The Encore Video Store Co. Is Owned And Operated By Sergio A

The Encore Video Store Co Is Owned And Operated By Sergio Alonzo The

The Encore Video Store Co. is owned and operated by Sergio Alonzo. The following is an excerpt from a conversation between Sergio Alonzo and Suzie Engel, the chief accountant for The Encore Video Store: Sergio: Suzie, I’ve got a question about this recent balance sheet. Suzie: Sure, what’s your question? Sergio: Well, as you know, I’m applying for a bank loan to finance our new store in Cherokee, and I noticed that the accounts payable are listed as $120,000. Suzie: That’s right. Approximately $100,000 of that represents amounts due our suppliers, and the remainder is miscellaneous payables to creditors for utilities, office equipment, supplies, etc. Sergio: That’s what I thought. But as you know, we normally receive a 2% discount from our suppliers for earlier payment, and we always try to take the discount. Suzie: That’s right. I can’t remember the last time we missed a discount. Sergio: Well, in that case, it seems to me the accounts payable should be listed minus the 2% discount. Let’s list the accounts payable due suppliers as $98,000, rather than $100,000. Every little bit helps. You never know. It might make the difference between getting the loan and not. How would you respond to Sergio Alonzo’s request?

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In evaluating Sergio Alonzo’s request to adjust the accounts payable balance by deducting the 2% discount, it is essential to adhere to the principles of accurate financial reporting. From an accounting perspective, accounts payable is recorded at the invoice amount, which represents the obligations owed to suppliers at the invoice date. This amount is recognized as a liability on the balance sheet until paid, regardless of whether the company intends to or actually takes advantage of early payment discounts.

Generally Accepted Accounting Principles (GAAP) stipulate that liabilities should be reported at the gross amount owed, with discounts only recognized if they are actually taken. In other words, if The Encore Video Store pays early and earns the 2% discount, then the liability should be reduced accordingly, and the discount should be recognized as a reduction in the expense or an increase in income (depending on the accounting treatment). Until that payment occurs, the liability remains at its original amount of $120,000. Adjusting the accounts payable to reflect a hypothetical early payment discount, without actual payment or intent of payment, constitutes an inaccurate misstatement of liabilities.

Furthermore, presenting liabilities at a discounted amount when the actual obligation remains higher is misleading to creditors and lenders who rely on the financial statements to assess the company's true financial position. Financial statements aim to provide a true and fair view of the company’s liabilities and assets at a given point in time. Manipulating or adjusting reported figures to improve perceived financial health can jeopardize credibility and may have legal implications under accounting standards.

It is also important to consider the impact of such adjustments on the company’s financial ratios. Accounts payable is a key parameter used in calculating liquidity ratios such as the current ratio and quick ratio. An inflated payable balance portrays a different liquidity position than one adjusted for discounts that have not yet been realized. For a bank evaluating a loan application, the most accurate and transparent statement of liabilities will support a fair risk assessment.

Therefore, the appropriate response to Sergio Alonzo’s request is to explain that accounts payable should be reported at the gross invoice amount of $120,000. Any discounts should only be recognized once the company has taken advantage of them through actual early payment. As such, the current balance sheet figures reflect liabilities accurately, and any adjustments to undervalue liabilities without actual payment would be inconsistent with sound accounting principles. Transparency and adherence to standards are paramount to maintain the integrity of financial reporting, especially in situations where external parties like banks rely heavily on these statements for decision-making.

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