WEEK 2 Analyzing Accounting Standards Essay

WEEK 2 Analyzing Accounting Standards
The company Sears came up with another framework in 1998 where accounts are charged automatically when the client fails to make a required payment in each of the 8 billing cycles. The reason that Sears came up with this new framework was to help them better deal with the collection efforts by effectively finding out witch accounts are delinquent sooner. Also, it helps to ensure there are more effective controls in place for uncollectable expenses. This framework in comparison to the old one is better in the sense that it allows for account balances to be charged earlier, which from an accounting aspect, is more ideal.
For Sears, the standard of accounting that should be considered is GAAP. As indicated by the GAAP, Sears must assess its outstanding accounts receivable now and again and concoct an estimate of the amount of the aggregate Sears won't have the capacity to collect. This judgment ought to be made on the premise of experience. As indicated by GAAP, Sears is required to report an expense given the estimate that Sears analyzed from its accounts receivable. As per the GAAP, an "allowance for uncollectable accounts" must be made. This is a contra asset it counterbalances the balance in another account.
The management from Sears has met its financial reporting targets to a degree. We analyze the examination for uncollectible accounts given by Sears. The information has been displayed for a period of five years. Of those five, three years had a net credit loss higher than that of the provision for uncollectable accounts. These years are 1996, 1998, and 1999. Next, we look at the allowance toward the start of the year. The net credit losses for each of the four years 1996-1999 have been more than the allowance from the start of the year. This implies start of year allowances were not sufficiently extensive to ingest looming write offs. Next we consider the allowance exhaustion rate. This rate is over 1 years in the year of 1995. In each other year the uncollectible accounts allowance exhaustion rate is short of that one year. This implies Sears management has barely met its financial reporting objectives as it relates to uncollectable accounts.
As it relates to the accountants and management of Sears, they have utilized assumptions to a certain degree as a part of making decisions. There is a distinction between estimates, assumptions, or knowledge. In the past the management of Sears would consider any account that had a balance that was eight times the scheduled minimum monthly payment, as bad and written off. Later, Sears' management accepted that credit was uncollectible when the client did not make required payments in each of the eight billing cycles after a missed payment. Learning depends on data, certainties, and mindfulness. Estimates are rough calculations in light of judgment. Then again assumptions acknowledge things as valid without verification.
Reference
(1) Sears Accounting for Uncollectible Accounts, Case A-165, Stanford Graduate School of Business. David Hoyt.