Module06Solutions - Module 6 E 6-24(25 minutes a,b($ millions 2005 $ 9,903 227 $10,130 2004 $10,226 286 $10,512 Accounts receivable(net Allowance

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©Cambridge Business Publishers, 2008 Solutions Manual, Module 6 6-1 Module 6 E 6-24 (25 minutes) a,b. ($ millions) 2005 2004 Accounts receivable (net). ......................... $ 9,903 $10,226 Allowance for uncollectible accounts . ..... 227 286 Gross accounts receivable. ....................... $10,130 $10,512 Percentage of uncollectible accounts to gross accounts receivable . ................ 2.24% ($227/$10,130) 2.72% ($286/$10,512) c. ($ millions) 2005 2004 2003 Bad debt expense (reversal of allowance) . ... $17 $(6) $29 Amounts actually written off . ......................... $76 $64 $92 The provision (increase in the allowance account arising from bad debt expense recorded on the income statement) has generally declined from 2003 to 2005, and was even a negative amount in 2004 (i.e. bad debt expense increased net income in 2004). The receivables that the company wrote off, exhibit a similar pattern. d. The allowance for uncollectible accounts has decreased as a percentage of gross accounts receivable from 2.72% in 2004 to 2.24% in 2005 (see part b). In 2004, HP allowed its allowance account to decline as a percentage of gross accounts receivable as the provision was actually reversed, resulting in negative bad debt expense (increase in profitability). One way to gauge the adequacy of the allowance account is to look at write-offs as a percentage of the allowance account at the beginning of the year. In 2004, this percentage is 18.4% ($64/$347) and for 2005 it is 26.6% ($76/$286). HP’s write-offs as a percentage of the allowance increased from 2004 to 2005. This means that the bad debt expense is not keeping up with actual accounts that go bad. As well, HP has a smaller allowance account in 2005 compared to 2004 (although sales are dropping). If HP’s allowance was adequate in 2003, the
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©Cambridge Business Publishers, 2008 Financial Accounting for MBAs, 3rd Edition 6-2 reversal in 2004 (with the consequent increase in profitability in that year) appears to have been more than necessary. Further insight might be gained by comparing HP’s accounts to those of its peers.
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©Cambridge Business Publishers, 2008 Solutions Manual, Module 6 6-3 E6-27 (30 minutes) Units Cost Beginning Inventory 1,000 $ 20,000 Purchases: #1 1,800 39,600 #2 800 20,800 #3 1,200 34,800 Goods available for sale 4,800 $115,200 Units in ending inventory = 4,800 – 2,800 = 2,000 a. First-in, first-out Units Cost Total 1,200 @ $29 = $34,800 800 @ $26 = 20,800 Ending Inventory 2,000 $55,600 Cost of goods available for sale $115,200 Less: Ending inventory 55,600 Cost of goods sold $ 59,600 Balance Sheet Income Statement Transaction Cash Asset + Noncash Assets = Liabil- ities + Contrib. Capital + Earned Capital Rev- enues Expen- ses = Net Income COGS 59,600 INV 59,600 59,600 59,600 COGS INV Record FIFO cost of goods sold -59,600 Inventory = -59,600 Retained Earnings +59,600 Cost of Sales = -59,600 b. Last-in, first-out Units Cost Total 1,000 @ $20 = $20,000 1,000 @ $22 = 22,000 Ending inventory 2,000 $42,000 Cost of goods available for sale $115,200 Less: Ending inventory 42,000 Cost of goods sold $ 73,200
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This note was uploaded on 05/12/2010 for the course ACG 5065 taught by Professor Asare during the Spring '08 term at University of Florida.

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Module06Solutions - Module 6 E 6-24(25 minutes a,b($ millions 2005 $ 9,903 227 $10,130 2004 $10,226 286 $10,512 Accounts receivable(net Allowance

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