The proper GAAP way to record transactions.

Sample Solution

• Check their payment history: Look at their accounts payable aging report to see how quickly they pay their bills. A company with a good payment history will have a short accounts payable aging report.
• Review their credit score: A company's credit score is a measure of their ability to repay their debts. A company with a good credit score is less likely to default on their payments.
• Get references from other suppliers: Ask other suppliers who have done business with the car manufacturer about their payment history.

Full Answer Section

• Look at their financial statements: The car manufacturer's financial statements will show their debt levels and their cash flow. A company with a good record of servicing sales and paying its suppliers will have a manageable debt load and a positive cash flow.

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

• An increase in the allowance for doubtful accounts: The allowance for doubtful accounts is a reserve that companies set aside to cover unpaid debts. An increase in this account may indicate that the company is expecting more bad debts.
• A high ratio of accounts receivable to sales: A high ratio of accounts receivable to sales means that the company is taking a long time to collect its debts. This could be a sign that there are a lot of bad debts.
• A declining credit rating: A declining credit rating is another sign that a company may have a problem with bad debts.

Here are the advantages and disadvantages of allowing customers to make purchases on credit:

Advantages:

• It can increase sales.
• It can improve customer satisfaction.
• It can help to build customer relationships.

Disadvantages:

• It can increase the risk of bad debts.
• It can increase the cost of doing business.
• It can make it more difficult to manage cash flow.

Ultimately, the decision of whether or not to allow customers to make purchases on credit is a business decision that should be made on a case-by-case basis.

Here is an article about a real-world situation where the company accounting was not done properly:

Enron: The Accounting Scandal That Rocked Wall Street

Enron was an energy company that was once one of the largest companies in the United States. However, the company's accounting practices were fraudulent, and it eventually filed for bankruptcy in 2001.

The Enron scandal was a major event that shook the confidence of investors and the public in the accounting profession. The scandal led to the Sarbanes-Oxley Act of 2002, which was passed by Congress to improve corporate governance and financial reporting.

The following are some of the things that were not done properly in Enron's accounting:

• The company used special purpose entities (SPEs) to hide debt and liabilities.
• The company overstated its profits by booking revenues that had not yet been earned.
• The company used mark-to-market accounting, which allowed it to book profits on assets that had not yet appreciated in value.

The improper accounting at Enron had a number of negative consequences. The company's stock price plummeted, and investors lost billions of dollars. The scandal also led to the resignation of several top executives and the criminal prosecution of others.

The Enron scandal is a reminder of the importance of proper accounting. When companies engage in fraudulent accounting practices, it can have devastating consequences for investors, employees, and the public.

I believe that the article left out a few important details. First, it did not mention the role that the auditors played in the scandal. The auditors, Arthur Andersen, were supposed to be independent watchdogs, but they were actually complicit in the fraud. Second, the article did not mention the impact of the scandal on the employees of Enron. Many employees lost their jobs and their retirement savings as a result of the scandal.

I think that it is important to understand the details of the Enron scandal so that we can learn from it and prevent similar scandals from happening in the future.