Q1. Examine the trend in each of the following accounts.
a. Sales revenue:
In Year 6 it (__________/ decreased), and then in Year 7 it (increased / __________).
b. Cost of goods sold:
In Year 6 it (__________/ decreased), and then in Year 7 it (increased / __________).
c. Operating income:
In Year 6 it (__________/ decreased), and then in Year 7 it (increased / __________).
d. Accounts receivable:
In Year 6 it (__________/ decreased), and then in Year 7 it (__________/ decreased).
e. Allowance for bad debts:
In Year 6 it (__________/ decreased), and then in Year 7 it (increased / __________).
f. Comment on any unexpected or suspicious observations.
Q2. Compute the Accounts Receivable Turnover ratio and the Allowance as a Percentage of Sales ratio for each of the three years. Record in the chart above. What information do these ratios reveal?
Q3. The amount reported for the allowance for bad debts is a(n) (known / __________) amount so this amount (__________ / cannot) be manipulated.
Q4. Would you feel comfortable granting a loan based on the information above? (Yes / __________). If not, what additional information would you request before granting a loan? Explain.