Abe Technologies provides maintenance service for computers and office equipment for companies throughout the Northeast. The sales manager is elated because she closed a $300,000, 3-year maintenance contract on December 29, 2016, two days before the company’s year-end. “Now we will hit this year’s net income target for sure,” she crowed. The customer is required to pay $100,000 on December 29 (the day the deal was closed). Two more payments of $100,000 each are also required on December 29, 2017 and 2018. Discuss the effect that this event will have on the company’s financial statements.
Fried, A. N. (2013). An Event Study Analysis of Statement of Financial Accounting Standards No. 158. Accounting and Finance Research, 2(2). doi:10.5430/afr.v2n2p45
Long-Term Reputation Effects in the Global Financial Industry: How the Financial Crisis Has Fundamentally Changed Reputation Dynamics. (n.d.). Reputation Management: Building and Protecting Your Company’s Profile in a Digital World. doi:10.5040/9781472920423.0016
This is what I put…… To begin with, we need to understand that this is a very critical deal that when undertaken, can really bring great impacts on the general financial statements of the Company. An instance is that when the deal was closed, it may have reached the expiry date for the contract. Therefore, there must have been some goals and aims that had been set by the management that were to be achieved. Therefore, when all this huge amount of cash is out, there is some great hindrance in operations such as the debits and credits of the organization will really raise concerns. It will also lead to poor management because maybe the money also involved the remuneration process and therefore due to the huge cut off and late payments, the remunerations could not be done effectively thereby reducing the morale of the employees’ hence poor quality of work in the various sectors within the organization.
This is what the teacher told me
Important post Desminique.
You have mentioned that: “To begin with, we need to understand that this is a very critical deal that when undertaken, can really bring great impacts on the general financial statements of the Company.”
Could you please research and explain how the initial $100,000 that Abe Technologies is getting paid on December 29, 2018 is going to be treated in the accounting books? Also, why does the sales manager believe that the company is going to hit the net income target for the year? Be specific in providing your explanation with examples.
How would you respond to teacher’s comment above? ^
How would you respond to Krista
This company will benefit showing the income every year as a gain of $100,000 assuming there fiscal year end December 31st. They will have to record receiving the money as a cash asset but need to record when they complete the job an expense since this is an unfilled obligation that was no completed when they received payment first time. It is very important that whoever does all the paperwork needs to make sure they log all income and expenses correctly.
The company should be elated as that job they secured brings in a nice amount of income for the business. This all comes down to preparing the statements correctly.
How would you respond to Miguel?
Class, A company that has contracts with others, that are to be paid over time they have to rely on the accrued accounting method. This helps to make sure that there is proper record keeping with all of the accounts. By doing this, it helps to increase the assets and revenue. By making sure that all of the accounts are kept up, it helps with the record keeping at the end of each year as the company receive money for the contracts and the services that were completed. The statements from each contract, with effect the balance sheet, income statement, and retained earnings. Each time a contract if completed the balance sheet much be completed. This will help to complete an accurate retained earning sheet at the end of the year. If the contract is completed in full, and on time, they could count it in the current year statement. If not, then the company would be set back $100,000 in revenue and would offset the next year by $200,000.
Reference Warren, C. S. (2013). Survey of Accounting, 6th Edition. [Purdue University Global Bookshelf]. Retrieved from https://purdueuniversityglobal.vitalsource.com/#/books/9781285953113/