3. The original and revised current ratios and debt-to-equity ratios are computed below:

	Current Assets	Current Liabilities	Current Ratio	Change
As Originally reported	$41,500	$11,100
Impact of Adjustments most conservative
Adjusted for most conservative
As Originally reported	41,500	11,100
Impact of Adjustments least conservative
Adjusted for least conservative

	Debt	Equity	Debt-to-Equity Ratio	Change
As Originally reported	$111,100	$66,000
Impact of Adjustments most conservative*
Adjusted for most conservative
As Originally reported	111,100	66,000
Impact of Adjustments least conservative**
Adjusted for least conservative

Statements of Financial Position and Cash Flows and the Annual Report 293 CASES Judgment Cases Judgment Case 1: Balance Sheet Management The CFO of First Things Computing, Inc. (FTC) prepared the following balance sheet as of December 31, 2019, $ 5,000 700 11,000 24,000 600 200 $ 41,500 First Things Computing, Inc. Balance Sheet As of December 31, 2019 Assets Current Assets: Cash Trading Securities at Fair Value Accounts Receivable-net Merchandise Inventory Office Supplies Prepaid Rent Total Current Assets Noncurrent Assets: Investments Property. Plant, and Equipment Land Buildings Machinery and Equipment Less: Accumulated Depreciation Total Property, Plant, and Equipment-net Deferred Tax Asset Intangible Assets: Franchise - net Other Assets Total Noncurrent Assets $ 15,000 20,000 80,000 70,000 162,000) 108,000 5,000 4,500 3,100 $135,600 $177,100 Total Assets $ Liabilities Current Liabilities: Accounts Payable Short-term Notes Payable Current Portion of Long-term Debt Interest Payable Income Taxes Payable Unearned Revenue Total Current Liabilities 2,700 1,000 300 200 1,500 5,400 11,100 $ Noncurrent Liabilities: Notes Payable, due 10 years Bonds Payable, due 20 years Total Noncurrent Liabilities Total Liabilities $ 40,000 60,000 100,000 $ 111,100 Stockholders' Equity Common Stock - at par Additional Paid-in Capital Retained Earnings Accumulated Other Comprehensive Income Total Stockholders' Equity Total Liabilities and Stockholders' Equity $ 20,000 30,000 5,000 11,000 $ 66,000 $177,100 For the sake of simplicity, assume that FTC does not incur income tax expense. Thus, the impact on equity can be computed as the combination of the impact on assets and the impact on the liabilities The CFO must make the following adjustments before finalizing the financial statements: 1. FTC will need to record some amount of bad debt expense. The offset will be a reduction in accounts receivable. This adjustment is a matter of judgment, and reasonable estimates range between $1,000 and $3.000. 2. FTC will need to write down its inventory (i.e., reduce the reported value of inventory). The offset will be to cost of goods sold. This adjustment is a matter of judgment, and reasonable estimates range between $2,500 and $3,750. 3. FTC may need to record an impairment loss on its PPE (.e., reduce the reported value of PPE). The offset will be an impairment loss reported on the statement of net income. This adjustment is a matter of judgment, and reasonable estimates range between 0 and $5,000. 4. FTC may need to record an impairment loss on its noncurrent investments (ie., reduce the reported value of noncurrent investments). The offset will be an impairment loss reported on the statement of net income. This adjustment is a matter of judgment, and reasonable estimates range between $250 and $750. 5. FTC may need to record a litigation contingency (i.e., it may need to record a liability for an unresolved lawsuit). The offset is to litigation expense. The lawsuit is expected to be settled in 2020. FTC's attor neys believe that they can provide a point estimate of amount for which FTC will be liable. The estimate will either be $2.000 or $10,000 6. FTC may need to reduce the reported amount of its deferred tax asset. The amount by which the asset needs to be reduced is highly judgmental and ranges from $0 to $5,000. The offset to this adjustment is income tax expense. Assume the deferred tax asset is noncurrent 7. FTC currently has unearned revenue on its balance sheet of $5,400. Up to $5,000 of this amount could possibly be recognized as revenue in 2019. However, this amount is a matter of judgment. Required a. If FTC makes the most conservative choices for all these adjustments that will result in the lowest net income number, what is the impact on assets and liabilities in terms of absolute dollar impact and percentage change? h. If FTC makes the least conservative choices for all these adjustments that will result in the highest net income number, what is the impact on assets and liabilities in terms of absolute dollar impact and percentage change? c. What is the impact