4 solutions - Balance Sheet and Cash Flows CHAPTER 5 E5-2....

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Balance Sheet and Cash  Flows CHAPTER  5
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E5-2. Account Classification
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E5-2. A Few Notes Trading securities—one firm only holds it for SHORT- term profit (less than 12 months for sure)  current  assets Available-for-sale securities—can be EITHER current  assets OR non-current assets (long-term investment)! Demand bank loan—bank can ask for the return of  money in days  current liabilities Mortgage payable—real estate loan seldom is payable  IN ONE YEAR
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E5-5. Correction of B/S—First Entries 1. Reclassify the sinking fund Dr. LT investment-sinking fund 15,000 Cr. Cash  15,000 1. A/R normally should have Dr. balance (credit balance is actually  the prepayment from your customer) Dr. A/R 8,000 Cr. Other payable  8,000  (or put in “notes and accounts payable) Note: better to present separately the gross value of A/R and the  allowance balance
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E5-5. Correction 3. Totally nonsense—consignment should be  recognized still as inventory! No revenue  recognition, no COGs! Dr. Inventory 5,300 Cr. A/R   5,300 4. Nothing wrong—better to separately disclose  two items 5. The setoff is totally nonsense Dr. Cash 6,000 Cr. Taxes payable  6,000
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Corrected B/S
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Corrected B/S
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(b) $8,000 Cr. Balance Since there is no legal right to offset the credit  balance against any other amounts owing from  customers, these balances need to be  classified as  current liabilities. Had the credit balances in accounts receivable been  set off (netted) against other debit balances as  originally presented, there would have been  no  effect on the working capital.  The net amount of  current assets, less current liabilities would not  change in absolute amount. The classification change does affect the current  ratio (current assets / by current liabilities) as  demonstrated below:
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(b) $8,000 Cr. Balance
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(b) $8,000 Credit Balance—Clearly A  Material Item
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E5-10. Classify Items, GET Your Net  Income/R.E. Correct First!
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B/S
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B/S
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(b) No-classification The length of the operating cycle will determine what  items are classified as current where the operating  cycle is longer than one year. Should the business 
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This note was uploaded on 04/10/2009 for the course MANG MGCR 352 taught by Professor Zlou during the Spring '09 term at McGill.

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4 solutions - Balance Sheet and Cash Flows CHAPTER 5 E5-2....

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