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Unformatted text preview: 6-1Odd-numbered SolutionsCHAPTER 6RECEIVABLES AND REVENUE RECOGNITIONQuestions, Short Exercises, Exercises, Problems, and Cases: Answers and Solutions6.1See the text or the glossary at the end of the book.6.3The direct write-off method matches the loss from an uncollectible accountwith revenue of the period when a particular account becomes uncollectible.The allowance method matches the loss from an uncollectible account withrevenue of the period of the sale instead of the later period when aparticular account becomes uncollectible.6.5a.This statement is valid. Most businesses ought not to set creditpolicies so stringent that they have no uncollectible accounts. To do sowould require extremely careful screening of customers, which is costly,and the probable loss of many customers who will take their businesselsewhere. So long as the revenues collected from credit sales exceedthe sum of both selling costs and the cost of goods sold on credit, thenthe firm should not be concerned if some percentage of its accountsreceivable are uncollectible.b.If a business liberalizes its credit policy by granting to a group ofcustomers, who were not previously granted this privilege, the right tobuy on account, it can find that its net revenues from the new creditcustomers exceed the cost of goods sold to them and the sellingexpenses of executing the sales. The extension of credit to newcustomers can increase net income even though it results in moreuncollectible accounts.c.When the net present value of the receipts from selling to newcustomers is larger than the net present value of the costs of puttinggoods into their hands.6.7Manufacturing firms typically do not identify a customer or establish a firmselling price until they sell products. Thus, these firms do not satisfy thecriteria for revenue recognition while production is taking place. Incontrast, construction companies usually identify a customer and establisha contract price before construction begins. In addition, the productionprocess for a manufacturing firm is usually much shorter than for aconstruction firm. The recognition of revenue at the time of production orat the time of sale does not result in a significantly different pattern ofincome for a manufacturing firm. For a construction company, the patternof income could differ significantly.Odd-numbered Solutions6-26.9Under both the installment method and the cash basis of accounting,accountants recognize revenue when the firm receives cash. Theinstallment method recognizes expenses in the same period as theassociated revenues. The cash basis recognizes expenses when the firmmakes cash expenditures.6.11Accountants are more concerned with the reliability of income data thanare economists. Accountants are responsible for measuring and auditingincome amounts and, therefore, require reliable measures of wealthchanges. Such evidence usually takes the form of market transactions....
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This note was uploaded on 05/31/2008 for the course ORIE 310 taught by Professor Callister during the Fall '07 term at Cornell University (Engineering School).
- Fall '07