建军节的由来-森林防火宣传标语

CHAPTER 7
FINANCIAL ASSETS
OVERVIEW OF EXERCISES, PROBLEMS, CASES,
AND INTERNET ASSIGNMENT

Exercises
7–1



Topic
You as a student
Learning
Objectives
3

Characteristics
Mechanical, conceptual
7–2 Reporting financial assets 1, 2
7–3 Embezzling cash 2
7–4 Protecting liquid assets 2
7–5 Bank reconciliation 3
7–6 Cash and cash equivalents 1, 2
7–7 Evaluating cash equivalents 1, 2
7–8 Marketable securities 1, 4
7–9 Estimating uncollectible 1, 5
accounts
7–10 Collection performance by 7
industry
7–11 Effects of transactions 1, 8
7–12 Doubtful accounts by 5
industry
7–13 Reporting financial assets 1
7–14 Analyzing accounts 1, 5, 7
receivable
*7–15 Mark-to-market adjustments 1, 8, 9
*7–16 Sale of marketable securities 1, 8, 9
7–17 Notes and interest 6
7–18 Notes and interest 6, 8
7–19 Examining an annual report 1, 4, 7








____________
*Supplemental Topic, “Accounting for Marketable Securities.”
224
Conceptual, real—Apple Computer
Conceptual, real—White Electric Supply
Conceptual
Mechanical, conceptual
Conceptual, real—Westinghouse Electric
Conceptual, real—Nexity Bank, MBNA
America Bank, IndyMac Bank, Next
Bank
Conceptual, real—Microsoft
Corporation
Mechanical, conceptual
Conceptual, mechanical, real—Huffy
Corporation and Pennsylvania Power
Company
Conceptual, analytical
Conceptual, real—Albertsons, Inc., and
Sprint Corporation
Conceptual
Mechanical, conceptual, real—Adolph
Coors Company and Anheuser-Busch
Companies, Inc.
Mechanical, conceptual, real—Weis
Markets
Mechanical, conceptual
Mechanical
Mechanical, analytical
Conceptual, mechanical, real—Tootsie
Roll Industries, Inc.

© The McGraw-Hill Companies, Inc., 2005

Problems
7–1
7–2
7–3
7–4
*7–5
7–6
7–7















Bank reconciliation
Protecting cash
Aging accounts receivable
Uncollectible accounts
Accounting for marketable
securities
Notes receivable and interest
Short Comprehensive
Problem

Topic
Cash management
Window dressing
Accounting principles
Understanding cash flows

1, 3
2, 3
1, 5
1, 5
1, 4, 9







Mechanical, conceptual
Mechanical, analytical, conceptual
Mechanical, conceptual
Mechanical, conceptual
Mechanical, conceptual, real—
Footlocker, Inc. and Gap, Inc.
6 Mechanical, conceptual
1, 3, 4, 5, 6, Mechanical, conceptual, analytical
7
Learning Character of
Objectives Assignment
2 Group assignment, communication
1–5, 7 Analytical, ethics, communication
1, 5, 6 Analytical, communication
7, 8 Conceptual, communication, group





2

1, 2



Conceptual


Internet, real—


Cases
7–1
7–2
7–3
7–4





Business Week

Assignment
7–5 Business Week assignment
Internet
Assignment
7–1

Cash management









____________
*Supplemental Topic, “Accounting for Marketable Securities.”
Solutions Manual Vol. I, Financial and Managerial Accounting 13e, Williams et al 225

DESCRIPTIONS OF PROBLEMS, CASES,
AND THE INTERNET ASSIGNMENT
Below are brief descriptions of each problem, case, and the Internet assignment. These descriptions are
accompanied by the estimated time (in minutes) required for completion and by a difficulty rating. The time
estimates assume use of the partially filled-in working papers.
Problems
7–1 Banner, Inc.
A comprehensive bank reconciliation.

25 Medium
45 Strong

7–2 Osage Farm Supply
Students are to analyze a fraudulently prepared bank reconciliation to
determine the amount of concealed embezzlement. Also calls for
recommendations for improving internal control. A very challenging problem
well suited to use as a group assignment.
7–3 Super Star
Computation of the amount required in the allowance for doubtful accounts
based on an aging schedule of accounts receivable. Also requires journal
entries for adjustment of the allowance account and for write-off of a
worthless receivable.

15 Medium

7–4 Wilcox Mills
A problem designed to dispel the misconception that the allowance is equal to
annual bad debt expense. Students are to summarize (in general journal entry
form) transactions during the year that affect the allowance for doubtful
accounts. Then they are to comment on the relative size of the year-end
allowance in comparison to write-offs during the subsequent year.

* 7–5 Weston Manufacturing Co.
A comprehensive problem on marketable securities. Includes recording gains
and losses, the mark-to-market adjustment, and balance sheet presentation.

7–6 Eastern Supply
Briefly covers accounting for notes receivable, including accrual of interest,
maturity, and default.
7-7

Hendry Corporation
A short comprehensive problem that integrates the various components of
financial assets. Includes a bank reconciliation, cash equivalents, short-term
investments, doubtful accounts, notes receivable, and interest revenue.
30 Medium
40 Strong
20 Medium
40 Strong







____________
*Supplemental Topic, “Accounting for Marketable Securities.”

226 © The McGraw- Hill Companies, Inc., 2005

Cases
7–1 Interview a Bank Officer (group assignment)

Students are to report upon the cash management options offered by a local
bank. Also, select the option they consider most appropriate for two investors
with differing requirements.

7–2 Ethics Case: ―Window Dressing‖

Students are to evaluate several proposals being considered by management
for ―improving‖ the year-end balance sheet. One issue is whether the company
must comply with GAAP as it is not publicly owned. Involves both ethical
and accounting issues.

7–3 Accounting Principles

Accounting practices are described in four separate situations. Students are
asked to determine whether there has been a violation of generally accepted
accounting principles, to identify the principles involved, and to explain the
nature of the violations.
7–4 Rock, Inc.

An unstructured problem involving the effects of a major change in credit
policy upon sales, cash receipts, turnover of accounts receivable, and
uncollectible accounts. Good problem for classroom discussion.
Business Week Assignment
7–5 Cash Management

Students are to consider issues related to charging income taxes to a credit
card.

Internet Assignment
7–1

An Internet research problem that requires students to compare interest rates
of various U.S. Treasury securities, CDs, and money market accounts.


Solutions Manual Vol. I, Financial and Managerial Accounting 13e, Williams et al
No time
estimate

40 Strong
20 Medium
40 Strong
10 Medium
No time
estimate
Medium
227

SUGGESTED ANSWERS TO DISCUSSION QUESTIONS
Receivables are created as a result of sales and are converted into cash as they are collected. Cash
1.
receipts that will not be needed in the near term are invested in marketable securities. Then, should
cash needs exceed the cash on hand, some of the marketable securities may quickly be converted
back into cash.
All financial assets appear in the balance sheet at their current value—that is, the amount of cash
2.
that the assets represent. For cash, current value is simply the face amount. But for marketable
securities, current value means current market value. For receivables, current value means the
collectible amount, which is called net realizable value (i.e., the amount of cash expected to be
collected).
Cash equivalents are very short-term investments that convert quickly into cash. Examples include
3.
money market funds, U.S. Treasury bills, certificates of deposit, and high-grade commercial paper.
These items are considered so similar to cash that they often are combined with cash in the balance
sheet. The first asset in the balance sheet then is called Cash and cash equivalents.
Lines of credit are preapproved loans, which the borrower may access simply by writing a check. A
4.
line of credit increases solvency, because it gives the holder immediate access to cash. Unused lines
of credit generally are disclosed in the notes accompanying financial statements.
Yes, efficient management of cash includes more than preventing losses from fraud or theft.
5.
Efficient management of cash also includes policies that will (a) provide accurate accounting for all
cash receipts, cash payments, and cash balances; (b) maintain a sufficient amount of cash to make
all payments promptly as required; and (c) prevent unnecessarily large amounts of cash from being
held idle in bank checking accounts that produce little or no revenue.
Cash generates little or no revenue. In fact, federal laws prohibit banks from paying interest on
6.
corporate checking accounts. Therefore, cash not needed in the near future should be invested to
earn some form of revenue. Short-term, liquid investments include cash equivalents and marketable
securities. If cash is available on a long-term basis, it usually can be used to finance growth or repay
long-term debt. If it cannot be used efficiently in the business, it should be distributed to the
company’s owners.

