Excerpts from the 2014 financial statements of Finley Ltd., a service company, follow: Fees earned ..............$240,000 Accounts
Question:
Excerpts from the 2014 financial statements of Finley Ltd., a service company, follow:
Fees earned ..............$240,000
Accounts receivable ............ 68,000
Allowance for doubtful accounts ...... 3,400
Total current assets ............ 105,000
Total current liabilities ......... 65,000
Net income ............... 15,000
Dividends declared ........... 5,000
Bad debt expense ........... 3,400
Auditors from Price and Company reviewed the financial records of Finley and found that a credit sale of $10,000 (for services rendered), which was included in the fees earned amount above, should not have been recognized until January 20, 2015. The auditors also noted that a more reasonable estimate of future bad debts would be 10 percent of the accounts receivable balance. The auditors have informed Finley’s management that the audit opinion will be qualified if Finley does not adjust the financial statements accordingly.
REQUIRED:
a. Compute the effect of the auditors’ recommended adjustment on the 2014 fees earned, accounts receivable, allowance for doubtful accounts, current ratio, working capital, and net income reported by Finley.
b. Assume that Finley has a loan agreement with a bank, requiring it to maintain a current ratio of 1.5 and limiting its annual dividend payment to 50 percent of net income. How might these restrictions have influenced the reporting decisions of Finley’s managers?
Financial statements are the standardized formats to present the financial information related to a business or an organization for its users. Financial statements contain the historical information as well as current period’s financial... Accounts Receivable
Accounts receivables are debts owed to your company, usually from sales on credit. Accounts receivable is business asset, the sum of the money owed to you by customers who haven’t paid.The standard procedure in business-to-business sales is that... Dividend
A dividend is a distribution of a portion of company’s earnings, decided and managed by the company’s board of directors, and paid to the shareholders. Dividends are given on the shares. It is a token reward paid to the shareholders for their...
Step by Step Answer:
a The effect of the auditors findings on 2014 Fees Earned Accounts Receivable Allowance for Doubtful ...View the full answer
