a) Discuss how Orange Company should report the effects of the interest-bearing note on its income statement for the year ended December 31, 2022 and its December 31, 2022 Statement of Financial Position. b) Discuss how Orange Company should account for the collection of the accounts previously written off as uncollectible. c) What are the two basic approaches to estimating uncollectible accounts under the allowance method and discuss? What is the rationale for each approach?
Reporting Cash Flows
Reporting of cash flows means a statement of cash flow which is a financial statement. A cash flow statement is prepared by gathering all the data regarding inflows and outflows of a company. The cash flow statement includes cash inflows and outflows from various activities such as operating, financing, and investment. Reporting this statement is important because it is the main financial statement of the company.
Balance Sheet
A balance sheet is an integral part of the set of financial statements of an organization that reports the assets, liabilities, equity (shareholding) capital, other short and long-term debts, along with other related items. A balance sheet is one of the most critical measures of the financial performance and position of the company, and as the name suggests, the statement must balance the assets against the liabilities and equity. The assets are what the company owns, and the liabilities represent what the company owes. Equity represents the amount invested in the business, either by the promoters of the company or by external shareholders. The total assets must match total liabilities plus equity.
Financial Statements
Financial statements are written records of an organization which provide a true and real picture of business activities. It shows the financial position and the operating performance of the company. It is prepared at the end of every financial cycle. It includes three main components that are balance sheet, income statement and cash flow statement.
Owner's Capital
Before we begin to understand what Owner’s capital is and what Equity financing is to an organization, it is important to understand some basic accounting terminologies. A double-entry bookkeeping system Normal account balances are those which are expected to have either a debit balance or a credit balance, depending on the nature of the account. An asset account will have a debit balance as normal balance because an asset is a debit account. Similarly, a liability account will have the normal balance as a credit balance because it is amount owed, representing a credit account. Equity is also said to have a credit balance as its normal balance. However, sometimes the normal balances may be reversed, often due to incorrect journal or posting entries or other accounting/ clerical errors.
![Orange Company has an operating cycle of less than one year
and provides credit terms for all of its customers. On May 20,
2022, the company factored, without recourse, some of its
accounts receivable. On October 1, 2022, Orange Company sold
special order merchandise and received an interest-bearing note
due June 30, 2023. Orange Company uses the allowance method
to account for uncollectible accounts. During 2022, some
accounts were written off as uncollectible, and other accounts
previously written off as uncollectible were collected.
a) Discuss how Orange Company should report the effects of
the interest-bearing note on its income statement for the
year ended December 31, 2022 and its December 31, 2022
Statement of Financial Position.
b) Discuss how Orange Company should account for the
collection of the accounts previously written off as
uncollectible.
c) What are the two basic approaches to estimating
uncollectible accounts under the allowance method and
discuss? What is the rationale for each approach?](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F5aebdc8d-6927-4cfa-bc36-b84f4a7d9d18%2F70d2e7ab-5a22-49ea-b333-3ba61ad8ec6a%2Fzqsg6zp_processed.jpeg&w=3840&q=75)
![Oman Oil Marketing Company
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
December 31, 2021 and December 31, 2022 (in millions)
Current Assets: (Amounts in OMR)_
2021
Cash and cash equivalents
1,000
750
Accounts receivable, less allowances
of OMR 57 and OMR 59, respectively
850
Notes to Consolidated Financial Statements (in part)
NOTE 2: Trade Receivables
The following table summarizes the activity in the allowance for
doubtful accounts
2022
2022
Beginning allowance balance 59
Charged to costs and expenses 3
800
2021
OMROMR
61
4
Deductions (*)
(5) (6)
Ending allowance balance 57 59
(*) Represents amounts written off against the allowance, net of
recoveries.
Required
a) Why does Oman Oil Marketing Company combine cash
and cash equivalents into one amount on the statement of
financial position?
b) For 2022 recreate the summary journal entries that Oman
Oil Marketing Company must have made for its Allowance
account.
c) Based on the information presented, comment on the effect
of Oman Oil Marketing Company's estimate of bad debt
expense on the financial statements for the period
presented.
d) Oman Oil Marketing Company plans to factor its accounts
receivables to get advantage of factoring. Give your
arguments to support the company's plan.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F5aebdc8d-6927-4cfa-bc36-b84f4a7d9d18%2F70d2e7ab-5a22-49ea-b333-3ba61ad8ec6a%2Fdvjpj8b_processed.jpeg&w=3840&q=75)
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