Sing Songs Ltd Using the Information Provided Below, Discuss Whether the Cumulative Cash

question 73

Essay

Sing Songs Ltd. started operations on January 1, 2019. During its first year of operations, the company had a choice of accounting policies:
$$\begin{array} { | l | l | l | } \hline & \text { Accounting Option 1 } & \text { Accounting Option } 2 \\\hline \text { Inventory valuation } & \text { FIFO } & \text { Average cost } \\\hline \text { Bad debt expense } & 7 \% \text { of sales } & \begin{array} { l } \text { Allowance: } 20 \% \text { of } \\\text { losing (gross) accounts } \\\text { receivable }\end{array} \\\hline \text { Warranty expense } & 5 \% \text { of sales } & \begin{array} { l } \text { Allowance: an analysis } \\\text { of sales and repairs }\end{array} \\\hline\end{array}$$ Using the information provided below, discuss whether the cumulative cash flows will be the same or different each accounting option.
$\begin{array}{|l|r|r|r} & 2019 & 2020 & 2021 \\\hline \text { Sales (all on account) } & 10,500,000 & 13,500,000 & 14,100,000 \\\hline \text { Inventory purchases (paid immediately) } & 4,500,000 & 3,000,000 & 2,900,000 \\\hline \text { Ending inventory value: FIFO } & 1,800,000 & 2,000,000 & 2,150,000 \\\hline \text { Ending inventory value: Average cost } & 1,710,000 & 1,750,000 & 2,150,000 \\\hline \text { Collections } & 9,500,000 & 12,500,000 & 7,165,000 \\\hline \text { Amounts actually written off } & 100,000 & 250,000 & 750,000 \\\hline \text { Bad debt expense 7\% of sales } & 735,000 & 945,000 & 987,000 \\\hline \text { Bad debt expense AFDA based on } & 200,000 & 200,000 & 1,387,000 \\\text { analysis of AR } & & & \\\hline \text { Warranties actually paid } & 180,000 & 500,000 & 525,000 \\\hline \text { Warranty expense 5\% of sales } & 525,000 & 675,000 & 705,000 \\\hline \text { Warranty expense provision based on } & 385,000 & 525,000 & 700,000 \\\text { analysis of sales and repairs } & & & \\\hline \text { Depreciation expense } & 1,100,000 & 1,100,000 & 1,100,000 \\\hline \text { All other operating expenses (paid } & 2,500,000 & 2,800,000 & 3,000,000 \\\text { immediately) } & & &\end{array}$

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