In each of the situations described below, indicate the accounting principles or concepts, if any that have been violated and explain briefly the nature of the violation. If you believe the practice is in accord with generally accepted accounting principles, state this as your position and defend it.
a. A small business in which credit sales fluctuate greatly from year to year uses the direct write-off method both for income tax purposes and in its financial statements.
b. Computer Systems often sells merchandise in exchange for interest-bearing notes receivable, maturing in 6, 12, or 24 months. The company records these sales transactions by debiting Notes Receivable for the maturity value of the notes, crediting Sales for the sales price of the merchandise, and crediting Interest Revenue for the balance of the maturity value of the note.
The cost of goods sold also is recorded.
c. A company has $400,000 in unrestricted cash, $1 million in a bank account specifically earmarked for the construction of a new factory, and $2 million in cash equivalents. In the balance sheet, these amounts are combined and shown as “Cash and cash equivalents . . . $3.4 million.”