Accounting Ppaper
Autor: Maryam • October 15, 2018 • 1,009 Words (5 Pages) • 763 Views
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Effects on the Financial Statements & Users of Financial Statements:
The choice of capitalizing or expensing has an impact on the balance sheet and the income statement. Capitalizing costs and depreciating them over time will show a smoother pattern of reported income. Expensing have higher variability in the income. Capitalizing items will have a higher profitability than expensing. The impact on the net income will greatly influence the retained earning, which will later on impact the shareholders’ equity. Hence, the choice of capitalizing or expensing can impact your debt-to-equity ratio. As a result, it will affect your bank covenant. In addition, the $800,000 is considerably a large amount of cost, the choice of capitalizing or expensing can largely influence the covenant.
Issue #6
Appropriate Treatment:
The revenue recognition is based on the earned or achieved performance, the measurability and the collectability. Once these three criteria are met, the revenue can be recognized. For bill-and-hold, the revenue may be recognized if it is probable that delivery will be made, the item is ready for delivery and the customer has paid.
Recommendation:
Before December 20, the delivery is probable to be made as the contract is already signed and the client specified to pick up the inventory on December 15th. The shipment was prepared and segregated and the specialized inventory was ready to be picked up. Assume there is a partial down payment, the revenue can be recorded on December 15th. Near end December, Hi-Speeders informed that due to warehouse constraints and short-term liquidity issues, they have intended to pick up and to pay later on. In addition, the company is facing business risks. The delivery might not be made and the collectability of the payment changed. After receiving the news, new information has been delivered, a prospective treatment needs to be adjusted. The revenue should not be recognized at this point in time.
Effects on the Financial Statements & Users of Financial Statements (Bank & SKI management):
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