Suggestions for Class Activities
1. Real World Scenario
The following is an excerpt from a December 18, 2000, article on TheStreet.com titled “Cisco
Triples Bad-Account Provision as Cash Crunch Deepens.” The article discusses an increase in
bad debts for Cisco Systems, Inc., the world’s largest networking products company.
Cisco’s deadbeat account column has more than tripled in the span of a
year, adding to evidence that some of its network equipment customers are
collapsing under the weight of a cash crunch.
For the fiscal first quarter ended Oct. 28 [2000], Cisco moved $275
million from operating cash to cover potential nonpayments from failed
customers, according to the company’s quarterly regulatory filing. The
company told analysts on its earnings conference call last month that it
was taking insignificant provisions to cover doubtful accounts. It wasn’t
until this week, when Cisco filed its financial reports, that there was a
dollar figure clearly associated with those potential losses. In the year–ago
period, Cisco’s provision was $75 million.
Suggestions:
There are a number of issues that could be discussed with the class. For example, the article
states that “Cisco moved $275 million from operating cash to cover potential nonpayments from
failed customers …” What is wrong with the terminology used in that sentence? You could have
the class access the 10-Q for the period ended October 28, 2000, using the EDGAR database and
have them locate the $275 million provision. Then, using information from the balance sheet,
have them determine the amount of receivables actually written off during the quarter. You could
also have the class access the most recent financial statements of Cisco, investigate the
relationship between receivables and the allowance, and then compare the relationship with a
competitor such as Juniper Networks.
Points to Note:
Of course, no “cash” was moved to cover potential nonpayments from failed customers. The
correct terminology is that the company increased the allowance for uncollectible accounts to
cover the increase in bad debts.
The $275 million provision can be located on the statement of cash flows as an adjustment to
net income. The allowance for uncollectible accounts (allowance for doubtful accounts)
increased during the quarter from $43 million to $57 million, indicating actual write-offs during
the quarter of $261 million.
2. Research Activity
In June of 2007, Frozen Food Express Industries reported that its auditors found material
weaknesses in its internal financial controls. The PCAOB’s Auditing Standard No. 2 requires that
the auditor form an opinion on the effectiveness of controls. If any deficiencies exist, they should
be reported in writing to management and the audit committee. The existence of a material
weakness requires the issuance of an adverse opinion. There are three types of possible
deficiencies.
Suggestions:
Have the class research Auditing Standard No. 2 (www.pcaobus.org) and list and describe the
three types of deficiencies. This activity could be used for classroom discussion or as a writing
assignment.
Points to Note:
The three types of deficiencies are:
1. A control deficiency exists when the design or operation of a control does not allow
management or employees, in the normal course of performing their assigned functions, to
prevent or detect misstatements on a timely basis.
2. A significant deficiency is a control deficiency or combination of control deficiencies that
adversely affects the company’s ability to initiate, authorize, record, process, or report
external financial data reliably in accordance with generally accepted accounting principles
such that there is more than a remote likelihood that a misstatement of the company’s annual
or interim financial statements that is more than inconsequential will not be prevented or
detected.
3. A material weakness is a significant deficiency or combination or significant deficiencies
that results in more than a remote likelihood that a material misstatement of the annual or
interim financial statements will not be prevented.
3. Symantec Analysis
Have students, individually or in groups, go to the most recent Symantec annual report using
EDGAR at www.sec.gov. Ask them to:
1. Compare the allowance for uncollectibles with the amount reported in the 2016 report
located in the annual report included with all new copies of the text. Has there been any
change in the relationship between the allowance and gross receivables? If so, how might
this be interpreted?
2. Compute the current year’s average collection period and compare it to 2016. Interpret your
results in light of your findings in requirement 1 above.
3. Use EDGAR to locate the most recent annual report information for CA, Inc., Symantec’s
competitor. Using the most recent annual report information for both companies, compare
the relationship between gross receivables the allowance for uncollectibles, the receivables
turnover ratio, and the average collection period.
4. Professional Skills Development Activities
The following are suggested assignments from the end-of-chapter material that will help your
students develop their communication, research, analysis, and judgment skills.
Communication Skills. In addition to Communication Case 7–2, Integrating Case 7–8 can be
adapted to ask students to write a memo from a junior accountant to a controller explaining
the appropriate accounting treatment. Real World Case 7–4, Ethics Case 7–5 and Judgment
Case 7–6 do well as group assignments. All of these cases also create good class
discussions. Real World Cases 7–4 and 7–7 are suitable for a student presentation.