a.
Separate the functions of handling cash receipts from maintenance of (or access to) the
7.
accounting records.
b.
Prepare a cash budget so that departmental cash receipts can be compared with expected
amounts.
c.
Prepare an immediate record (or control listing) of all cash receipts.
d.
Deposit cash receipts in the bank on a daily basis.
e.
Reconcile bank statements to determine that recorded cash receipts reached the bank.
(a) Outstanding checks, and (b) items collected for the depositor by the bank.
8.
A cash budget is a forecast of future cash receipts and cash payments. By comparing actual cash
9.
flows with the budgeted amounts, management has a basis for evaluating the reasonableness of the
actual results. Cash budgets typically are prepared for each department or other area of managerial
responsibility. In this way, the budgets provide a basis for evaluating the performance of individual
managers.
228 © The McGraw-Hill Companies, Inc., 2005

Marketable securities are less liquid than cash equivalents, primarily due to management’s intent
10.
with regard to converting them to cash. They are usually presented separate from cash and cash
equivalents in the balance sheet.
For each type of security owned the marketable securities subsidiary ledger shows the total cost,
11.
number of units (shares or bonds) owned, and cost per unit. The record assists the investor in
keeping track of the securities owned, of interest and dividends received, and in computing the gain
or loss resulting from sales of specific securities.
Mark-to-market is the process of adjusting the balance sheet valuation of investments in marketable
12.
securities to current market value at each balance sheet date. This adjustment affects only the
balance sheet. The offsetting entry is to a special owners’ equity account entitled Unrealized
Holding Gains (or Losses) on Investments.
The account Unrealized Holding Gains (or Losses) on Investments represents the difference
13.
between the cost of marketable securities owned and their current market value. In essence, this is
the amount of gain or loss that would be realized if the securities were sold today. The amount of
unrealized gain or loss appears in the owners’ equity section of the balance sheet. An unrealized
gain increases total owners’ equity, and an unrealized loss decreases owners’ equity.
Uncollectible accounts expense is associated with the revenue resulting from making credit sales to
14.
customers who do not pay their bills. The matching principle states that revenue should be offset
with all of the expenses incurred in producing that revenue. Therefore, the expense of an
uncollectible account should be recognized in the same accounting period as the credit sale.

At the time of a credit sale, we do not know that the resulting account receivable will prove to be
uncollectible. This determination usually is made only after months of unsuccessful collection
effort. Therefore, if the expense of uncollectible accounts is to be recognized in the same period as
the related sales revenue, this expense must be estimated.
The balance sheet approach to estimating uncollectible accounts means aging the accounts
15.
receivable on hand at year-end and estimating the uncollectible portion of these receivables. The
Allowance for Doubtful Accounts is then adjusted by the amount necessary to make it equal to the
estimated uncollectible amount contained in the receivables.
The income statement approach to estimating uncollectible accounts means determining the
average percentage relationship of uncollectible accounts expense to the year’s net sales on credit.
Ordinarily, no consideration is given to the existing balance in the allowance account. If the
percentage used is valid, the allowance account will be subject to fluctuations in the short run but
will neither build up to unreasonable size nor become exhausted.
The direct write-off method does not require estimates of uncollectible accounts expense or use of a
16.
valuation allowance. When individual accounts receivable are determined to be uncollectible, they
are written off by debiting Uncollectible Accounts Expense. This method (in contrast to the
allowance method) does not attempt to assign the expense from uncollectible accounts to the
accounting period in which the uncollectible receivables originated, and therefore does not match
related revenue and expenses.
No; companies are not required to use the same method of accounting for uncollectible accounts in
17.
their financial statements and in their income tax returns. In fact, tax regulations require use of the
direct write-off method in income tax returns. In financial statements, however, an allowance
method generally is considered preferable and is required for compliance with generally accepted
accounting principles. Exceptions may be made due to the concept of materiality.
Solutions Manual Vol. I, Financial and Managerial Accounting 13e, Williams et al 229

The advantages of making credit sales only to customers who use nationally recognized credit cards
18.
are that this policy: (1) eliminates all the work associated with maintaining records of accounts
receivable from individual customers, billing customers, and collection procedures; (2) provides
cash almost immediately from credit sales; (3) eliminates the risk of uncollectible accounts; (4)
eliminates the need to investigate a customer’s credit before making a credit sale; and (5) does not
restrict sales by excluding the large number of shoppers who prefer to use these credit cards for
purchases.
Alta Mine Company apparently has not benefited from the new policy of honoring nationally
19.
known credit cards. Since all previous sales were for cash, the restaurant has not had problems with
accounts receivable or uncollectible accounts. The only possible benefit for Alta Mine Company
from honoring credit cards would be an increase in sales, and this did not occur. Since former cash
customers have begun using the credit cards, Alta Mine Company is actually having to wait longer
to receive cash from sales and is having to pay a discount to the credit card company. Unless the
credit cards may be preventing a decline in the restaurant’s sales, Alta Mine Company should
consider discontinuing the policy of honoring credit cards.
The accounts receivable turnover rate is computed by dividing annual net sales by the average
20.
amount of accounts receivable throughout the year. This ratio indicates the number of times during
the year that the average amount of accounts receivable is collected. Thus, dividing 365 days by the
accounts receivable turnover rate indicates the number of days required (on average) for the
company to collect its average accounts receivable.

These computations are of interest to short-term creditors because they indicate the liquidity of the
company’s accounts receivable—that is, how quickly this asset is converted into cash.
The annual audit of a company by a CPA firm includes the confirmation of receivables by direct
21.
communication with the debtors. The debtors (customers) are asked to respond directly to the CPA
firm, confirming the amount and due date of the accounts being confirmed. Thus, documentary
evidence is gathered to prove that the customers actually exist and that they agree with the terms
stated. The CPA firm will also study the client’s internal controls relating to receivables, evaluate
the credit ratings of major debtors, and consider the adequacy of the allowance for doubtful
accounts.

a.
In a multiple-step income statement, the loss from a sale of marketable securities reduces net
22.
income and is classified as a nonoperating item. In a statement of cash flows, the entire proceeds
from the sale are shown as a cash receipt from investing activities.
b.
The adjusting entry to create or increase the allowance for doubtful accounts involves the
recognition of an expense. This expense (uncollectible accounts expense) appears as a selling
expense in a multiple-step income statement. But this adjusting entry, like all adjusting entries,
involves no cash receipts or cash payments. Therefore, it has no effect upon cash flows.
c.
Writing off an account receivable against the allowance does not affect income or cash flows.
d.
The adjusting entry to increase the balance sheet valuation of marketable securities affects only
the balance sheet. No cash flows are involved, and the unrealized gain appears in the
stockholders’ equity section of the balance sheet, not in the income statement.

230 © The McGraw-Hill Companies, Inc., 2005

Changes in the market value of securities owned do not affect the investor’s taxable income. For
*23.
income tax purposes, gains and losses on investments are recognized only when the investments are
sold.

a.
Maturity value = $$10,900 (interest = $$10,000  .09  1 = $$900).
24.


Maturity date = July 1, 2006 (365 days later, but the counting starts on July 2).



b.
Maturity value = $$20,400 (interest = $$20,000  .08  90360 = $$400).
Maturity date = June 9 (20 days in March, 30 days in April, 31 days in May, leaves 9 days in
June).



















