ANALYSIS OF STATEMENT OF CASH FLOWS
REVENUE RECOGNITION
GAC's new business relationship with the bank requires the company to maintain a minimum current ratio of 1.0. If GAC does not meet this requirement, they will have to have the accounts audited externally. The custom shirt business appears to be a positive aspect of the company's operations this year.
There was no structural damage to the warehouse, but the leak caused stains and water damage on half of the plain T-shirts purchased. An alternative point in time at which revenue must be reported is the completion and delivery of the shirts. GAAP requires that receivables be reported on the balance sheet at the net realizable value of the receivables.
The compensation method is by far the better option for Nicki at this point in the company's life. This approach is beneficial because it will provide Nicki with a more accurate measure of the net realizable value of GAC's receivables in 2014. This method further provides an accurate representation of the true net realizable value of the 2014 receivables.
This contra revenue account will be debited for the refund amount and credited to Receivables to cancel the expected payment. This provides external users with a fair and conservative measure of the value of the company's inventory. After selling the damaged goods to retailers, GAC must consider selling the damaged shirts below cost to recoup some of the cost of producing the shirts.
After adjusting for all proposed changes to GAC's balance sheet, the effects on the company's current ratio can be observed in the four graphs above. Correcting the errors in the financial statements reveals the company's inability to pay off its short-term debts. An adjusted partial balance sheet for 2014 is shown below, which summarizes all adjustments to current assets and liabilities and highlights the effects of these changes on the current ratio.
DEPRECIATION EXPENSE
This may seem to be a cause for concern; however, different business practices can lead to different estimates of the useful life of the same asset. A significant part of the fraud involved processing expenses related to depreciation on the company's garbage trucks and other equipment. However, the company's management is expected to act in a systematic and rational manner to determine the value of these estimates and the amount of depreciation expense necessary to report the correct book value of the asset.
Pre-set earnings targets were introduced to assess a company's financial stability, and managers began manipulating earnings each year to save their jobs and earn bonuses for high performance. The information must be available before the financial statements are issued and the amount of the loss must be reasonably estimable. The FASB Codification provides for the creation of a liability in an amount that can be reasonably estimated.
Because the purchase of the property has already taken place, no loss is expected for Construct on the property. Because the purchase of the property has already taken place and no restructuring is likely, no loss is expected from BigMix's bankruptcy. The FASB Codification provides for the recognition of liability when an environmental remediation occurs and the company is the current owner of the site (25-‐3).
Because the EPA claim has been asserted and the outcome of the investigation is likely to be unfavorable, there is a responsibility to remediate the environment. The provision can be reliably estimated and should therefore create a liability for the full amount of the remediation. Construct must therefore participate in all aspects of the remediation process and is obliged to cover the costs of the remediation plan.
This amount represents the difference between Construct's expected $1.5 million cost of the remediation plan and the $1 million settlement with BigMix that is highly likely (75 percent) to occur. Construct should therefore record a liability up to this amount to cover the costs of the remedial plan. This amount can be used in the future to recover some of the loss related to the remediation costs.
LONG-TERM DEBT
These debt securities are convertible into common stock of the company at the option of the holder. The proceeds from these notes were then used to buy back some of the company's older debt. The nominal value of the 7.5% preferred secured debt securities is stated in the eleventh note to the financial statements.
The nominal value of the 9.375 percent senior notes can be found in note 11 to the financial statements. The face value and the book value differ because of the existence of the unamortized discount. The cash received represents the present value of the principal plus interest on those notes.
This number can be found in the Liabilities and Stockholders' Equity section of the company's balance sheet. This number can also be found in the Liabilities and Stockholders' Equity section of the balance sheet. The amortized discount is added to the original value of the security to equal the amortized value.
The difference between the market value and the redemption value of the securities represents the amount of the amortized premium. It is important that these accounts show the correct balance to accurately reflect the company's intentions for future investment. With the net method, the e-merchant records revenue only in the amount of commission earned.
For obvious reasons, the commission is much lower than the total value of the transaction, which leads to a reduction in the amount of reported revenue. The use of the gross method of revenue recognition was inappropriate, based on the company's business model. The valuation account is a contra asset account and is presented in the balance sheet as a reduction of the carrying amount of the deferred tax asset.
The sum of these factors results in the ending balance, or terminal value, of the retirement plan assets. In my opinion, expected returns better reflect the economics of the company's pension costs.
