(a)The quarterly cash flows from operations for two technology firms are as follows:

	Q1	Q2	Q3	Q4	Q5
Firm 1	$451.2	$220.8	$703.5	$475.5	$601.2
Firm 2	$165.9	$240.7	$698.8	$(91.8)	$(173.3)

Required:

Explain why Firm 2 has more credit risk than Firm 1.

(3 marks)

(b)Firms may meet earnings benchmarks via operational excellence or by taking real actions to maintain accounting appearances. Discuss why the latter approach may be detrimental to a firm's stockholders.

(7 marks)

(c)Sendayan Berhad sells $250,000 of its accounts receivable to Pekan Finance with recourse. Pekan Finance charges a fee of 2% and withholds 8% of the face amount of the receivables to cover possible uncollectible accounts and sales returns. Sendayan Berhad estimates the fair value of the recourse obligation is equal to $13,500 allowance for uncollectibles associated with these accounts.

Required:

(i)Show the journal entry Sendayan Berhad would make to record the factoring.

(5 marks)

(ii)Show Sendayan Berhads journal entry to record any subsequent cash received from Pekan Finance if Pekan Finance collects the receivables except for $6,500 due to a sales return and $12,000 resulting from a bad debt.