During the second year of operations, Rabbit Company found itself in financial difficulties. The entity decided to use the accounts receivable as a means of obtaining cash to continue operation. On July 1, 2022, the entity sold P1,500,000 of accounts receivable for cash proceeds of P1,400,000. No allowance for doubtful accounts was associated with these accounts. On December 15, 2022, the entity assigned the remainder of its accounts receivable, P5,000,000 as of that date, as collateral on a P2,500,000, 12% annual interest rate loan from Finance Company. The entity received P2,500,000 less a 2% finance charge. None of the assigned accounts have been collected by the end of the year. It is estimated that 10% of accounts receivable would be uncollectible. The entity revealed the following data on December 31, 2022. Accounts Receivable, excluding factored and assigned ACCOUNTS 1,000,000 Accounts receivable -assigned 5,000,000 Accounts receivable – factored 1,500,000 Allowance for doubtful accounts before adjustment 100,000 1. What total amount was received from the financing of accounts receivable? A. 3,900,000 B. 3,850,000 C. 3,950,000 D. 4,000,000 2. What amount should be reported as net realizable value of accounts receivable on December 31, 2022? A. 4,500,000 B. 5,400,000 C. 6,000,000 D. 5,000,000 3. What amount should be recognized as doubtful accounts expense for 2022? A. 600,000 B. 500,000 C. 650,000 D. 0
Reporting Cash Flows
Reporting of cash flows means a statement of cash flow which is a financial statement. A cash flow statement is prepared by gathering all the data regarding inflows and outflows of a company. The cash flow statement includes cash inflows and outflows from various activities such as operating, financing, and investment. Reporting this statement is important because it is the main financial statement of the company.
Balance Sheet
A balance sheet is an integral part of the set of financial statements of an organization that reports the assets, liabilities, equity (shareholding) capital, other short and long-term debts, along with other related items. A balance sheet is one of the most critical measures of the financial performance and position of the company, and as the name suggests, the statement must balance the assets against the liabilities and equity. The assets are what the company owns, and the liabilities represent what the company owes. Equity represents the amount invested in the business, either by the promoters of the company or by external shareholders. The total assets must match total liabilities plus equity.
Financial Statements
Financial statements are written records of an organization which provide a true and real picture of business activities. It shows the financial position and the operating performance of the company. It is prepared at the end of every financial cycle. It includes three main components that are balance sheet, income statement and cash flow statement.
Owner's Capital
Before we begin to understand what Owner’s capital is and what Equity financing is to an organization, it is important to understand some basic accounting terminologies. A double-entry bookkeeping system Normal account balances are those which are expected to have either a debit balance or a credit balance, depending on the nature of the account. An asset account will have a debit balance as normal balance because an asset is a debit account. Similarly, a liability account will have the normal balance as a credit balance because it is amount owed, representing a credit account. Equity is also said to have a credit balance as its normal balance. However, sometimes the normal balances may be reversed, often due to incorrect journal or posting entries or other accounting/ clerical errors.
During the second year of operations, Rabbit Company found itself in financial difficulties. The entity
decided to use the accounts receivable as a means of obtaining cash to continue operation.
On July 1, 2022, the entity sold P1,500,000 of accounts receivable for cash proceeds of P1,400,000. No
allowance for doubtful accounts was associated with these accounts.
On December 15, 2022, the entity assigned the remainder of its accounts receivable, P5,000,000 as of
that date, as collateral on a P2,500,000, 12% annual interest rate loan from Finance Company. The entity
received P2,500,000 less a 2% finance charge.
None of the assigned accounts have been collected by the end of the year. It is estimated that 10% of
accounts receivable would be uncollectible.
The entity revealed the following data on December 31, 2022.
| Accounts Receivable, excluding factored and assigned ACCOUNTS | 1,000,000 |
| Accounts receivable -assigned | 5,000,000 |
| Accounts receivable – factored | 1,500,000 |
| Allowance for doubtful accounts before adjustment | 100,000 |
1. What total amount was received from the financing of accounts receivable?
A. 3,900,000 B. 3,850,000 C. 3,950,000 D. 4,000,000
2. What amount should be reported as net realizable value of accounts receivable on December
31, 2022?
A. 4,500,000 B. 5,400,000 C. 6,000,000 D. 5,000,000
3. What amount should be recognized as doubtful accounts expense for 2022?
A. 600,000 B. 500,000 C. 650,000 D. 0
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