Research Skills. In their careers, our graduates will be required to locate and extract relevant
information from available resource material to determine the correct accounting practice,
perhaps identifying the appropriate authoritative literature to support a decision. Research
Case 7–11 provides an excellent opportunity to help students develop this skill. In addition,
Real World Case 7–7 can be adapted to require students to research the authoritative
literature on accounting for bad debts.
Analysis Skills. The “Broaden Your Perspective” section includes Analysis Cases that direct
students to gather, assemble, organize, process, or interpret data to provide options for
making business and investment decisions. In addition to Analysis Cases 7–9, 7–12, and
7–13, Exercises 7–24, 7–25, and 7–26, as well as Real World Case 7–7 also provide
opportunities to develop and sharpen analytical skills.
Judgment Skills. The “Broaden Your Perspective” section includes Judgment Cases that
require students to critically analyze issues to apply concepts learned to business situations
in order to evaluate options for decision making and provide an appropriate conclusion. In
addition to Judgment Cases 7–1, 7–3, and 7–6, Research Cases 7–4 and 7–11 also require
students to exercise judgment.
5. Ethical Dilemma
The chapter contains the following ethical dilemma:
ETHICAL DILEMMA
The management of the Auto Parts Division of the Santana Corporation receives a bonus if the
division’s income achieves a specific target. For 2018, the target will be achieved by a wide
margin. Mary Beth Williams, the controller of the division, has been asked by Philip Stanton,
the head of the division’s management team, to try to reduce this year’s income and “bank”
some of the profits for future years. Mary Beth suggests that the division’s bad debt expense as
a percentage of the gross accounts receivable for 2018 be increased from 3% to 5%. She
believes that 3% is the more accurate estimate but knows that both the corporation’s internal
auditors as well as the external auditors allow some flexibility when estimates are involved.
Does Mary Beth’s proposal present an ethical dilemma?
You may wish to discuss this in class. If so, discussion should include these elements.
Step 1—The Facts:
Managers of the Auto Parts Division receive bonuses for attaining division target net income.
The 2018 target net income has been achieved. The head of the management team asks Mary
Beth Williams, division controller, to defer some of this year’s income to future years in order to
provide bonuses in later reporting periods. The controller, although believing the 3% is a
reasonable estimate, suggests increasing the bad debt percentage of net credit sales to 5% as a
way to defer the income to future periods. By changing the bad debt percentage, the controller
makes both net receivables and net income less reliable and possibly misleading to users of the
financial statements.
Step 2—The Ethical Issue and the Stakeholders:
The ethical issue or dilemma is whether the controller’s obligation to the management team to
provide for future profit and the ensuing bonuses is greater than her obligation to provide
information that is not misleading to users of the financial statements.
Stakeholders include Mary Beth Williams, controller; Philip Stanton, head of the management
team; other division managers; the top management of Santana Corporation; internal and
external auditors; current and future creditors; and current and future investors.
Step 3—Values:
Values include competence, honesty, integrity, objectivity, loyalty to the company, loyalty to
the management team, and responsibility to users of the financial statements.
Step 4—Alternatives:
1. Follow the suggestion of Philip Stanton to defer some 2018 income to future years.
2. Refuse to defer profit to the future and record the 2018 bad debt expense at the best
estimate of 3% of net credit sales.
3. Report Stanton’s request to a higher level of management, the audit committee, or the
auditors.
4. Resign from the company and seek employment elsewhere.
Step 5—Evaluation of Alternatives in Terms of Values:
1. Alternative 1 illustrates loyalty to the management team.
2,3. Alternatives 2 and 3 illustrate loyalty to the company as a whole and also incorporate the
values of competence, honesty, integrity, objectivity, and responsibility to users of the
financial statements.
4. Alternative 4 supports the values of honesty and integrity but does not reflect
competence, objectivity, or responsibility to financial statement users and the company
as a whole.
Step 6—Consequences:
Alternative 1
Positive consequences: The controller would please the management team, who would
probably receive bonuses in future years.
Negative consequences: Users of the financial statements, including corporate top
management, would be misinformed. The increased bad debt expense would reduce operating
income and place the division in a less favorable financial position for 2018. Net accounts
receivable would be lower. The controller may lose her self-respect, the respect of co-workers,
and possibly her job if the manipulation of 2018 income is detected by corporate top
management.
