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Accounting and Decision Making
Finance & Accounting
Pages 6 (1506 words)
Four critical areas of subjective judgment There are pre-invoiced sales for a customer and the goods will be sent in January 2013. The revenue has been already been recognized in December 2012…
It is prudent to treat such income as accrued or deferred income as it has not been received and should not be treated as sales income (Nikolai et al 2009). The accounting standards require that revenue should be recognized when earned and received. Invoices raised on a long term contract for a customer show an ending balance of 219,750. The company is confident that the amount will be fully recovered. However, 137,000 relates to amounts due over 90 days. This amount may be written off as a bad debt since the customers industry is experiencing financial difficulties. No provision for bad debt has been made by the management. A prudent approach would be to make a provision in the 2012 accounts. It is advisable in the future for the management to create provisions if it anticipates making losses (Nikolai et al 2009). There are inventories worth 105,000 relating to a customer who signed a long-term contract. These inventories are neither sold to another customer. The customer is not in a position to clear unpaid balance and keeping such stock jeopardizes the liquidity position of the company since they are not moving. ...
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