Discussion: Accounting principles (Essay Sample)

Please read each response and reply to it. use any personal experience if appropriate to help support or debate other students' posts. If differences of opinion occur, debate the issues professionally and provide examples to support your opinions. Please be considerate. Also if you have any questions ask. I will post the assignment, then the two reposes. You are replying to the responses. Please keep them separate. Assignment: Grant Film Productions wants to expand and has borrowed $100,000. As a condition for making this loan, the bank requires that the store maintain a current ratio of at least 1.50. Business has been good but not great. Expansion costs have brought the current ratio down to 1.40 by December 15. Rita Grant, owner of the business, is considering what might happen if she reports a current ratio of 1.40 to the bank. One course of action for Grant is to record in December $10,000 of revenue that the business will earn in January of next year. The contract for this job has been signed. Step 2 Post to the discussion board. Respond to the following questions and, if appropriate, include personal experience as part of your answers. Indicate how recording this revenue in December would affect the current ratio. Discuss whether it is ethical to record the revenue transaction in December. Identify the accounting principle relevant to this situation. Give the reasons underlying your conclusion. Response 1: Indicate how recording this revenue in December would affect the current ratio. If the revenue in December was recorded it would bring the ratio down .10, meaning that the debt ratio dropped from 1.50 to 1.40. · Discuss whether it is ethical to record the revenue transaction in December. It is ethical to record the revenue transaction in December because it is still considered to be part of the current year, also it will give and accurate reading for the end of the year. · Identify the accounting principle relevant to this situation. The accounting principle that is relevant to this situation is Time Period Assumption. · Give the reasons underlying your conclusion. I would consider this particular principle to define this scenario because it is designed to keep track of the report of the ongoing activities throughout a certain stretch of time. Response 2: Grant Film Productions wants to expand and has borrowed $100,000. As a condition for making this loan, the bank requires that the store maintain a current ratio of at least 1.50. Business has been good but not great. Expansion costs have brought the current ratio down to 1.40 by December 15. Rita Grant, owner of the business, is considering what might happen if she reports a current ratio of 1.40 to the bank. One course of action for Grant is to record in December $10,000 of revenue that the business will earn in January of next year. The contract for this job has been signed. Respond to the following questions and, if appropriate, include personal experience as part of your answers. Indicate how recording this revenue in December would affect the current ratio. Recording the $10,000 in revenue in December, would effectively increase the current ratio of 1.40 and bring it closer to the desired 1.50 mark. This happens because the current ratio is calculated by divided the current assets by the current liabilities. The $10,000 would surely increase the current assets. Discuss whether it is ethical to record the revenue transaction in December. My original thought was that this would be unethical but according to chapter 3 the company could consider this revenue as accrued revenue, since the contract has been signed and the revenue had just not been received yet. As opposed to the cash basis of accounting, which would only consider it revenue when the actual funds are received. Identify the accounting principle relevant to this situation. The revenue recognition principle is key regarding the accrual side of accounting. This principle acknowledges that a business can earn revenue before they receive the cash. This how most larger businesses operate, as opposed to smaller businesses that may use the cash basis of accounting. Give the reasons underlying your conclusion. As I alluded to, originally my take was going to be that it was unethical because although the contract was signed, anything could happen and the contract could be broken. I ultimately referred back to the accrual basis of accounting, the revenue recognition principle and accrued revenue. With all of those in mind, I believe that it would be ethical to record at least some of the revenue for December, thus helping the company enhance it’s current ratio.