Carolina Dubasov enjoyed working with wood. She had a workshop set up in her backyard where she built articles of furniture, including tables, chairs, chests of drawers, end tables, and desks. She called her workshop C's Den of Wood. Every Saturday, she opened her workshop to the public and sold items of furniture that she had completed. Customers paid with cash or credit card. Sometimes customers asked her to make specific articles such as a table and six chairs or a bedroom suite. For these customers, she would draw up the plans. When the customer agreed to the design and the wood, she drew up a contract and asked for a 30% down payment. When the furniture was 60% completed, she showed it to the customer and collected another 30%. She collected the final 40% of the contract price when the furniture was completed.
Required:
a. Describe Carolina's cash-to-cash cycle.
b. What revenue recognition options are open to Carolina? Which one(s) would you recommend and why?
c. Using your recommended revenue recognition policy, how would you account for all the costs incurred by Carolina?
d. If a customer had signed a contract for a roll-top desk, paid the 30% down payment, and then decided he did not want the desk, should Carolina return the 30% down payment? Why or why not? How can she protect her business from this possibility?