TASK PERFORMANCE
DELL INC.
The goal of financial accounting is to paint a fairly presented portrait of an organization that enables
decision makers to make a reasonable assessment of its financial health and future prospects. This
likeness should be communicated based on Generally Accepted Accounting Principles (GAAP). As
indicated, other versions of GAAP do exist. The success of the conveyance is dependent on the ability of
an organization’s accountants to prepare financial statements that meet this rigorous standard. Equally
as important, every party analyzing the resulting statements must possess the knowledge necessary to
understand the multitude of reported figures and explanations. If appropriate decisions are to result
based on this information, both the preparer and the reader need an in-depth knowledge of GAAP. For
example, the asset section of the balance sheet produced by Dell Inc. as of January 30, 2009, indicates
that the company held “accounts receivable, net” amounting to $4.731 billion. Based on the information
provided by Dell Inc., companies seem to maintain two separate ledger accounts in order to report
accounts receivables on their balance sheet at net realizable value. One is the sum of all accounts
outstanding and the other is an estimation of the amount within that total which will never be collected.
Interestingly, the first is a fact and the second is an opinion. The two are then combined to arrive at the
net realizable value figure that is shown within the financial statements. Accounts receivable and the
offsetting allowance for doubtful accounts are netted with the resulting figure reported on the balance
sheet. Some companies include both accounts on the balance sheet to explain the origin of the reported
balance. Others show only the single net figure with additional information provided in the notes to the
financial statements.
Answer the following questions: (4 items x 10 points)
1. What does the figure amounting to $4.731 billion reflect?
- The net realizable value of Dell Inc.’s accounts receivable is $4.731 billion. The net
realizable value is computed by deducting the allowance for doubtful accounts from Dell
Inc.’s total accounts receivables Accounts receivables of Executives at Dell Inc. analyzed
its accounts receivable as of January 30, 2009 And determined that $4.731 billion was
the best estimate for the amount of money that would be Recovered. Whereas the total
amount of receivables was increased, an estimated amount for doubtful Accounts had
already been subtracted because account for the probability that these kinds of debts
will not be collected. And the result of this, is to reflect that potential losses have been
anticipated and eliminated, an asset is classified on the balance sheet as accounts
receivable, net or accounts receivable, net of allowance for doubtful accounts.
2. Inherent uncertainty is associated with the reporting of receivables. No one can know exactly
how much cash will be collected. How do company officials obtain sufficient evidence to
provide reasonable assurance that the balance is not materially misstated?
- The precise identification and total amount of accounts receivable would almost likely
not be Identified for several months. There is no tangible evidence to determine which
will become Worthless at the time of selling. The Buyers rarely make a purchase and
then declare bankruptcy or Leave town right away. Accountants, for the sake of
convenience, wait until financial statements are Completed before estimating net
realizable value. The necessary reductions is then recorded using an Adjustment entry.
The adjustment includes an expense. This kind of presentation has a long history in
financial accounting. The Financial Accounting Standards Board, on the other hand,
recently argued whether a direct decrease in revenue might not be a better solution to
show bad debts. Financial Accounting laws are evaluated on a regular basis, resulting in
continuous change.
3. What is an Allowance for Doubtful Accounts?
- An allowance for doubtful accounts is a contra asset account of Accounts Receivables
that records the percentage receivables expected to be uncollectible. On the balance
sheet, which can be shown or not “direct deduction on Accounts Receivable”, just the
amounts expected to be paid are shown. The allowance for doubtful accounts is simply
an estimate of the amount or percentage of receivables That are unlikely to be
recovered. It is reported with a bad debt charge offset in the same accounting period as
the original transaction.
4. Does the existence of doubtful account expense affect the income statement?
- Except for the initial charge to bad debt expenses when the allowance is filled, the
allowance for doubtful accounts has no impact on the income statement. Doubtful
account expense can help you not just to offset the loss from bad debts, but it could also
offer you with valuable information. You Can also estimate your bad debt losses by
estimating the number of accounts receivable that clients Will not pay. Your Allowance
for doubtful Account, in instance, may demonstrate how successfully Your company
controls the credit it extends to customers. It can also point up areas where you might
Need to make modifications.