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Unformatted text preview: ies Inventory
Interest Payable, Prepaid Interest, Premium on Bonds Payable, and Discount on Bonds
Payable. Note that if a company does not use a Premium on Bonds Payable account for bonds
issued at a premium or a Discount on Bonds Payable account for bonds issued at a discount, it
would be necessary to use the Bonds Payable account to analyze cash flows associated with
Accumulated Depreciation Concluded Sales Revenue
1. Unearned Sales Revenue would increase when a company collects cash from a customer in
advance of providing goods or services. Since this amount would not be reflected in Sales Revenue until the company provided goods or services, the amount of the increase in Unearned
Sales Revenue would have to be added to accrualbasis sales.
2. Accounts Receivable would increase when a company makes credit sales. The amount of the
increase would be reflected in Sales Revenue, yet the company would not have collected any
cash. Thus, the amount of the increase in Accounts Receivable would have to be deducted from
accrualbasis sales. 3. An increase in Allowance for Doubtful Accounts by itself has no effect on accrualbasis sales.
However, one must analyze the account to determine whether the company had any writeoffs or
recoveries of previously written off accounts during the year. Writeoffs would be deducted from
accrualbasis sales, while recoveries would be added to accrualbasis sales to arrive at cash
collections from sales. Cost of Goods Sold
Adjusting the balance in Cost of Goods Sold for changes in Merchandise Inventory and Accounts
Payable will convert COGS from the accrualbasis to the cash outflow for inventory. An increase in
Merchandise Inventory means that the company purchased more inventory than it sold during the
year. An increase in the balance of Merchandise Inventory is added to COGS because it is assumed
that the company paid cash for the inventory it acquired during the year. However, an increase in the
balance of Accounts Payable indicates that this assumption is not
valid. That is, an increase in Accounts...
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