Alternative 2
Positive consequences: Users of the financial statements would receive a more relevant and
reliable estimate of net income for 2018 and future years. Net income and bonuses in future
years would be fairly stated. The controller would maintain her integrity, may receive praise for
being honest, and may keep her job.
Negative consequences: The controller may incur the disfavor of division management and
may lose the trust of other managers. Bonuses in future years may be lower or nonexistent.
Alternative 3
Positive consequences: The controller maintains her integrity. Users of the financial
statements may receive a more relevant and reliable estimate of reported income if upper
management levels or the audit committee compel fair presentation of the bad debt expense in
the financial statements.
Negative consequences: The controller may incur the disfavor of division management and the
trust of other employees, resulting in a loss of future promotions or her job. Whistle-blowers
often are not rewarded.
Alternative 4
Positive consequences: The controller maintains her integrity and avoids conflict with division
management.
Negative consequences: The controller has no job and may have difficulty getting references
for a new job. Users of financial statements, including corporate management, still do not receive
relevant and reliable information regarding bad debt expense and bonuses. Bonuses in future
years may not be correctly calculated.
Step 7—Decision:
Student(s) must decide their course of action.
Assignment Chart
Learning Est.
time
Questions Objective(s) Topic
(min.)
7–1 1 Cash equivalents 5
7–2 1 Internal control procedures 5
7–3 1 Internal controls and Sarbanes-Oxley 5
7–4 2 Compensating balance 5
7–5 2,10 IFRS; bank overdrafts 5
7–6 3 Trade versus cash discounts 5
7–7 3 Cash discounts; gross versus net methods 5
7–8 4 Sales returns 5
7–9 5 Accounting treatment for uncollectible accounts 5
7–10 6 Income statement versus balance sheet
approaches of accounting for bad debts 5
7–11 6,10 IFRS; disclosure 5
7–12 8 Assigning of accounts receivable 5
7–13 8 Factoring with and without recourse 5
7–14 8,10 IFRS; transfer of receivables 5
7–15 8 Discounting a note receivable 5
7–16 9 Monitoring a company’s investment in
receivables
5
7–17 7A Bank reconciliation (based on Appendix 7A) 5
7–18 7A Petty cash (based on Appendix 7A) 5
7–19 7A Debt impairment (based on Appendix 7A) 5
7–20
7–21
10,7B
7B
IFRS; debt impairment (based on Appendix 7B)
IFRS (based on Appendix 7B)
5
5
Brief Learning Est.
time
Exercises Objective(s) Topic
(min.)
7–1 1 Internal control 10
7–2 2,10 Bank overdrafts 10
7–3 2 Cash and cash equivalents 5
7–4 3 Cash discounts; gross method 10
7–5 3 Cash discounts; net method 10
7–6 4 Sales returns 10
7–7 4 Sales returns 10
7–8 5,10 Accounts receivable classification 10
7–9 5,6 Uncollectible accounts; income statement
approach
10
7–10 5,6 Uncollectible accounts; balance sheet approach 10
7–11 5,6 Uncollectible accounts; solving for unknown 10
7–12 5,6 Uncollectible accounts; solving for unknown 10
7–13 7 Note receivable 10
7–14 4 Long-term notes receivable 10
7–15 8 Factoring of accounts receivable 10
7–16 8 Factoring of accounts receivable 10
7–17
7–18
7–19
7–20
7–21
7–22
7–23
8,10
8
8
7A
7A
7B
7B
Transfers of accounts receivable
Discounting a note
Receivables turnover
Bank reconciliation (based on Appendix 7A)
Bank reconciliation (based on Appendix 7A)
Impairments of accounts receivable (based on
Appendix 7B)
Credit losses on accounts receivable (CECL
model) (based on Appendix 7B)
10
10
5
Learning Est.
time
Exercises Objective(s) Topic
(min.)