____________
*Supplemental Topic, “Accounting for Marketable Securities.”
Solutions Manual Vol. I, Financial and Managerial Accounting 13e, Williams et al 231

Ex. 7–1


Ex. 7–2





232
SOLUTIONS TO EXERCISES
Balance per bank statement at September 30 .. .................................................. $$3,400.00
Add: Deposit made by your parents on October 2 ............................................ 2,400.00
$$ 5,800.00
Deduct outstanding checks:
#203 University tuition ........... .................................................. .......................... 1,500.00
#205 University bookstore ............................. .................................................. ... 350.00
#208 Rocco’s pizza ............ .................................................. ................................


25.00
#210 Stereo purchase ............. .................................................. ........................... 425.00
#211 October apartment rent ........................... ................................................. 500.00
Adjusted cash balance ................. .................................................. ....................... $$ 3 ,000.00
Balance per your checkbook (including $$2,400.00 deposit) .............................. $$ 3 ,001.00
Add: Interest earned in September ............ .................................................. ....... 4.00
$$ 3,005.00
Deduct bank’s service charge ................................... ...........................................


5.00
Adjusted cash balance (as above) .................................................. ...................... $$ 3 ,000.00

As shown above, your current checkbook balance is $$3,000.00. Prior to adjusting
your records, neither your checkbook nor your bank statement report this balance,
because neither contains complete information about your account activity during
the month.

a. Financial assets are cash and other assets that will convert directly into known amounts
of cash.
b. Cash and cash equivalents are reported in the balance sheet at face value. Marketable
securities are reported at market value, whereas accounts receivable are reported at
net realizable value. The common goal is to report these assets at their current value—
that is, the amount of cash that each asset represents.
c. Companies hold marketable securities because these assets, unlike corporate checking
accounts, have the potential to generate income through interest and capital
appreciation. The reason companies hold accounts receivable is different. Most
companies must be willing to make sales on account (as opposed to only cash sales) in
order to maximize their income potential. Thus, they must be willing to hold some of
their resources in the form of accounts receivable.
d. Cash equivalents are safe and highly liquid investments that convert to cash in no more
than 90 days of acquisition. These investments often include certificates of deposits
(CDs), U.S. Treasury bills, and money market accounts.
e. Apple Computer’s accounts receivable, in total, amount to $$1.017 billion. Of this
amount, however, the company estimates that $$64 million will not be collected. Thus,
the company reports receivables at a net realizable value of $$953 million in its balance
sheet ($$1.017 billion - $$64 million).
© The McGraw-Hill Companies, Inc., 2005

Ex. 7–3 a. There were several controls lacking at White Electric Supply which made it possible for
the bookkeeper to embezzle nearly $$416,000 in less than five years. First, not only did
the bookkeeper prepare the company’s bank reconciliation each month, she also had
complete control over all cash receipts and disbursements. These duties must be
segregated for adequate protection against theft. Second, the company had no
inventory control system in place. Thus, it went undetected by management when the
check register consistently showed inventory purchase amounts in excess of actual
inventory received. Finally, because White Electric Supply was not a publicly owned
corporation, an independent audit was not required. As a result, management never
considered conducting an independent review of the company’s financial records and
control systems.
b. Employee theft is never ethical, even if it is committed to pay for medical bills. It is also
unethical for employees to ―borrow‖ funds from their employers without formal
permission (even if one has the ―intent‖ of eventually paying back the full amount).
Note to instructor: The White Electric Supply example is one of several ―real world‖ cases
documented in a video entitled, Red Flags: What Every Manager Should Know About Crime. The video
is produced by The Institute for Financial Crime Prevention, 716 West Avenue, Austin, TX 78701.

Solutions Manual Vol. I, Financial and Managerial Accounting 13e, Williams et al 233

Ex. 7–4 a. The fraudulent actions by D. J. Fletcher would not cause the general ledger to be out of
balance, nor would these actions prevent the subsidiary ledger for accounts receivable
from agreeing with the control account. Equal debits and credits have been posted for
each transaction recorded.
b. In the income statement, the Sales Returns and Allowances account would be
overstated by $$3,000; hence net sales would be understated by $$3,000. Net income
would also be understated by $$3,000.
In the balance sheet, the assets would be understated because the company has an
unrecorded (and unasserted) claim against Fletcher for $$3,000. Thus, understatement
of assets is offset by an understatement of owners’ equity by $$3,000.
If Bluestem Products bonds its employees, it may be able to collect the $$3,000 from the
bonding company if the loss is discovered and Fletcher is unable to make restitution.




c. (1) Cash receipts should be deposited daily in the bank. The $$3,000 of currency stolen
by Fletcher represented the larger part of three days’ receipts from over-the-
counter cash collections.
(2) The function of handling cash should be separate from the maintenance of
accounting records. Fletcher apparently has access to the cash receipts, to incoming
mail, to the general journal, and to the general and subsidiary ledgers.
(3) The employee who opens the mail should prepare a list of amounts received. One
copy of the list should be sent to the accounting department to record the
collections. Another copy should be sent with the checks to the cashier who should
deposit each day’s cash collections.
(4) The total of each day’s cash receipts recorded by the accounting department should
be compared with the amount of the daily bank deposit by the cashier.



Note to instructor: The exercise calls for only three specific actions to strengthen internal control. The
above list of four is not exhaustive; others could be cited.
234 © The McGraw-Hill Companies, Inc., 2005

Ex. 7–5 a.





















WARREN ELECTRIC
Bank Reconciliation
December 31, 20__
Balance per bank statement .............. .................................................. .................... $$ 15,200
Add: Undeposited receipts of December 31 .............. ............................................ 10,000
$$ 25,200
Less: Outstanding checks
No. 620 ..................................... .................................................. .. $$ 1,000
630 ............................ .................................................. ........... 3,000
641 ..................... .................................................. .................. 4,500 8,500
Adjusted cash balance ..................................... .................................................. ...... $$ 16,700
Balance per depositor’s records .......................................... ................................... $$ 17,500
Less: Service charges ........................ .................................................. .. $$ 25
Jane Jones check returned NSF ................................................. 775 800
Adjusted cash balance, as above ..... .................................................. ...................... $$ 16,700
b.
Journal Entry
Bank Service Charges ...... .................................................. .....................
Accounts Receivable (Jane Jones) ..................................... ....................
Cash ................. .................................................. ...........................
To record bank service charge for December and NSF check returned
by bank.
25
775


800

c. The $$25 service charge most likely resulted from the $$775 check drawn by Jane Jones
and marked NSF. Banks normally charge between $$5 and $$25 for each NSF check
processed. This fee is often added to the balance of the offending customer’s account
receivable.

Ex. 7–6 a. Cash equivalents are usually short-term debt securities (e.g., U.S. Treasury bills, high-
grade commercial paper, etc.). This appears to be true for Westinghouse Electric, as
the footnote specifically mentions that all cash equivalents have a maturity date of three
months or less (equity securities have no maturity date).
b. The statement referring to the company’s limited credit exposure to any one financial
institution means simply that Westinghouse has not put ―all of its eggs in any one
basket.‖ In short, it has spread any risk associated with cash equivalents across
numerous financial institutions that issue these short-term securities.
c. The $$42 million designated as restricted cash and cash equivalents is not available to
meet the normal operating needs of the company. The amount may be reserved for a
specific purpose or may represent a compensating balance as a condition of a bank loan
or some other credit agreement.


