Financial Accounting Bus 221 851 Name Please Make Sure You A

Bus221 851namefinancial Accountingplease Make Sure You Answer A

Make sure you answer all parts of the questions: 50 pts…..2 pts each question.

Question 1: If inventory errors are said to correct themselves, why are accounting users concerned when such errors are made?

Question 2: What two purposes are accomplished by recording closing entries? 1. 2.

Question 3: Explain how a business can earn a positive gross profit on its sales and still have a net loss.

Question 4: What accounting concept justifies charging low-cost plant asset purchases immediately to an expense account?

Question 5: Identify three events that might lead to the disposal of a plant asset. 1. 2. 3.

Question 6: Explain why writing off a bad debt against the allowance for Doubtful Accounts does not reduce the estimated realizable value of a company’s accounts receivable

Question 7: Identify four kinds of external users and describe how they use accounting information. 1. 2. 3. 4.

Question 8: Discuss the steps in processing business transactions.

Question 9: What is the general rule for cost inclusion for plant assets?

Question 10: Why would a company’s manager be concerned about the quantity of its purchase returns if its suppliers allow unlimited returns?

Question 11: When a store purchases merchandise, why are individual departments not allowed to directly deal with suppliers?

Question 12: (1) When do we know that a company has goodwill? (2) When can good will appear in a company’s balance sheet? 1. 2.

Question 13: List three ways sellers benefit from allowing their customers to use credit cards? 1. 2. 3.

Question 14: What are at least three questions business owners and managers might be able to answer by looking at accounting information? 1. 2. 3.

Question 15: What type of business is most likely to select a fiscal year that corresponds to its natural business year? Why?

Question 16: Why does the recordkeeper prepare a trial balance?

Question 17: Internal control procedures are important in every business, but at what stage in the development of the business do they become especially critical?

Question 18: How is unearned revenue reported in the financial statements and why?

Question 19: Why is the Modified Accelerated Cost Recovery System not generally accepted for financial accounting purposes?

Question 20: Why might a business prefer a note receivable to an account receivable?

Question 21: Why should responsibility for related transactions be divided among different departments or individuals?

Question 22: How does a company that uses a perpetual inventory system determine the amount of inventory shrinkage?

Question 23: Distinguish between cash discounts and trade discounts. Is the amount of a trade discount on purchased merchandise recorded in the accounts?

Question 24: Why are incidental costs sometimes ignored in inventory costing? Under what accounting constraint is this permitted?

Question 25: What are the limitations of internal control?

Sample Paper For Above instruction

Introduction

Financial accounting plays a crucial role in providing relevant information for decision-making, control, and reporting in a business. This paper addresses key questions related to inventory errors, closing entries, profit calculations, asset valuation, external users of financial information, and internal controls, among other topics. Understanding these fundamental concepts is vital for effective financial management and ensuring accurate financial statements.

Inventory Errors and Their Correction

When inventory errors occur, they are said to correct themselves over time, especially in periodic inventory systems, because the errors often offset during subsequent periods. However, accounting users remain concerned because these errors can distort financial statements, mislead stakeholders, and impact decision-making. Inaccurate inventory figures can lead to incorrect cost of goods sold, gross profit, and net income, which could influence investment, lending, and managerial decisions (Kieso, Weygandt, & Warfield, 2019).

Purposes of Closing Entries

Closing entries serve two main purposes: first, they transfer the balances of temporary accounts (revenues, expenses, and dividends) to retained earnings, resetting these accounts for the next accounting period. Second, they help in determining the net income or loss for the period, which is then reflected in retained earnings (Horngren, Sundem, & Elliott, 2018).

Gross Profit and Net Loss

A business can report a positive gross profit when sales revenue exceeds the cost of goods sold. However, if operating expenses, interest, taxes, or other expenses surpass gross profit, the net result could be a net loss. For instance, high administrative costs or interest expenses may wipe out gross profit, leading to an overall net loss despite profitable sales (Wild, Subramanyam & Halsey, 2019).

Accounting Concept for Immediate Expense Recognition

The accounting concept that justifies charging low-cost plant assets immediately to an expense account is the Materiality Concept. It states that insignificant costs may be expensed rather than capitalized, as the benefit of capitalizing small assets does not outweigh the effort and cost involved (Kieso et al., 2019).

Events Leading to Disposal of Plant Assets

Events that might lead to the disposal of a plant asset include:

1. Obsolescence due to technological advances.
2. Physical deterioration making the asset unusable.
3. Sale or exchange for other assets or cash.

Bad Debt Write-Offs and Accounts Receivable Value

Writing off a bad debt against the Allowance for Doubtful Accounts reduces the receivables' gross amount but does not affect the estimated realizable value because the allowance account already accounts for expected bad debts. This method ensures the net realizable value remains unchanged (Wild et al., 2019).

External Users of Accounting Information

Four external users include:

1. Investors: Use financial statements to assess profitability and investability.
2. Creditors: Evaluate creditworthiness and liquidity to decide on lending.
3. Regulatory agencies: Ensure compliance with laws and regulations.
4. Customers: Assess a company's stability and ability to provide ongoing service or supplies.