7–1 2 Cash and cash equivalents; restricted cash 15
7–2 2 Cash and cash equivalents 10
7–3 2,6,7 FASB codification research 15
7–4 2,10 Bank overdrafts 15
7–5 3 Trade and cash discounts; the gross method and
the net method compared 15
7–6 3 Cash discounts; the gross method 10
7–7 3 Cash discounts; the net method 10
7–8 4 Sales returns 15
7–9 5 FASB codification research 15
7–10 5,6 Uncollectible accounts; allowance method vs.
direct write-off method 15
7–11 5,6 Uncollectible accounts; allowance method;
balance sheet approach
20
7–12 6 Uncollectible accounts; allowance method and
direct write-off method compared; solving for
unknown
15
7–13 5,6 Uncollectible accounts; allowance method;
solving for unknowns; General Mills
15
7–14 7 Note receivable 10
7–15 7 Noninterest-bearing note receivable 15
7–16 7 Long-term notes receivable 20
7–17 7 Interest-bearing note receivable; solving for
unknown rate
20
7–18 8 Assigning of specific accounts receivable 10
7–19 8 Factoring of accounts receivable without
recourse
10
7–20 8 Factoring of accounts receivable with recourse 15
7–21 8,10 Factoring of accounts receivable with recourse
under IFRS
15
7–22 8 Discounting a note receivable 20
7–23 1,2,3,4,5,
6,7,8
Concepts; terminology 15
7–24 3,5,6,7,8 Receivables; transaction analysis 25
7–25 9 Ratio analysis; Microsoft 10
7–26 9 Ratio analysis 15
7–27 7A Petty cash (based on Appendix 7A) 10
7–28 7A Petty cash (based on Appendix 7A) 10
7–29 7A Bank reconciliation (based on Appendix 7A) 15
7–30 7A Bank reconciliation and adjusting entries (based
on Appendix 7A)
20
7–31
7–32
7–33
7–34
7B
7B
7B
7B
Impairments of notes receivable (based on
Appendix 7B)
Credit losses from notes receivable (CECL
model) (based on Appendix 7B)
Impairment of notes receivable; troubled debt
restructuring (based on Appendix 7B)
Impairment of notes receivable; troubled debt
restructuring (based on Appendix 7B)
25
25
25
25
Learning Est.
time
Problems Objective(s) Topic
(min.)
7–1 5,6 Uncollectible accounts; allowance method;
income statement and balance sheet approach
30
7–2 5 Uncollectible accounts; Amdahl 25
7–3 5 Bad debts; Nike 25
7–4 5,6 Uncollectible accounts 40
7–5 4,5 Receivables; bad debts and returns; Avon
Products, Inc.
40
7–6 7 Notes receivable; solving for unknowns 20
7–7 8 Factoring versus assigning of accounts receivable 25
7–8 8 Factoring of accounts receivable; without
recourse
15
7–9 2,5,8,10 Cash and accounts receivable under IFRS 45
7–10 3,4,7,8 Miscellaneous receivable transactions 30
7–11 7 Discounting a note receivable 45
7–12 5,6,7,8,9 Accounts and notes receivable; discounting a
note receivable; receivables turnover ratio
40
7–13 7A Bank reconciliation and adjusting entries; cash
and cash equivalents (based on Appendix 7A)
25
7–14 7A Bank reconciliation and adjusting entries (based
on Appendix 7A)
45
7–15
7–16
7–17
7B
7B
7B
Impairment of receivables (based on Appendix
7B)
Impairment of receivables (based on Appendix
7B)
Impairment of receivables; troubled debt
restructuring (based on Appendix 7B)
50
Star Problems
Learning Est.
time
Cases Objective(s) Topic
(min.)
Judgment Case 7–1 5,6,8 Accounts and notes receivable 15
Communication Case 7–2 5 Uncollectible accounts 40
Judgment Case 7–3 3,7,8 Accounts receivable 20
Real World Case 7–4 4 Sales returns; Green Mountain Coffee Roasters 60
Ethics Case 7–5 5 Uncollectible accounts 20
Judgment Case 7–6 1 Internal control 30
Real World Case 7–7 5 Receivables; bad debts; Cisco Systems, Inc. 60
Integrating Case 7–8 5 Change in estimate of bad debts 15
Analysis Case 7–9 8 Financing with receivables 15
Real World Case 7–10 5,8,10 Financing with receivables; Sanofi-Aventis 20
Research Case 7–11 8 Locate and extract relevant information and
authoritative support for a financial reporting
issue; financing with receivables
45
Analysis Case 7–12 9 Compare receivables management using ratios;
Tyson Foods Inc. and Pilgrim’s Pride Corp.
60
Target Case 2,5 IFRS; Target 20
Air France–KLM Case 8 IFRS; accounts receivable; Air France–KLM 20