Question
LO 9.4 You are considering two possible companies for investment purposes. The following data is available for each company. Company A Company B Net credit
LO 9.4 You are considering two possible companies for investment purposes. The following data is available for each company.
Company A Company B
Net credit sales, Dec. 31, 2019 $540,000 $620,000
Net Accounts receivable, Dec 31, 2018 $120,000 $145,000
Net accounts receivable, Dec 31, 2019 $180,000 $175,000
Number of days sales in receivables ratio, 2018 103 days 110 days
Net Income, Dec. 31, 2018 $250,000 $350,000
Additional Information:
Company A: Bad debt estimation percentage using the income statement method is 6%, and the balance sheet method is 10%. The $230,000 in Other Expenses includes all company expenses except Bad Debt Expense.
Company B: Bad debt estimation percentage using the income statement method is 6.5%, and the balance sheet method is 8%. The $140,000 in Other Expenses includes all company expenses except Bad Debt Expense.
- Compute the number of days sales in receivables ratio for each company for 2019 and interpret the results (round answers to nearest whole number).
- If Company A changed from the income statement method to the balance sheet method for recognizing bad debt estimation, how would that change net income in 2019? Explain (show calculations).
- If Company B changed from the balance sheet method to the income statement method for recognizing bad debt estimation, how would that change net income in 2019? Explain (show calculations).
- What benefits do each company gain by changing their method of bad debt estimation?
- Which company would you invest in and why? Provide supporting details.
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started