![Intermediate Accounting: Reporting And Analysis](https://www.bartleby.com/isbn_cover_images/9781337788281/9781337788281_smallCoverImage.jpg)
Concept explainers
Ethics and
You are the accountant for Nello Company, which manufactures specialty equipment. Nello has been in financial difficulty, so its suppliers require purchases to he paid in cash. Furthermore, Nello has long-term debt with a debt covenant that requires it to maintain a 1:1 acid-test (quick) ratio. Nello’s employees work a 5-day week, Monday through Friday.
On Wednesday morning during the last week of the current year, Sam (the production supervisor) comes to you and says, “I don’t understand it. We have this large special order from a customer that must be delivered at the end of the first week in January. Once we get the raw materials, it is going to take 5 solid days of work without overtime to produce the order. If Bob (the president) would let me order the raw materials this morning, we could have them by late today. This would give us 2 days this week and the 4 days after New Year’s Day (Monday) of next week to complete the order without incurring overtime costs. But Bob says we must wait until next Tuesday to order the materials. This means we will have to work double time that Wednesday through Friday to finish the order. That overtime cost is going to really increase next year’s factory salary expense, so our profit and operating cash flows from that order will be very low. Please talk to him.”
When you approach Bob about buying the raw materials this morning, he says, “If we purchase those materials today, we will have to write a check. And that means our cash flow from operating activities for this year will be much lower, which our shareholders won’t like. Furthermore, our quick ratio will go down from 1.01:1 to 0.90:1, so our creditors may be upset. I know our profit and operating cash flows for next year will be lower if we delay the purchase, but that seems to be the best decision. Don’t you agree?”
Required:
From financial reporting and ethical perspectives, how would you respond to Bob?
![Check Mark](/static/check-mark.png)
Want to see the full answer?
Check out a sample textbook solution![Blurred answer](/static/blurred-answer.jpg)
Chapter 21 Solutions
Intermediate Accounting: Reporting And Analysis
- Between the end of one month and the 15th day of the next month, the balance in the employers business bank account has been getting smaller and smaller. An employee prepares the next payroll and correctly computes the necessary withholding taxes. The employer is supposed to pay accumulated employment taxes on the 15th of the next month. Payday is the last day of the month. However, the employer has used the funds withheld from employees to pay some of the businesss bills. He hopes that enough of the customers who owe him money will pay their outstanding debts. If his assumption is true, the checking account will have enough in it to pay the federal deposit on the 15th of the month. Is the employer acting ethically? After all, he says he intends to have enough money in the account for the deposit. Explain your answer.arrow_forwardAs the accountant for Clean Air Controls, you attend a meeting with the sales managers to discuss credit policies. At the meeting, you report that bad debts expense for the year is estimated to be $85,000 and account receivables at year end is $1,500,000 less a $57,000 allowance for doubtful accounts. Arthur Levitt, a sales manager, asks why bad debts expense and the allowance are not the same amount. Required 1. Write a professional email explaining this concept to Arthur. The company estimates bad debts expense as 3% of sales.arrow_forwardThe following information relates to the month of August for XYZ Inc. Prepare the bank reconciliation. Date 1 Aug 31 Aug 31 Aug 28 Aug 27 Aug 31 Aug 31 2 3456 7 Aug 1-31 8 Aug 31 9 Aug 31 10 Aug 31 Information Multiple Choice Bank statement balance $3,490 Bank statement reflects bank fees for the month $35 NSF cheque $100 with fee of $10. Bank statement reflects paper statement fee $80 Bank statement reflects interest earned on balance $8 $1,000 note receivable collected by bank and deposited into XYZ's account. Related bank fee is $40. XYZ wrote cheques with total value over $60,000. As of Aug 31 $3,021 of the cheques written have not cleared the bank. Also, $200 cheques written back in June have still not cleared the bank. Deposits in transit $1,450 The GL reflects cash sales of $145. The bank statement reflects deposits related to these sales of $154. XYZ incorrectly recorded $145. General ledger cash account reflects $967 Which of the following journal entries is required after the…arrow_forward