Processing Business Transactions

The steps include identifying the transaction, analyzing its impact on accounts, recording it in the journal, posting to ledger accounts, preparing trial balances, and finally, preparing financial statements (Kieso et al., 2019).

Cost Inclusion for Plant Assets

The general rule states that all costs necessary to acquire the asset and prepare it for use should be included in the cost of the plant asset. This includes purchase price, freight, taxes, and installation costs.

Concern over Purchase Returns Despite Unlimited Allowance

Management may be concerned because excessive purchase returns could signal problems such as overstocking, poor sales forecasts, or supplier issues, which can affect inventory management and financial planning.

Departments and Supplier Dealings

Departments do not directly deal with suppliers to maintain control over purchasing processes, ensure proper authorization, and streamline recordkeeping. Centralized purchasing helps prevent fraud and errors.

Goodwill Recognition

We recognize goodwill when a company acquires another for a premium over the fair value of net identifiable assets. Goodwill appears on the balance sheet only during acquisitions, reflecting intangible value such as reputation, customer relationships, and brand strength.

Benefits of Credit Cards for Sellers

1. Accelerated cash flow as payments are processed quickly.
2. Reduced risk of theft compared to physical cash.
3. Increased sales volume by offering convenient payment options.

Using Accounting Information for Decision-Making

Business owners use accounting data to evaluate profitability, monitor liquidity, and assess operational efficiency, enabling informed strategic decisions.

Choosing a Fiscal Year

Most service businesses or companies with a seasonal cycle select a fiscal year aligning with their natural business cycle to accurately reflect their financial performance within relevant periods.

Purpose of a Trial Balance

The trial balance is prepared to verify that debits equal credits after posting transactions, serving as a preliminary check for recording accuracy.

Internal Controls During Business Development

Internal controls are especially critical during the startup phase to establish security, prevent fraud, and promote reliable financial reporting as the business grows and transactions increase.

Reporting Unearned Revenue

Unearned revenue is recorded as a liability on the balance sheet because it represents cash received before services are rendered or goods are delivered, indicating an obligation to perform in the future (Kieso et al., 2019).

Modified Accelerated Cost Recovery System (MACRS)

MACRS is not accepted for financial accounting because it involves depreciation methods mandated for tax purposes, which do not necessarily match the actual economic usage or decline in asset value, differing from generally accepted accounting principles (GAAP).

Preference for Notes Receivable

A business might prefer a note receivable because it formalizes the debt, specifies interest, and provides legal enforceability, aiding in collection efforts and cash flow management.

Responsibility Segregation

Dividing responsibility among different departments or individuals reduces the risk of errors and fraud, ensures checks and balances, and enhances accountability.

Inventory Shrinkage Determination

Under a perpetual inventory system, inventory shrinkage is determined by comparing the physical count of inventory to the recorded balance. The difference indicates shrinkage due to theft, loss, or damage.

Cash Discounts vs. Trade Discounts

Cash discounts are offered to encourage prompt payment and are recorded as discounts on the sales or purchases account. Trade discounts are reductions in list price and are not recorded in the accounts; they are used for pricing purposes only.

Incidental Costs in Inventory

Incidental costs, such as storage or handling costs, are often ignored in inventory costing under the IASB's materiality principle because their impact on inventory could be insignificant relative to total costs, simplifying the accounting process.

Limitations of Internal Control

Internal controls cannot eliminate all fraud or errors. Limitations include management override, human error, collusion among employees, and cost-benefit considerations that prevent establishing controls for every possible risk.

References

• Kieso, D. E., Weygandt, J. J., & Warfield, T. D. (2019). Intermediate Accounting (16th ed.). Wiley.
• Horngren, C. T., Sundem, G. L., & Elliott, J. A. (2018). Introduction to Financial Accounting. Pearson.
• Wild, J. J., Subramanyam, K. R., & Halsey, R. F. (2019). Financial Statement Analysis. McGraw-Hill Education.
• Gassen, J., & Schackmann, H. (2020). Internal Controls and Their Limits. Journal of Accounting and Economics, 70(2-3), 101347.
• Gibson, C. H. (2018). Financial Reporting & Analysis. Cengage Learning.
• Schroeder, R. G., Clark, M. W., & Cathey, J. M. (2020). Financial Accounting Theory and Analysis. Wiley.
• Hoffelder, G. (2017). Depreciation Methods and Asset Management. Journal of Accountancy, 224(4), 45-50.
• Foster, G., Dimmock, S., & Wall, E. (2019). Accounting and Financial Management. Routledge.
• Beasley, M. S., Carcello, J. V., Hermanson, D. R., & Neal, T. L. (2020). Fraudulent Financial Reporting: 1998-2018. Journal of Accountancy, 229(3), 32-37.
• Lopez, A. (2021). Inventory Management Strategies. Supply Chain Digest, 21(7), 16-23.