Solutions Manual Vol. I, Financial and Managerial Accounting 13e, Williams et al 235

Ex. 7–7



Ex. 7–8






236
If the company is certain it will not need any of the $$100,000 in the form of cash for at least
90 days, putting the entire amount in Next Bank’s 90-day CD may be its best choice. After
all, this investment’s 2.3% interest rate is the highest among the four alternatives, and it’s
FDIC insured. If, however, the company is uncertain about its future cash needs, the risk of
penalty associated with liquidating the CD may offset its slightly higher interest rate.
Management may wish to consider investing a portion of the $$100,000, say $$50,000, in the
2.1% IndyMac Bank CD. The remaining $$50,000 could be invested in the MBNA America
money market account at 2.0%. This option would offer the company flexibility, should its
cash needs change prior to the CD’s maturity date. It would also give the company FDIC
coverage on the portion invested in the CD. If it decides to put more than $$50,000, but less
than $$100,000, in the IndyMac Bank CD, it would have to invest the remainder in the
Nexity Bank money market account.
The company must also keep in mind that the interest rates on the CDs are guaranteed so
long as they are held for 90 days. The rates on the two money market accounts may
fluctuate slightly, either up or down.
a. Marketable securities are either equity or debt instruments that are readily marketable
at quoted market prices. They often consist of investments in the capital stock issued by
large, publicly traded, corporations. Marketable securities are financial assets because
they are convertible directly into known amounts of cash at quoted market prices.
b. Cash generates little or no revenue. Marketable securities, on the other hand, produce
revenue in the form of dividends, interest, and perhaps increases in their market values
over time. For a company like Microsoft, revenue from short- term investment
represents billions of dollars each year. Of course, investments in marketable securities
are of higher risk than investments in lower yielding cash equivalents.
c. Investments in marketable securities appear in the investor’s balance sheet at their
current market value.
d. (1) The valuation of marketable securities at market value is a departure from the cost
principle. Cost is often disclosed in the footnotes to the financial statements, but it
does not serve as the basis for valuation.
(2) Valuation at market value is not a departure from the principle of objectivity. The
quotation of up-to-date market prices enables companies to measure market values
with considerable objectivity.
e. Mark-to-market benefits users of financial statements by showing marketable
securities at the amount of cash those securities represent under current market
conditions. Current market values are far more relevant to the users of financial
statements than what was paid for the securities when they were purchased.
© The McGraw-Hill Companies, Inc., 2005

Ex. 7–9 a. Uncollectible Accounts Expense ............ ........................................... 200,000
Allowance for Doubtful Accounts .............................................
To record estimated uncollectible accounts expense at 2.5% of
net credit sales ($$8,000,000  2.5% = $$200,000).





b.



Uncollectible Accounts Expense .................................................. .....
Allowance for Doubtful Accounts ........................................
To increase balance in allowance account to required $$84,000:
Credit balance at beginning of year ........................ $$ 25,000
Write-offs during year .............................................. ( 96,000)
Temporary debit balance ......................................... $$ 71,000
Required year-end credit balance ........................... 84,000
Required adjustment for year ................................. $$ 155,000
155,000



200,000


155,000





c. Uncollectible Accounts Expense ................... .........................................
Accounts Receivable .............................. .....................................
To record as uncollectible expense only those accounts
determined during the year to be uncollectible.
96,000



96,000
d. Adjusting the balance in the Allowance for Doubtful Accounts account based upon the
aging schedule will provide to investors and creditors the most accurate assessment of
the company’s liquidity. This method is the only approach to take into consideration
the underlying declining probability of collecting outstanding accounts as they become
increasingly past due.

Ex. 7–10 a.
Accounts receivable turnover rate (net sales  average accounts receivable):











Huffy Corporation: $$372,896  $$70,892 = 5.3 times
Pennsylvania Power Company: $$7,078,000  $$296,548 = 23.9 times
Huffy Corporation: 365 days  5.3 times = 69 days
Pennsylvania Power Company: 365 days  23.9 times = 15 days
b.
Accounts receivable days outstanding (365 days  accounts receivable turnover rate):
c. The reason it takes Huffy 54 days longer than PPC to collect its receivables is due, in
large part, to industry characteristics of each company. Customers of public utilities
have a tendency to pay their bills quickly to avoid having bad credit ratings and to keep
from having their electricity turned off. Huffy’s customers, on the other hand, are
primarily large retailers. These businesses are notorious for making delayed payments
to their suppliers, and often do so without penalty. How do they get away with it? In
Huffy’s case, a relatively small number of retailing giants account for more than 90%
of the company’s total revenue.

Solutions Manual Vol. I, Financial and Managerial Accounting 13e, Williams et al 237

Ex. 7–11



Transaction
a.
b.
c.
d.
e.
f.



Total
Assets
NE
NE
NE
NE
I
I



Net
Income
NE
NE
D
NE
I
NE


Net Cash Flow Net Cash Flow
from Operating (from Any
Activities Source)
NE D*
I I
NE I*
NE NE
I I
NE NE


Ex. 7–12
*Cash payment or receipt is classified as an investing activity.
All sales by long distance carriers, such as Sprint Corporation, are made on account. In contrast, the
majority of sales made by grocery chains, such as Albertsons, are cash sales. Thus, one would expect
accounts receivable, expressed as a percentage of net sales, to be larger for Sprint than it is for
Albertsons (14.2% versus 1.4%).
Sales made on account by grocery chains are often to institutional customers (e.g., restaurants,
college cafeterias, Boy Scout Camps, etc.). Long distance carriers, on the other hand, generate a large
volume of credit sales from individuals. Generally speaking, individuals pose a greater credit risk
than institutional customers. Therefore, it is not surprising that the allowance for doubtful accounts,
expressed as a percentage of net sales, is nearly 17 times greater for Sprint than it is for Albertsons
(1.5% versus 0.09%).

238 © The McGraw-Hill Companies, Inc., 2005

Ex. 7–13
a. Cash equivalents normally are not shown separately in financial statements. Rather, they are
combined with other types of cash and reported under the caption, ―Cash and Cash Equivalents.‖
A note to the statements often shows the breakdown of this asset category.
b. Cash earmarked for a special purpose is not available to pay current liabilities and, therefore,
should be separated from cash and cash equivalents. This fund should be listed under the caption
―Investments and Funds‖ in the balance sheet.
c. Compensating balances are included in the amount of cash listed in the balance sheet, but the
total amount of these balances should be disclosed in notes accompanying the statements.
d. The difference between the cost and current market value of securities owned is shown in the
balance sheet as an element of stockholders’ equity. The account is entitled, ―Unrealized Holding
Gain (or Loss) on Investments.‖ Unrealized gains and losses are not shown in the income
statement.
e. The allowance for doubtful accounts is a contra-asset account. It reduces the amount shown for
accounts receivable in the balance sheet.
f. The accounts receivable turnover rate is equal to net sales divided by average accounts receivable.
The rate itself does not appear in financial statements, but the information needed to compute it
does.
g. Realized gains and losses on investments sold during the year are reported in the income
statement. If the income statement is prepared in a multiple-step format, these gains and losses
are classified as nonoperating activities, and appear after the determination of income from
operations.
h. Transfers between cash and cash equivalents are not reported in financial statements. For
financial statement purposes, cash and cash equivalents are regarded as a single type of financial
asset.
i. Proceeds from sales of marketable securities are shown in the statement of cash flows as cash
receipts from investing activities.

Solutions Manual Vol. I, Financial and Managerial Accounting 13e, Williams et al 239

Ex. 7–14 a.
Accounts receivable turnover rate (net sales  average accounts receivable):











Adolph Coors: $$2,842  $$114 = 25 times
Anheuser-Busch: $$12,262  $$615 = 20 times
Adolph Coors: 365 days  25 times = 15 days
Anheuser-Busch: 365 days  20 times = 18 days
b.
Accounts receivable days outstanding (365 days  accounts receivable turnover rate):
c. Both of these companies have very liquid accounts receivable – that is, their
receivables convert quickly into cash. However, the accounts receivable of Adolph
Coors are even more liquid than those of Anheuser-Busch. Adolph Coors, on
average, collects on its outstanding accounts 3 days faster than Anheuser-Busch (18
days – 15 days).
* Ex. 7–15 a. Weis’s unrealized gain on investments is the difference between the cost of these
investments and their current market values. In essence, it is the amount of gain that
would be realized if the investments were sold today. But the term ―unrealized‖
indicates that this gain has not been finalized through an actual sale of the
investments. Therefore, its amount will change as market values fluctuate.
b. The $$14 million unrealized gain increases the asset amount and also appears in a
special account in Weis’s stockholders’ equity section of its balance sheet. The
recognition of this gain does not involve any cash flow.
c. Weis’s unrealized gain is not included in the computation of taxable income. For
income tax purposes, losses and gains on investments are reported in the period in
which the investments are sold.
d. Weis’s short-term creditors are primarily interested in the company’s current debt-
paying ability. From this perspective, mark-to-market should enhance the usefulness
of the balance sheet by showing the amount of liquid resources that would be
available if the marketable securities were sold.












