Chap009 Solution Manual(1)

9 33 chapter 09 accounting for receivables reporting

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Chapter 09 - Accounting for Receivables Reporting in Action BTN 9-1 1. Research In Motion’s receivables at February 27, 2010, are $2,594 million. 2. Accounts receivable turnover for fiscal 2010 ($ millions) = 6.35 times 3. Average collection period = 365/ Turnover = 365 / 6.35 = 57.5 days This time period is about ~60 days because RIM typically sell its products on credit. The majority of its customers probably pay within this 60-day window, which might coincide with a net 60 payment window for most customers who purchase merchandise on credit. 4. Liquid assets as a percent of current liabilities ($ millions) Feb. 27, 2010: = 185.3 % Feb. 28, 2009: = 171.7% Comments : Current liabilities are obligations that are due to be paid or liquidated within one year or one operating cycle of the business, whichever is longer. Typically, cash provided from the operations of the business during the year along with the existing liquid assets are used to satisfy these obligations. Looking solely at Research In Motion’s ability to satisfy current obligations using cash, investment, and receivables assets, the company is in a slightly better position at February 27, 2010, as compared to February 28, 2009. In either year, Research In Motion should not have trouble satisfying its current liabilities with these liquid assets. As a benchmark it is preferable to have closer to 100% in liquid assets to cover current liabilities. 5. Note 1 to Research In Motion’s financial statements describes its significant accounting policies. It reports that: “Cash and cash equivalents consist of balances with banks and liquid investments with maturities of three months or less at the date of acquisition.” 6. Solution depends on the financial statement information obtained. 9-34 $14,953 ($2,594 + $2,112)/2 $836 + $683 + $2,112 $2,115 $1,551 + $361 + $2,594 $2,432
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Chapter 09 - Accounting for Receivables Comparative Analysis BTN 9-2 1. Accounts Receivable Turnover ($ millions) Research In Motion (Current Year): = 6.35 times Research In Motion (Prior Year): = 6.73 times Apple (Current Year): = 14.8 times Apple (Prior Year): = 18.5 times 2. Average Collection Period (or “Average Days’ Sales Uncollected”) Research In Motion (Current Year): 365 days / 6.35 times = 57.5 days Research In Motion (Prior Year): 365 days / 6.73 times = 54.2 days Apple (Current Year): 365 days / 14.8 times = 24.7 days Apple (Prior Year): 365 days / 18.5 times = 19.7 days Interpretation: The average collection period for Research In Motion is longer than Apple because Apple sells more merchandise for cash and on credit card than does Research In Motion. 3. Both companies appear reasonably efficient in collecting accounts receivable, but RIM collects them over a longer period of time in both years vis-à-vis Apple. Both RIM and Apple showed an unfavorable trend with a longer collection time for the current year. 9-35 $11,065 ($2,112 + $1,175)/2 $37,491 ($2,422 + $1,637)/2 $42,905 ($3,361 + $2,422)/2 $14,953 ($2,594 + $2,112)/2
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Chapter 09 - Accounting for Receivables Ethics Challenge BTN 9-3 1. If the estimate for bad debts is reduced then less Bad Debts Expense will be recognized on the income statement resulting in a higher net income. It also means that a lower allowance will be shown on the
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