W2 Discussion Questions

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Earnings management is not always intended to produce higher income. The manipulation’s purpose is to give the illusion of a smooth income pattern. According to our text, “Most executives prefer to report earnings that follow a smooth, regular, upward path….It is better to have two years of 15% earnings increases than a 30% gain in one year and none in the next” (Spiceland, Sepe, & Nelson, 2011).

Spiceland, J. D., Sepe, J. F. & Nelson, M.W. (2011). Intermediate Accounting (6th ed.)

The manipulation is not always intended to produce higher income but to achieve a smooth pattern of income over time to appear less risky or volatile.For example, accelerated recognition and overestimation of restructuring costs is a technique that companies could use to understate income in an otherwise good year and then use the “banked” income in following years in case income declines

1.) Explain and justify why revenue often is recognized as earned at point of delivery. Revenue is often recognized as earned at point of delivery so that the actual revenue gain for the period is not misstated on the income sheet. According to the text, premature revenue recognition reduces the quality of reported earnings (Spiceland, Sepe, & Nelson, 2011). In addition, there are too many uncertainties, before the point of delivery, such as if the product with sell and actual selling price (Spiceland, et al, 2011)

2.) Explain in what situations it would be useful to recognize revenue as the productive activity takes place. It would be useful to recognize revenue as the productive activity takes place in the construction of a building.

3.) At what times, other than those included in (1) and (2) above, may it be appropriate to recognize revenue? After Delivery and Prior to delivery
References:
Spiceland, J. D., Sepe, J. F. & Nelson, M.W. (2011). Intermediate Accounting (6th ed.)

E 4-16
Blue Bonnet BakersStatement of Cash FlowsYear Ending December 31, 2011| Cash Flows from Operating Activities:| | |
Cash Received from Customers| 380,000| |
Cash Received from Interest rec| 6,000| |
Purchase of Inventory| (160,000)| |
Salaries Paid| (90,000)| |
Interest Payable| (5,000)| |
Net Cash Flows from operating activities| | 131,000|
| | |
Cash Flows From Investing Activities:| | |
Purchase of Equipment| (85,000)| |
Sale of Investments| 30,000| |
Proceeds from Note Payable| 100,000| |
Proceeds from Principal on Note Receivable| 50,000| | Payment of Principal on Note Payable| 25,000| |
Net Cash Flows from Investing Activities| | 120,000|
| | |
Cash Flows from financing activities:| | |
Payment of Dividends| (20,000)| |
Net Cash Flows from Financing Activities| | (20,000)|
| | |
Net Increase in Cash| | 231,000|
Cash Jan 1, 2011| | 17,000|
Cash Dec 31, 2011| | 248,000|

E4-19

Financing| Investing| Operating|
1. 300,000 inflow| | |
2. 30,000 √| 2. 10,000 outflow| |
| | 3. 90,000√|
| | 4. 120,000√ & 70,000√|
| | 5. 5,000 Outflow|
| | 6. 6,000 Outflow|
| | 7. 70,000 Outflow|
| | 8. 55,000 Inflow|
| 9. 1,000√| |

Wainwright CorporationStatement of Cash FlowsMonth Ending March 31, 2011| Cash Flows from Operating Activities:| | |
Cash Received from Customers| 55,000| |
Cash Paid for rent| (5000)| |
Purchase of Inventory| (70,000)| |
Cash Paid for Insurance| (6,000)| |
| | |
Net Cash Flows from operating activities| | (26,000)|
| | |
Cash Flows From Investing Activities:| | |
Purchase of Equipment| (10,000)| |
Net Cash Flows from Investing Activities| | (10,000)|
| | |
Cash Flows from financing activities:| | |
Issuance of Common Stock| 300,000| |
Net Cash Flows from Financing Activities| | 300,000|
| | |
Net...
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