____________
*Supplemental Topic, “Accounting for Marketable Securities.”
240 © The McGraw-Hill Companies, Inc., 2005

* Ex. 7–16 a. The amount of unrealized holding gain included in the securities’ current market
value will appear as an element of stockholders’ equity. Also, the securities will
appear in the balance sheet at current market value, with their cost disclosed as
supplemental information.
b. As of December 31, 2005, McGoun Industries still owns the marketable securities.
Therefore, it has not yet paid any income taxes on the increase in the securities’
value. Unrealized gains on investments are not subject to income taxes. Taxes are
owed only in the year in which the gains are realized through the sale of investments.


c. Jan. 4 Cash ......................... .................................................. .... 260,000
Marketable Securities ...................................... 90,000
Gain on Sale of Investments ............................ 170,000
To record sale of investments at a price above cost.

Note to instructor: If no other marketable securities were purchased during the month, an adjusting
entry is needed at the end of January which includes a debit to Unrealized Holding Gain and a credit
to Marketable Securities in the amount of $$170,000.

d. The sale of securities on January 4, 2006, will increase McGoun’s taxable income for
that year by $$170,000, the amount of the gain. As the company pays income taxes at
the rate of 30% on capital gains, 2006 income taxes will be increased by $$51,000
($$170,000 capital gain  30% tax rate).

x. 7–17 a. Sept. 1 Notes Receivable ....................................... .................... E
Accounts Receivable .........................................
To record receipt of a 9-month, 12% note
receivable in settlement of the account receivable of
Herbal Innovations.








b. Dec. 31 Interest Receivable .............................. .........................
Interest Revenue ...............................................
To recognize 4 months’ interest on note from
Herbal Innovations ($$22,000  12% 
4

12
= $$880).

c. May 31 Cash ............................................. ..................................
Notes Receivable ...............................................
Interest Receivable ...........................................
Interest Revenue ...............................................
To record collection of principal and interest on
12% note from Herbal Innovations. Interest
revenue is computed as $$22,000  12% 
5

12
.
22,000



880


23,980





22,000



880


22,000
880
1,100


____________
*Supplemental Topic, “Accounting for Marketable Securities.”
Solutions Manual Vol. I, Financial and Managerial Accounting 13e, Williams et al 241

Ex. 7–18
a.

2005
Aug. 1



















1.







Notes Receivable ........................ .................................................. .......
Accounts Receivable (Dusty Roads) .....................................
Accepted a six-month, 9% note receivable in settlement of an
account receivable on August 1, 2005.

Interest Receivable ............ .................................................. ...............
Interest Revenue ........... .................................................. ........
To record accrued interest earned from August through
December: $$36,000 × 9% × 512 = $$1,350.


Cash ................. .................................................. ..................................
Notes Receivable ....................................... ..............................
Interest Receivable ....................................... ..........................
Interest Revenue .................................................. ...................
To record collection of six-month note plus interest from Dusty
Roads. Total interest amounts to $$1,620 ($$36,000 × 9% × ½), of
which $$270 was earned in 2006.


Accounts Receivable (Dusty Roads) .................................................
Notes Receivable ............................ .........................................
Interest Receivable .............................. ...................................
Interest Revenue .......................................... ...........................
To record default by Dusty Roads on six-month note receivable.
Revenue

Expenses = Income
NE NE NE
I NE I
I NE I
I NE I










36,000



1,350




37,620










36,000



1,350




36,000
1,350
270

Dec. 31
2.


2006
Jan. 31
3.











2006
Jan. 31
4.






37,620







36,000
1,350
270

b.
Transaction
1.
2.
3.
4.
Assets = Liabilities + Equity
NE
I
I
I




NE
NE
NE
NE




NE
I
I
I
242 © The McGraw-Hill Companies, Inc., 2005

Ex. 7–19
The annual report of Tootsie Roll in Appendix A reveals the following:
a. Financial assets total $$173,003,000*.

b. The company reports $$40,737,000 in short-term investments (marketable securities). Unrealized
gains and losses are reported in a separate equity account called, ―Accumulated and Other
Comprehensive Earnings.‖ For 2002, this figure is an $$11,052,000 loss.

c. The Allowance for Uncollectible Accounts has a balance of $$2,005,000.

d. (1) Net sales in 2002 $$393,185,000

Accounts receivable 123101 $$ 20,403,000

Accounts receivable 123102 22,686,000

$$ 43,089,000*


 2

(2) Average accounts receivable in 2002 $$ 21,544,500



(3) Accounts receivable turnover rate (1)  (2)
18.25 times



(4) Days in a year 365 days



Average days outstanding (4)  (3)
20 days



























____________
*The account Other Receivables appearing in the company’s balance sheet is included in the computation of financial
assets, but is not included in the computation of average accounts receivable.
Solutions Manual Vol. I, Financial and Managerial Accounting 13e, Williams et al 243

SOLUTIONS TO PROBLEMS
25 Minutes, Medium
PROBLEM 7–1
BANNER, INC.
BANNER, INC.
Bank Reconciliation
July 31, 20__
$$114828
16000
$$130828
$$314
625
175
a.
Balance per bank statement, July 31
Add:Deposit in transit
Deduct:Outstanding checks
no.811
814
823
Adjusted cash balance
Balance per accounting records, July 31
Add:Note receivable collected by bank
Check no. 821 for office equipment:
Recorded as
Actual amount
Deduct:Service charges
NSF check, Howard Williams
Adjusted cash balance (as above)
1114
$$129714
$$125568
$$4000
$$915
519
$$
396
50
200
4396
$$129964
250
$$129714
b.
General Journal
20__
July31 Cash

4396
4000
396
Notes Receivable
Office Equipment
To record collection by bank of note receivable from
Rene Manes, and correct recorded cost of office equipment.
31 Bank Service Charges
Accounts Receivable (Howard Williams)
Cash
To adjust accounting records for bank service charges and
customer抯 check charged back as NSF.
50
200
250
c. The amount of cash that should be included in the balance sheet at July 31 is the adjusted balance
of $$129,714.
d. The balance per the company’s bank statement is often larger for two reasons: (1) There are
checks outstanding which have been deducted in the company’s records but which have not yet
cleared the bank, and (2) the bank periodically makes collections and deposits them into the
company’s account.

