Accounting Issues

Jane launched an extensive advertising campaign amounting to $2.8 million to launch the new and

limited edition RV 7000 series, a luxury series to attract new customers. According to Jane, with

COVID -19 and the need for social distancing, the campaign to explore the wilderness and the

great outdoors was so successful, it increased internet traffic, increased foot traffic in all 70 dealers.

This drove the sales orders up and the advertising has deemed to be a success. As a result, Jane

has been able to improve inventory turnover, increase its profit margins and has increased the flow

of customers through all stores. By December 31, 2020 year end, Viking received 100 new orders

of the latest RV 7000 series amounting to revenue of $2.5 million (cost of goods sold of $1.5

million). Since these RVs only takes 3 months to build, Jane recognized these sales in the current

year. With the increase demand of the limited edition, there is no question the customers will

accept the orders. After all, we already received 50% of the cash when the orders are placed and it

only takes 3 months to build. Because the advanced sales of RV 7000 was a success, Jane

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capitalized 50 percent of the advertising costs as goodwill since the reputation of Viking has

improved tremendously and will potentially increase future sales since the demand outpaced the

supply. Jane directed the accountant to amortize the goodwill over five years, arguing that they

will benefit the firm over a number of years.

Jane has had a policy of writing off all slow-moving inventory at the end of each fiscal period.

Slow-moving inventory is defined as merchandise that has been on hand for more than 6 months.

Jane has changed the policy and now only writes off inventory that she believes cannot be sold.

Since the pandemic and the effective and successful advertising campaign, Jane believes all the

older models RV 3000 and RV4000 merchandises, in addition to last years camping accessory

products is still in stock will be sold and no write offs are necessary for the current year.

The company purchased parts and accessories from a supplier in Asia with terms F.O.B.

destination. These goods, which cost $1.2 million, were shipped on December 24, 2020, but had

not arrived by December 31. The companys accountant included the cost of these goods in

inventory at year-end because it was shipped before year end. He argues that it is essentially our

inventory.

Calculating Key Metrics to be included in the Board report

Jane prepared the following key information (amounts in thousands of dollars) as part of the

board report. The figures below is a draft version and did not include the accounting issues

noted above. The effective tax rate is 35%.

She has asked you to compute the following amounts for each of the fiscal years 2019 and 2020

that will be included in the board report. No explanation is needed. Jane just needs to include

these figures in her board report.

1. Collections from customers

2. Purchases of merchandise from suppliers. All purchases are made on account.

3. Payments to suppliers

4. Receivables turnover ratio and the average collection period

5. Inventory turnover ratio and the average period to sell inventory

6. Average period for conversion of inventories into cash

In the notes to its financial statements, the company states that the cost of merchandise is

determined by using the weighted-average costing method. Given the cost of inventory is rising, Jane wants to know whether the company's net income will increase or decrease if it uses FIFO instead of weighted-average cost.

Net sales Cost of sales Earnings (Loss before income taxes) Income tax expense Accounts receivable Inventories Trade payables 2020 827.2 413.5 0.6 5.9 133.1 312.1 236.1 2019 884.5 456.9 26.8 11.4 162.5 283.2 219.4 2018 900.8 471.3 7.3 5.3 111.4 336.8 196.3 Net sales Cost of sales Earnings (Loss before income taxes) Income tax expense Accounts receivable Inventories Trade payables 2020 827.2 413.5 0.6 5.9 133.1 312.1 236.1 2019 884.5 456.9 26.8 11.4 162.5 283.2 219.4 2018 900.8 471.3 7.3 5.3 111.4 336.8 196.3