- You are the assistant controller in charge of general ledger accounting at Linebarger Bottling Company. Your company has a large loan from an insurance company. The loan agreement requires that the company's cash account balance be maintained at $200,000 or more, as reported monthly. On June 30, the cash balance is $80,000, which you report to Lisa Infante, the financial vice president. Lisa excitedly instructs you to keep the cash receipts book open for one additional day for purposes of the June 30 report to the insurance company. Lisa says, “If we don't get that cash balance over $200,000, we'll default on our loan agreement. They could close us down, put us all out of our jobs!” Lisa continues, “I talked to Oconto Distributors (one of Linbarger's largest customers) this morning. They said they sent us a check for $150,000 yesterday. We should receive it tomorrow. If we include just that one check in our cash balance, we'll be in the clear. It's in the mail!” a. Who will suffer…arrow_forwardThe chief accountant for Bramble Corporation provides you with the following list of accounts receivable written off in the current year. Date March 31 June 30 September 30 December 31 Customer E. L. Masters Company Stephen Crane Associates Amy Lowell's Dress Shop R. Frost, Inc. Amount $7,500 6,600 6.900 Net income would be $ 9,100 Bramble follows the policy of debiting Bad Debt Expense as accounts are written off. The chief accountant maintains that this procedure is appropriate for financial statement purposes because the Internal Revenue Service will not accept other methods for recognizing bad debts. All of Bramble's sales are on a 30-day credit basis. Sales for the current year total $2,200,000. The balance in Accounts Receivable at year-end is $81,100 and an analysis of customer risk and charge-off experience indicates that 12% of receivables will be uncollectible (assume a zero balance in the allowance). (b) By what amount would income before taxes differ if bad debt expense was…arrow_forwardSharon Els sells security systems for Guardsman Security Co. Els has a monthly sales quota of $40,000. If Els exceeds this quota, she is awarded a bonus. In measuring the quota, a sale is credited to the salesperson when a customer signs a contract for installation of a security system. Through the 25th of the current month, Els has sold $30,000 in security systems. Vortex Co., a business rumored to be on the verge of bankruptcy, contacted Els on the 26th of the month about having a security system installed. Els estimates that the current contract would yield about $14,000 worth of business for Guardsman Security Co. In addition, this contract would be large enough to put Els "over the top" for a bonus in the current month. However, Els in concerned that Vortex Co. will not be able to make the contract payment after the security system is installed. In fact, Els has heard rumors that a competing security services company refused to install a system for Vortex Co. because of these…arrow_forward
- Ethics in Action Tonya Latirno is a staff accountant for Cannally and Kennedy, a local CPA firm. For the past 10 years, the firm has given employees a year-end bonus equal to two weeks salary. On November 15, the firm's management team announced that there would be no annual bonus this year. Because of the firm's long history of giving a year end bonus. Tonya and her coworkers had come to expect the bonus and believed that Cabbally and Kennedy had breached an implicit agreement by discontinuing the bonus. As a result, Tonya decided that she would make up for the lost bonus by working an extra six hours of overtime per week for the rest of the year. Cannally and Kennedy's policy is to pay overtime at 150% of striaght time. Tonya's Supervisor was surprised to see overtime being reported, there is generally very little additional or unusual client service demands at the end of the calendar year. However, the overtime was not questioned, because employees are on the "honor system" in…arrow_forwardJames Howard owns Howard Auto Sales. He periodically borrows money from Bay City State Bank and Trust. He permits some customers to sign short-term notes for their purchases. He usually discounts these notes at the bank. Following are selected transactions that occurred in March 20X1. DATE TRANSACTIONS 20X1 Mar. 4 Mr. Howard borrows $34,560 from the bank on a note payable for the business. Terms of the note are 10 percent interest for 45 days. 11 A 90-day $47,520 note payable to the bank is discounted at a rate of 8 percent. 22 Sold a car to Darnell Jones for $40,320 on a 75-day note receivable, bearing interest at 7 percent. 23 Discounted the Jones note with the bank. The bank charges a discount rate of 10 percent. 