244 © The McGraw-Hill Companies, Inc., 2005

45 Minutes, Strong
PROBLEM 7–2
OSAGE FARM SUPPLY
ted bank reconciliation for November:
Balance per bank statement, November 30
Add: Deposit in transit
Subtotal
Less:Outstanding checks:
no. 8231
no. 8263
no. 8288
no. 8294
Total outstanding checks
Adjusted cash balance per bank statement
Balance per accounting records
Add: Note receivable collected by bank
Subtotal
Less:NSF check returned
Bank service charges
Adjusted cash balance per accounting records prior to
recognition of cash shortage
Less:Indicated cash shortage ($$41,510 - $$15,745)
Adjusted cash balance per accounting records
$$
$$
$$4
5
1
50
0
2< br>7
0
0
4
6
0





20600
1245
21845
6100
$$ 15745
$$ 35400
6255
$$ 41655
$$ 130
15 145
$$ 41510
25765
$$ 15745
attempted to conceal the shortage by making
the following intentional errors in her reconciliation:
Errors leading to a $$13,255 overstatement of the adjusted
balance per the bank statement:
Overstating the deposit in transit with a transposition error
Improperly adding the amount of the note collected by the
bank to the bank balance
Making an addition error in adding the adjustments to the
balance per the bank statement
Omitting check no. 8294 from the outstanding check list
Understating the sum of the outstanding checks that
were listed
Error causing a $$12,510 understatement of the
adjusted balance per the accounting records:
Subtracting the $$6,255 amount of the credit memorandum, even
though the caption stated that this amount should be added
Total shortage concealed in Escola's bank reconciliation
$$ 900
6255
1000
5000
100
$$ 13255
12510
$$ 25765

Solutions Manual Vol. I, Financial and Managerial Accounting 13e, Williams et al 245

PROBLEM 7–2
OSAGE FARM SUPPLY (concluded)
c. Two weaknesses in internal control are apparent. First, the bank account should be reconciled by
someone with no other responsibilities for cash transactions, not by the company’s cashier. The
person performing a control function never should have a personal incentive to conceal the types
of errors that the control procedure may bring to light.
Second, cash receipts are not being deposited intact in the bank, and management is unaware of
this internal control failure even after several months. Failure to deposit receipts intact can be
detected by comparison of the daily deposits listed in the bank statement with the daily totals in
the special journals used to record cash receipts.
246 © The McGraw-Hill Companies, Inc., 2005

15 Minutes, Medium
PROBLEM 7–3
SUPER STAR
Accounts Receivable by Age Group
Percentage
Considered
AmountUncollectible
$$500000 1
2100003
8000010
1500020
3000050
$$8 35000
Estimated
Uncollectible
Accounts
$$5000
6300
8000
3000
15000
$$37300< br> a.
Not yet due
1?0 days past due
31?0 days past due
61?0 days past due
Over 90 days past due
Totals

b.
General Journal

Dec31 Uncollectible Accounts Expense
Allowance for Doubtful Accounts
To increase the valuation account to the estimated
required total of $$37,300 computed as follows:
Required credit balance for valuation acct.$$37,300
Present credit balance 11,800
Current provision$$25,500
25500
25500

c.
Jan10 Allowance for Doubtful Accounts
Accounts Receivable (April Showers)
To write off as uncollectible the account receivable
from April Showers.
8250
8250

d. Such a policy would compensate the company for having to wait extended periods of time to
collect its cash. It also provides the company with additional ―leverage‖ in a court of law, should
it decide to press charges against customers with delinquent accounts.


Solutions Manual Vol. I, Financial and Managerial Accounting 13e, Williams et al 247

30 Minutes, Medium
PROBLEM 7–4
WILCOX MILLS
General Journal

a.
2005
Var.* Allowance for Doubtful Accounts
Accounts Receivable
Entry summarizing the write-off of receivables throughout
the year.
Accounts Receivable
Allowance for Doubtful Accounts
Entry summarizing the reinstatement of accounts proving
to be collectible.
Cash
Accounts Receivable
Entry summarizing the collection of accounts reinstated.
165000165000
Var.*15000
15000
Var.*15000
1 5000
Dec31 Uncollectible Accounts Expense
Allowance for Doubtful Accounts
To adjust allowance for doubtful accounts to $$90,000
credit balance:
Balance at Dec. 31, 2004
Less: Write-offs during 2005
Add: Accounts reinstated
Unadjusted balance (debit balance)
Desired balance (credit)
Required a djustment
160000
160000
$$80,000
(165,0 00)
15,000)
$$(70,000)
90,000)
160,000)
$$

*The first three entries summarize entries occurring at various dates throughout the year.
b. A case can probably be made that the allowance is unreasonably low. The amount of the
allowance at the end of 2004 was $$80,000, but $$165,000 were written off during the following year
which may imply that the allowance should have been higher. A counter argument, which may
justify the $$80,000 balance, is that the allowance at the end of a year is not necessarily intended to
provide for all accounts that will be written off during the coming year. Rather, it represents only
the portion of the receivables existing at year-end estimated to be uncollectible.
As Wilcox Mills sells on 30-day terms, it should turn over its receivables about 12 times each year.
Thus, the year-end receivables should equal only about
1

12
of a year’s credit sales, and the balance
in the allowance should provide for about
1

12
of the accounts written off during the year.
248 © The McGraw- Hill Companies, Inc., 2005

40 Minutes, Strong
PROBLEM 7–5
WESTON MANUFACTURING CO.

a. Current assets:
Marketable securities (cost, $$153,000)
Stockholders?equity:
Unrealized holding gain on investments

$$160000
$$ 7000
b.
Apr10 Cash
Marketable Securities
Gain on Sale of Investments
Sold 1,000 shares of Footlocker, Inc. at a price above cost.
Aug7 Cash
Loss on Sale of Investments
Marketable Securities
Sold 2,000 shares of Gap, Inc. at a price below cost.
Marketable Securities account:
Balance at Dec. 31, 2004
Less:Sale of securities on Apr. 10
Sale of securities on Aug. 7
Balance at Dec. 31, 2005 (prior to adjustment)
Unrealized Holding Gains (or Losses) on Investments
(no change since Dec. 31, 2004)
d.
20950
17000
3950
27940
6060
34000
c.
$$160000
$$ 17000
34000 51000
$$109000
$$ 7000
Current
Market Value
$$ 72000
32000
$$104000
Cost
Footlocker, Inc. (4,000 shares; cost $$17 per share;
market value, $$18)
Gap, Inc. (2,000 shares; cost, $$17 per share; market
value, $$16)
Totals
e. Unrealized Holding Gain on Investments
Marketable Securities
To reduce unadjusted balance in Marketable Securities
account to current market value
($$109,000

$$104,000).
Current assets:
Marketable securities (cost, $$102,000)
Stockholders?equity:
Unrealized holding gain on investments

$$ 68000
34000
$$102000
5000
5000
f.
$$104000
$$ 2000

Solutions Manual Vol. I, Financial and Managerial Accounting 13e, Williams et al 249

PROBLEM 7–5
WESTON MANUFACTURING CO. (concluded)
rating items:
Loss on sales of investments
*Computation: Realized gains, $$3,950, less realized
losses, $$6,060 = net realized loss, $$2,110
$$2110*

h. Unrealized gains and losses are not reported in a company’s income tax return. The $$2,110
realized loss on the sale of marketable securities will be reported in Weston’s 2005 income tax
return and will have the effect of reducing both its taxable income and its income taxes liability.

250 © The McGraw-Hill Companies, Inc., 2005

20 Minutes, Medium
PROBLEM 7–6
EASTERN SUPPLY
General Journal
a.

20__
Sept1 Notes Receivable
Accounts Receivable (Party Plus)
Accepted a 9-month, 10% note in settlement of an account
receivable due today.
Dec31 Interest Receivable
Interest Revenue
To accrue interest for four months (September through
December) on Party Plus note ($$75,000 x 412 x 10% = $$2,500).
June1 Cash
Notes Receivable
Interest Receivable
Interest Revenue
Collected 9-month, 10% note from Party Plus ($$75,000  912
x 10% = $$5,625, of which $$3,125 was earned in current year).
75000
75000
2500
250 0
80625
75000
2500
3125
b. Assuming that note was defaulted.
20__
June1 Accounts Receivable (Party Plus)
Notes Receivable
Interest Receivable
Interest Revenue
To reclassify as an account receivable the defaulted
9-month, 10% note from Party Plus ($$75,000 x 912 x 10%
= $$5,625 interest, of which $$3,125 was earned in
current year).
80625
75000
2500
3125


c. There are two reasons why the company adopts this policy: (1) The interest earned on the note
compensates the company for delaying the collection of cash beyond the standard due date, and
(2) should the company have to take a customer to court, written contracts always are preferred
over verbal agreements.

