The CFO of First Things Computing, Inc. (FTC) prepared the following balance sheet as of December 31, 2016.

For the sake of simplicity, assume that FTC does not incur income tax expense. Thus, the impact in 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 (i. 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 (i. e., 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 2017. Reasonable estimates of the amount that FTC may be liable for range from $ 2,000 to $ 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 2016. However, this amount is a matter of judgment.
Required
1. 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?
2. 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?
3. 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?
4. Do you think that the management of FTC will care very much about the choices related to these adjustments?

Transcribed Image Text:

Assets Current Assets: Cash Trading Socuntios at Fair Value Accounts Receivablo-net Merchandise Irventory Office Supplies Prepaid Rent $ 5,000 700 11,000 24,000 600 200 41,500 Total CurrentAssets Noncurront Assets: Investments Property, Plant, and Equipment $15,000 Land Buildings Machinery and Equipment Loss: Accumulatad Dopreciation 20,000 80,000 70,000 (62,000) 108,000 5,000 4,500 3,100 S135,600 Total Proporty, Plant, and Equipment- not Deferred Tax Asset Intangible Assets: Franchise -net Other Assets Total Noncurrent Assets Total Assets $177,100 Liabilities Current Liabilities: Accounts Payable Short-term Notes Payable Current Portion of Long-term Debt Interest Payable Income Taxes Payable Uneamed Revenue s 2,700 1,000 300 200 1,500 5,400 11,100 Total Current Liabilities Noncurront Liablities: Notes Payable, due 10 yoars Bonds Payable, due 20 years s 40,000 60,000 100,000 $ 111,100 Total Noncurrent Liabilities Total Liabilities Stockholdors Equity Common Stock -at par Additional Paid-in Capital Retained Earnings Accumulated Othar Comprehensive Income s 20,000 30,000 5,000 11,000 S 66,000 $177100 Total Stockholders' Equity Total Liabilitios and Stockholders Equity