on the current ratio and the debt-to-equity ratio of these choices if management makes the most conservative choices? What is the impact on these ratios if management makes the least conservative choices? d. Do you think that the management of FTC will care very much about the choices related to these adjustments? Statements of Financial Position and Cash Flows and the Annual Report 293 CASES Judgment Cases Judgment Case 1: Balance Sheet Management The CFO of First Things Computing, Inc. (FTC) prepared the following balance sheet as of December 31, 2019, $ 5,000 700 11,000 24,000 600 200 $ 41,500 First Things Computing, Inc. Balance Sheet As of December 31, 2019 Assets Current Assets: Cash Trading Securities at Fair Value Accounts Receivable-net Merchandise Inventory Office Supplies Prepaid Rent Total Current Assets Noncurrent Assets: Investments Property. Plant, and Equipment Land Buildings Machinery and Equipment Less: Accumulated Depreciation Total Property, Plant, and Equipment-net Deferred Tax Asset Intangible Assets: Franchise - net Other Assets Total Noncurrent Assets $ 15,000 20,000 80,000 70,000 162,000) 108,000 5,000 4,500 3,100 $135,600 $177,100 Total Assets $ Liabilities Current Liabilities: Accounts Payable Short-term Notes Payable Current Portion of Long-term Debt Interest Payable Income Taxes Payable Unearned Revenue Total Current Liabilities 2,700 1,000 300 200 1,500 5,400 11,100 $ Noncurrent Liabilities: Notes Payable, due 10 years Bonds Payable, due 20 years Total Noncurrent Liabilities Total Liabilities $ 40,000 60,000 100,000 $ 111,100 Stockholders' Equity Common Stock - at par Additional Paid-in Capital Retained Earnings Accumulated Other Comprehensive Income Total Stockholders' Equity Total Liabilities and Stockholders' Equity $ 20,000 30,000 5,000 11,000 $ 66,000 $177,100 For the sake of simplicity, assume that FTC does not incur income tax expense. Thus, the impact on equity can be computed as the combination of the impact on assets and the impact on the liabilities The CFO must make the following adjustments before finalizing the financial statements: 1. FTC will need to record some amount of bad debt expense. The offset will be a reduction in accounts receivable. This adjustment is a matter of judgment, and reasonable estimates range between $1,000 and $3.000. 2. FTC will need to write down its inventory (i.e., reduce the reported value of inventory). The offset will be to cost of goods sold. This adjustment is a matter of judgment, and reasonable estimates range between $2,500 and $3,750. 3. FTC may need to record an impairment loss on its PPE (.e., reduce the reported value of PPE). The offset will be an impairment loss reported on the statement of net income. This adjustment is a matter of judgment, and reasonable estimates range between 0 and $5,000. 4. FTC may need to record an impairment loss on its noncurrent investments (ie., reduce the reported value of noncurrent investments). The offset will be an impairment loss reported on the statement of net income. This adjustment is a matter of judgment, and reasonable estimates range between $250 and $750. 5. FTC may need to record a litigation contingency (i.e., it may need to record a liability for an unresolved lawsuit). The offset is to litigation expense. The lawsuit is expected to be settled in 2020. FTC's attor neys believe that they can provide a point estimate of amount for which FTC will be liable. The estimate will either be $2.000 or $10,000 6. FTC may need to reduce the reported amount of its deferred tax asset. The amount by which the asset needs to be reduced is highly judgmental and ranges from $0 to $5,000. The offset to this adjustment is income tax expense. Assume the deferred tax asset is noncurrent 7. FTC currently has unearned revenue on its balance sheet of $5,400. Up to $5,000 of this amount could possibly be recognized as revenue in 2019. However, this amount is a matter of judgment. Required a. If FTC makes the most conservative choices for all these adjustments that will result in the lowest net income number, what is the impact on assets and liabilities in terms of absolute dollar impact and percentage change? h. If FTC makes the least conservative choices for all these adjustments that will result in the highest net income number, what is the impact on assets and liabilities in terms of absolute dollar impact and percentage change? c. What is the impact on the current ratio and the debt-to-equity ratio of these choices if management makes the most conservative choices? What is the impact on these ratios if management makes the least conservative choices? d. Do you think that the management of FTC will care very much about the choices related to these adjustments