Solutions Manual Vol. I, Financial and Managerial Accounting 13e, Williams et al 251

35 Minutes, Strong

PROBLEM 7–7
HENDRY CORPORATION
General
Ledger
Ba lance
$$96990
Bank
Statement
Balance
$$100560
24600
(31700)
a.
Preadjustmen t balances, 123105
Deposits in Transit
Outstanding Checks
Bank service charge
NSF check returned (Kent Company)
Error correction (check #244)
Adjusted cash balance, 123105

$$(20
(360
27
9346
0)
0)
0
0$$ 93460
The necessary journal to update the general ledger is as follows:
Bank Service Charge
Accounts Receivable (Kent Company)
Office Equipment
Cash
To update the general ledger following the bank reconciliation.
b.
Cash equivalents include:
Money market accounts
High- grade, 90-day, commercial paper
Total cash equivalents
Total cash (from part a)
Cash and cash equivalents at 123105
c.
Interest Expense
Interest Receivable
To record interest expense on the Moran Industries
note receivable ($$100,000 x 6% x 112).
500
500
$$75
3
$$78
93< br>$$171
0
0
0
4
4
0
0
0
6
6
0
0
0
0
0
200
3600
270
3530




252 © The McGraw-Hill Companies, Inc., 2005

PROBLEM 7–7
HENDRY CORPORATION
(continued)

d.

Accounts receivable balance January 1, 2005
Accounts receivable written off during 2005
Collections on account during 2005
Credit sales made during 2005
Reinstating Kent Company's account (paid with NSF check)
Accounts receivable balance December 31, 2005
Allowance for doubtful accounts balance January 1, 2005
Accounts receivable written off during 2005
Uncollectible accounts expense in 2005 (2% of sales)
Allowance for doubtful accounts balance December 31, 2005
Net realizable value of accounts receivable at December 31, 2005< br>$$2
(
(21
20
1
1
2
0
54
1
0
0
0
3
0
3
0
06
0
6
0
0
0
0
0
0
0)< br>0)
0
0
$$800000
40000
(140000)
400000
300000
$$500000
e.
Cash and cash equivalents (see b. above)
Marketable securities (at FMV, not cost)
Notes receivable (from Moran Industries)
Interest receivable (see c. above)
Accounts receivable
(see net realizable value computed in d. above)
Total financial assets at December 31, 2005
$$17 146
8600
10000
50
0
0
0
0
$$
500000
857960




Solutions Manual Vol. I, Financial and Managerial Accounting 13e, Williams et al 253

PROBLEM 7–7
HENDRY CORPORATION
(concluded)

f.

Accounts receivable (see d. above)
Allowance for doubtful accounts (see d. above)
Net realizable value
Average accounts receivable
($$2,110,000 + $$500,000)2
Sales
Accounts receivable turnover
(salesaverage accounts receivable)
Accounts receivable days
(365accounts receivable turnover)
If the industry average is 45 days,
Hendry Corporation is well below the average.
$$
$$800000
300000
500000
$$2150000
40000< br>$$2110000
December 31, 2005January 1, 2005

1305000
20000000
15.33
23.81days




254 © The McGraw-Hill Companies, Inc., 2005

SOLUTIONS TO CASES
Group assignment:
No time estimate
CASE 7–1
CASH MANAGEMENT
We do not provide comprehensive solutions for most group assignments. It is the nature of these
problems that solutions should reflect the collective thinking of the group. But the following
observations may be useful in stimulating class discussions.
a. Most banks offer a variety of cash management plans, and also will purchase and collect U.S.
Treasury bills, notes, and bonds. In addition, they may work in conjunction with a discount
brokerage firm which enables the depositor to readily buy and sell marketable securities and
mutual funds.
They also offer daily ―sweeps‖ of checking accounts of individuals or businesses other than
corporations. These sweeps transfer excess funds into one of several types of interest- bearing
money market accounts.
b. In selecting the most appropriate plan, students should consider such factors as:
 Some plans require large minimum balances andor may not be available to corporations.
 Yields vary; in addition, yields on U.S. Treasury obligations are exempt from state income
taxes, while yields on some money market funds are exempt from federal and (sometimes)
state taxes. Tax-free yields obviously are more attractive than similar taxable yields. The
relative value of a tax-free yield varies with the investor’s tax bracket.
 If the ―excess funds‖ must be accessed frequently, the investor cannot afford high
transaction costs. Thus, the individual who may need the money within 30 days probably
would not elect to invest in marketable securities through a brokerage firm.
 In conclusion, we would opt for the daily ―sweep‖ of excess balances into a money market
fund for the individual with up to $$10,000 in excess cash. Individuals in a high tax bracket
should select a tax-exempt fund. The business with $$400,000 to invest for nine months
probably should consider marketable securities or Treasuries, both of which provide
higher yields than most money market funds.

Solutions Manual Vol. I, Financial and Managerial Accounting 13e, Williams et al 255

40 Minutes, Strong
CASE 7–2
REPORTING FINANCIAL ASSETS
a. 1. There is certainly nothing improper or unethical about offering customers a discount for
prompt payment, but an interesting accounting issue arises. A 10% discount is quite
substantial, and many customers would likely take advantage of it. This affects the net
realizable value of accounts receivable—that is, the amount likely to be collected. It would
probably be necessary to establish a contra-asset account called Allowance for Sales
Discounts. This allowance would reduce the net realizable value of accounts receivable in the
same manner as the allowance for doubtful accounts.


Note to instructor: Few companies encounter bad debts of anywhere near 10% of receivables.
Therefore, the allowance for sales discounts might well be the larger of the two allowances.
2. The need for an allowance for doubtful accounts is not based upon whether these accounts are
officially ―overdue,‖ but whether they are collectible. The grace period is unlikely to affect the
collectibility of accounts receivable. Therefore, it does not eliminate the need for an allowance
reducing these accounts to estimated net realizable value.
3. Combining all forms of cash, cash equivalents, and compensating balances under a single
caption is quite acceptable. In fact, it is common practice. But unused lines of credit are not
an asset; these represent only the ability to borrow money. They may be disclosed in notes to
the financial statements, but they should not appear in the money columns of the balance
sheet.
4. Having officers repay their loans at year-end only to renew them several days later is a sham
transaction. Its only purpose is to deceive the users of the financial statements. It would be
unethical (and perhaps illegal) to show the money collected from these officers as unrestricted
cash available for the payment of current liabilities. If these transactions are executed as
described, the cash ―earmarked‖ for renewing loans should appear as a noncurrent asset.
5. It is appropriate to report marketable securities at their current market value. Thus, there
are no problems with this proposal.
6. This situation poses two questions: (1) The valuation of inventory in conformity with
generally accepted accounting principles, and (2) whether Affections can depart from
generally accepted accounting principles in its reporting to creditors.
(1) Inventory is not a financial asset. Generally accepted accounting principles call for the
valuation of inventory at cost (or the lower of cost or market value), not at market values
in excess of cost.
(2) As Affections is not a publicly owned company, need its financial statements be prepared
in conformity with GAAP? This is an interesting question. Affections is not required by
federal securities laws to prepare and distribute financial statements in conformity with
GAAP. But it does have a legal and ethical obligation not to deceive the users of its
financial statements.
Unless they clearly are told otherwise, users of financial statements reasonably may assume
that financial statements are based upon GAAP. In summary, Affections may depart from
GAAP and show its inventory at current market value. But it must take appropriate steps to
make the users of the statements fully aware of this departure from GAAP.








256 © The McGraw-Hill Companies, Inc., 2005

CASE 7–2
REPORTING FINANCIAL ASSETS (concluded)
7. Although these funds might actually be included in both year-end bank statements, they are
not really available to the company in both bank accounts. Thus, this check should be
included as an outstanding check in the year-end bank reconciliation of the account upon
which it was drawn. To double count these funds in financial statements would be more than
unethical—it would be an act of criminal fraud.
Note to instructor: This fraudulent practice is called ―kiting.‖ It more often is used to defraud
banks, rather than users of financial statements. The depositorcrook creates the inflated
bank balances, then withdraws the funds from both banks and runs.


b. There is nothing unethical about holding the meeting. Taking legitimate steps to ―put the
company’s best foot forward‖ is both an ethical and widespread practice. In fact, any
management that failed to plan how to maintain an adequate credit rating would be breaching its
ethical obligations to the company’s stockholders.

