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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
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 service revenue amount above, should not have been recognized until January 20,2021 . 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. INSTRUCTIONS: a. Compute the effect of the auditors' recommended adjustment on the 2020 service revenue, accounts receivable, allowance for bad debts, 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
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