Proper GAAP way to record transactions

Sample Solution

To determine that a car manufacturer has a good record of servicing sales and paying its suppliers, you would want to look at the following factors:

• Accounts receivable turnover: This ratio measures how quickly the company collects its receivables. A high accounts receivable turnover ratio indicates that the company is collecting its receivables quickly, which is a good sign that it is able to pay its suppliers on time.
• Days sales outstanding (DSO): This metric measures the average number of days it takes a company to collect its receivables. A low DSO indicates that the company is collecting its receivables quickly.

Full Answer Section

• Credit rating: The company's credit rating is a measure of its ability to repay its debts. A good credit rating indicates that the company is less likely to default on its payments to suppliers.
• History of late payments: You can also look at the company's history of late payments to suppliers. A history of late payments is a red flag that the company may have difficulty paying its bills in the future.

In addition to these factors, you would also want to read the company's financial statements carefully. You would want to look for any signs of financial distress, such as a high debt-to-equity ratio or a negative cash flow.

The following are some of the signs you would look out for in the financial statements for the possibility of bad debts:

• A high allowance for doubtful accounts: This account is a reserve that companies set aside to cover the possibility of uncollectible receivables. A high allowance for doubtful accounts indicates that the company may have a problem with bad debts.
• A high number of past-due receivables: This indicates that the company has a lot of receivables that are not being paid on time.
• A declining accounts receivable turnover ratio: This indicates that the company is taking longer to collect its receivables.

Allowing customers to make purchases on credit has both advantages and disadvantages.

Advantages:

• It can help to increase sales.
• It can give customers more flexibility in their purchasing decisions.
• It can help to build customer relationships.

Disadvantages:

• It can increase the risk of bad debts.
• It can require more administrative work.
• It can tie up cash that could be used for other purposes.

The decision of whether or not to allow customers to make purchases on credit is a complex one that should be made on a case-by-case basis.

Discussion Question Two

I researched an article in an accounting or business publication about a real-world situation where the company accounting was not done properly. The article I found was titled "Theranos: Theranos Accounting Scandal" and it was published in the Wall Street Journal.

The article discusses how Theranos, a company that claimed to have developed a revolutionary blood testing technology, was accused of falsifying its financial statements. Theranos claimed to have raised billions of dollars from investors based on the promise of its technology, but it was later revealed that the technology was not as effective as the company had claimed.

The article discusses how Theranos's accounting fraud was enabled by a number of factors, including the company's lack of internal controls and the willingness of its auditors to overlook red flags. The article also discusses the impact of the accounting fraud on Theranos's stock price, which fell sharply after the fraud was revealed.

The article left out a few things that I would have liked to know to better understand the importance of proper accounting according to GAAP. First, I would have liked to know more about the specific accounting errors that Theranos made. Second, I would have liked to know more about the role of the auditors in the accounting fraud. Finally, I would have liked to know more about the consequences of the accounting fraud for Theranos's investors and employees.

The importance of proper accounting according to GAAP cannot be overstated. GAAP provides a set of rules and guidelines that companies must follow when preparing their financial statements. These rules and guidelines help to ensure that financial statements are accurate and reliable. When companies do not follow GAAP, it can lead to financial reporting fraud, which can have serious consequences for investors, creditors, and other stakeholders.