following changes in credit standards and conditions would cause an improvement in profit?
A) An increase in the percentage of doubtful collections.
B) An increase in collection expenses.
C) Decrease in units sold
D) Increase in the turnover of accounts receivable.
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If accrued liabilities are overestimated in the current period, the reported income in a following period will be lower than it should be.
Select one:
True
False
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A change in credit policy has caused an increase in sales, an increase in discounts taken, a reduction in the investment in accounts receivable, and a reduction in the number of doubtful accounts. Based upon this information, we know that
a)Net income has increased
b)The average collection period has decreased.
c)Gross profit has declines
d)The size of of the discount offered has increased
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Which of the following basic accounting assumptions is threatened by the existence of severe inflation in the economy?
Monetary unit assumption.
Periodicity assumption.
Going-concern assumption.
Economic entity assumption.
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When using the percentage of sales method to estimate the amount of bad debt expense for uncollectible accounts, what effect would a debit balance in Allowance for Doubtful Accounts have on the current period's adjusting entry?
a.A debit balance would increase the amount of the current period's adjusting entry.
b.A debit balance would decrease the amount of the current period's adjusting entry.
c.The balance in Allowance for Doubtful Accounts would be ignored when making the current period's adjusting entry.
d.A debit balance would be carried over to the next period.
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Why is it important to check if debt is decreasing if we have decline in interest expense in financial statement?
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Which of the following is correct when bad debt expense is recorded at year-end?
Group of answer choices
A)Current assets will increase.
B)Gross profit will decrease.
C)Income from operations will not change.
D)Current liabilities will decrease.
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If sales were overstated by recording a false credit sale at the end of the year, where could you find the false “dangling debit”?a. Inventory.b. Cost of goods sold.c. Bad debt expense.d. Accounts receivable.
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Organics Plus is considering which bad debt estimation method works best for its company. It is deciding between the income statement method, balance sheet method of receivables, and balance sheet aging
receivables method. If it uses the
income statement method, bad debt would be estimated at 4 percent of credit sales. If it were to use the balance sheet method, it would estimate bad debt at 12 percent of accounts receivable. If it were to use the balance sheet aging of
receivables method, it would split its receivables into three categories: 0-30 days past due at 6 percent, 31-90 days past due at 19 percent, and over 90 days past due at 26 percent. There is currently a zero balance, transferred from the prior
year's Allowance for Doubtful Accounts. The following information is available from the year-end income statement and balance sheet.
2018 Year-End Total for Organics Plus
Credit Sales
$1,860,000
Accounts Receivable
650,000
There is also additional information regarding the…
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Which of the following statements is not correct?
Select the correct response:
The principal amount of a debt is the cash or cash equivalent amount borrowed
The carrying amount of a noninterest-bearing note payable due in lump sum will decrease as time goes by
When a noncash asset is acquired and the stated rate of interest is different from the current market rate of interest, the
cost of the asset is the present value of the future cash payments discounted at the current market rate of interest rather
than at the stated interest rate.
A company that receives cash in an amount less than the face amount of a noninterest-bearing note payable should record
the note at its discounted present value.
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Oscar Company has been using the FIFO cost flow method during a prolonged period of inflation. During the same time period,Oscar has been paying out all of its net income as dividends. What adverse effects may result from this policy?
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Compare and contrast the percent of sales and analysis of receivables method for determining bad debt. Both are acceptable under US GAAP, which one do you think is a better more accurate method and why?
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Related Questions
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Recommended textbooks for you
- Cornerstones of Financial AccountingAccountingISBN:9781337690881Author:Jay Rich, Jeff JonesPublisher:Cengage Learning

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Publisher:Cengage Learning