25 Sold a car for $48,960 to Henry Thomas. Thomas paid $4,000 cash and signed a 30-day note, bearing interest at 9 percent, for the balance. 28 Alfred Herron's account receivable is overdue. Howard requires him to sign a 8…arrow_forwardJames Howard owns Howard Auto Sales. He periodically borrows money from Bay City State Bank and Trust. He permits some customers to sign short-term notes for their purchases. He usually discounts these notes at the bank. Following are selected transactions that occurred in March 20X1. DATE TRANSACTIONS 20X1 Mar. 4 Mr. Howard borrows $34,560 from the bank on a note payable for the business. Terms of the note are 10 percent interest for 45 days. 11 A 90-day $47,520 note payable to the bank is discounted at a rate of 8 percent. 22 Sold a car to Darnell Jones for $40,320 on a 75-day note receivable, bearing interest at 7 percent. 23 Discounted the Jones note with the bank. The bank charges a discount rate of 10 percent. 25 Sold a car for $48,960 to Henry Thomas. Thomas paid $4,000 cash and signed a 30-day note, bearing interest at 9 percent, for the balance. 28 Alfred Herron's account receivable is overdue. Howard requires him to sign a 8…arrow_forward
- James Howard owns Howard Auto Sales. He periodically borrows money from Bay City State Bank and Trust. He permits some customers to sign short-term notes for their purchases. He usually discounts these notes at the bank. Following are selected transactions that occurred in March 20X1. DATE TRANSACTIONS 20X1 Mar. 4 Mr. Howard borrows $34,560 from the bank on a note payable for the business. Terms of the note are 10 percent interest for 45 days. 11 A 90-day $47,520 note payable to the bank is discounted at a rate of 8 percent. 22 Sold a car to Darnell Jones for $40,320 on a 75-day note receivable, bearing interest at 7 percent. 23 Discounted the Jones note with the bank. The bank charges a discount rate of 10 percent. 25 Sold a car for $48,960 to Henry Thomas. Thomas paid $4,000 cash and signed a 30-day note, bearing interest at 9 percent, for the balance. 28 Alfred Herron's account receivable is overdue. Howard requires him to sign a 8…arrow_forwardJames Howard owns Howard Auto Sales. He periodically borrows money from Bay City State Bank and Trust. He permits some customers to sign short-term notes for their purchases. He usually discounts these notes at the bank. Following are selected transactions that occurred in March 20X1. DATE TRANSACTIONS 20X1 Mar. 4 Mr. Howard borrows $34,560 from the bank on a note payable for the business. Terms of the note are 10 percent interest for 45 days. 11 A 90-day $47,520 note payable to the bank is discounted at a rate of 8 percent. 22 Sold a car to Darnell Jones for $40,320 on a 75-day note receivable, bearing interest at 7 percent. 23 Discounted the Jones note with the bank. The bank charges a discount rate of 10 percent. 25 Sold a car for $48,960 to Henry Thomas. Thomas paid $4,000 cash and signed a 30-day note, bearing interest at 9 percent, for the balance. 28 Alfred Herron's account receivable is overdue. Howard requires him to sign a 8…arrow_forwardJames Howard owns Howard Auto Sales. He periodically borrows money from Bay City State Bank and Trust. He permits some customers to sign short-term notes for their purchases. He usually discounts these notes at the bank. Following are selected transactions that occurred in March 20X1. DATE TRANSACTIONS 20X1 Mar. 4 Mr. Howard borrows $20,000 from the bank on a note payable for the business. Terms of the note are 8 percent interest for 45 days. 11 A 90-day $18,000 note payable to the bank is discounted at a rate of 10 percent. 22 Sold a car to Darnell Jones for $30,000 on a 75-day note receivable, bearing interest at 10 percent. 23 Discounted the Jones note with the bank. The bank charges a discount rate of 12 percent. 25 Sold a car for $30,000 to Henry Thomas. Thomas paid $4,000 cash and signed a 30-day note, bearing interest at 10 percent, for the balance. 28 Alfred Herron's account receivable is overdue. Howard requires him to sign a 12…arrow_forward
- College Accounting (Book Only): A Career ApproachAccountingISBN:9781337280570Author:Scott, Cathy J.Publisher:South-Western College PubCollege Accounting (Book Only): A Career ApproachAccountingISBN:9781305084087Author:Cathy J. ScottPublisher:Cengage Learning
- Individual Income TaxesAccountingISBN:9780357109731Author:HoffmanPublisher:CENGAGE LEARNING - CONSIGNMENT
![Text book image](https://www.bartleby.com/isbn_cover_images/9781337280570/9781337280570_smallCoverImage.gif)
![Text book image](https://www.bartleby.com/isbn_cover_images/9781305084087/9781305084087_smallCoverImage.gif)
![Text book image](https://www.bartleby.com/isbn_cover_images/9780357109731/9780357109731_smallCoverImage.gif)