Solutions Manual Vol. I, Financial and Managerial Accounting 13e, Williams et al 257

20 Minutes, Medium
CASE 7–3
ACCOUNTING PRINCIPLES
a. This practice violates the matching principle. The expense relating to uncollectible accounts is not
recorded until long after the related sales revenue has been recognized. The distortion caused in
the company’s financial statements is magnified by the fact that sales (and the creation of
uncollectible accounts receivable) fluctuate greatly from year to year.
b. In most cases, charging petty cash expenditures to Miscellaneous Expense would not violate
generally accepted accounting principles. The only principle at issue is that of adequate disclosure.
However, petty cash expenditures usually are not sufficiently material in dollar amount for users
of the financial statements to be concerned with the specific purpose of these outlays.
c. This practice violates the realization principle. The company is recognizing all of the interest to be
earned from its notes receivable as revenue at the date of sale. This revenue is actually earned
over the life of the note, not at the date on which the customer borrows the money.
d. By combining restricted cash (the $$1 million earmarked for construction) with unrestricted cash,
the company is violating the accounting principle of adequate disclosure. This restricted cash is
not available for paying current liabilities. Therefore, this amount should be classified as a long-
term investment, not as a current asset.

258 © The McGraw-Hill Companies, Inc., 2005

40 Minutes, Strong
CASE 7–4
ROCK, INC.
a. It is logical and predictable that the Double Zero policy—which calls for no down payment and
allows customers 12 months to pay—will cause an increase in sales. It also is predictable that
implementation of the Double Zero plan will cause cash receipts from customers to decline, at
least temporarily. Cash sales and sales on 30-day accounts are now being made on terms that
extend the collection period over one year. Thus, cash receipts that normally would occur in the
immediate future have been postponed.
Whether the plan will cause profits to increase or decline is more difficult to predict. The basic
question is whether the additional sales will exceed increases in the cost of goods sold and
expenses. The bookkeeper’s schedule indicates that they do, and that net income has more than
doubled (from $$10,000 per month to $$25,000 per month). However, the company uses the direct
write-off method of accounting for uncollectible accounts, which delays the recognition of
uncollectible accounts expense to future periods. Therefore, the bookkeeper’s measurement of net
income in the latest month ignores entirely what may be a major expense associated with sales of
Double Zero accounts.
b. The uncollectible accounts expense has dropped to zero only because the company uses the direct
write-off method and the Double Zero plan has just begun. It is too early for specific Double Zero
receivables to have been identified as uncollectible and written off. (Apparently all of the old 30-
day accounts have now been collected, are considered collectible, or have been written off.)
In the future—certainly within a year—some of the Double Zero accounts will be determined
uncollectible. At this time, the company will begin to incur significant amounts of uncollectible
accounts expense under the direct write-off method. This expense should eventually become much
larger than the uncollectible accounts expense in the past, due to the larger dollar amount of
accounts receivable and the nature of these accounts.
c. The reduction in cash receipts should be temporary. Under the old 30-day account plan, the
company was collecting approximately all of its sales within 30 days, and cash collections were
approximately equal to monthly sales. With the Double Zero accounts, however, only about
1

12
of
the sales price is collected in the month of sale. In the early months of the plan, cash receipts may
be expected to fall dramatically. In later months, however, the company will be collecting
installment receivables that originated during the 12 prior months, as well as
1

12
of the credit sales
in the current month.
After the plan has been in effect for one year, monthly cash collections again should approximate
a month’s sales (less uncollectible accounts expense). As sales are rising, monthly cash receipts
eventually may become significantly higher than before.
The above analysis ignores one crucial point. As of yet, we have no information as to the
percentage of Double Zero accounts that will prove to be uncollectible. Uncollectible accounts will
somewhat limit the increase in future monthly cash collections.

d. The Double Zero receivables generate no revenue after the date of sale. Hence, they represent
resources that are ―tied up‖ for up to 12 months without earning any return. As the company
uses the direct write-off method of accounting for uncollectible accounts, its receivables are
actually a ―shrinking‖ asset. Not only will they generate no future revenue, but some of these
accounts will be written off as an expense.

Solutions Manual Vol. I, Financial and Managerial Accounting 13e, Williams et al 259

CASE 7–4
ROCK, INC. (concluded)
e. Several means exist for a company to turn its accounts receivable into cash more quickly than the
normal turnover period. One approach is to offer credit customers cash discounts to encourage
earlier payment. Another is to sell the receivables to a factor, or to borrow money by pledging the
accounts receivable as collateral to secure the loan.
As Rock’s monthly income has increased dramatically, and cash receipts should increase in
future months (part c), the company may qualify for an unsecured line of credit from its bank.
However, the bank probably would require the company to develop estimates of its uncollectible
accounts receivable, and to recompute its monthly net income using an allowance method of
recording uncollectible accounts expense.
f. Note to instructor: This last question calls for students to express a personal opinion. Answers,
therefore, should be expected to vary greatly.


Net income has increased dramatically, and cash receipts should eventually increase well above
former levels. At first glance, therefore, the Double Zero plan looks quite successful.
No information has been provided, however, enabling us to estimate the amount of Double Zero
accounts that will prove uncollectible. In the bookkeeper’s schedule, monthly net income appears
to have increased by $$15,000. This computation, however, ignores the fact that some of these
credit sales will be uncollectible. Credit sales for the month on Double Zero terms amounted to
$$75,000. If $$15,000 of these sales (or 20%) prove to be uncollectible, monthly net income may be
lower under the Double Zero plan than before.
Credit losses of 20% or more are quite high. Thus, the Double Zero plan probably is increasing
the company’s profitability, though not by the $$15,000 per month shown in the bookkeeper’s
schedule.
Several other factors also may enter into the decision. For example, will competitors respond with
plans similar to Double Zero? If so, Rock’s sales may decline toward former levels. Without a
sustainable increase in sales, the Double Zero plan clearly is less advantageous than the 30-day
credit policy.
Another factor to consider is whether Rock will, in fact, be able to survive the temporary decline
in monthly cash receipts which accompanies the new, liberal credit terms.




260 © The McGraw-Hill Companies, Inc., 2005

10 Minutes, Medium
CASE 7–5
BUSINESS WEEK ASSIGNMENT

a. Perhaps the main reason people elect to charge their income taxes to a credit card is because they
have no cash. Many people wait until the last minute to file their income tax returns. Thus, they
may not know how much they owe the IRS until the last minute (April 15). Credit cards provide a
convenient means of coping with last-minute cash shortages.
b. Sound cash management could help taxpayers avoid the high costs associated with credit card
payments. Securing a line of credit with a bank in advance of filing one’s income taxes is a viable
option. Many banks offer lines of credit to homeowners. Another option would be to work out a
payment schedule directly with the IRS. This option, while less convenient than using a credit
card, is often less costly.

Solutions Manual Vol. I, Financial and Managerial Accounting 13e, Williams et al 261

SOLUTION TO INTERNET ASSIGNMENT
No time estimate, Medium
INTERNET 7–1

This assignment is based upon financial information that is continually updated. Thus, we are unable
to provide the same responses as students.
Note to instructor: It is important that students be guided to discover the wide range of cash
equivalent investment vehicles available to businesses, and the variation in the interest rates they
yield. It is also important that they consider the potential financial impact of selecting a cash
equivalent with an interest rate below market. Thus, you may wish to have students compute and
compare the interest that would be earned on an average excess cash balance of, say, $$1 million
dollars invested in: (1) market accounts, (2) CDs offered by banks, and (3) U.S. Treasury securities of
varying maturities. Such comparisons will provide a springboard for discussing the concepts of risk,
diversification, and liquidity.

262 © The McGraw-Hill Companies, Inc., 2005