Net Income is defined as the total income of the company after all the expenses and other costs from their total revenue. The level of Net Income is very important for the managers since it is the one that will be divided into the shareholders of the company. The higher the net income, the greater would be the capital gains that stockholder would receive. There are instances that even though the company has high revenue, its net income still remains low due to the higher level of spending or costs. Answer B Legally based, White’s plan is acceptable since theoretically his strategy complies with the available accounting principles.
Only that, he was able to play these principles on his hands in order to make their company look profitable based from their records. Ethically based, well of course White’s strategy is not ethical since he would trick the bank by virtually making Best Bike complying with their terms and agreement. Best Bike is profitable on the sheets of account but not in reality. Based from the definition of FASB on revenue, I think that the idea of revenue of Mr. White does not comply with the definition of the revenue of FASB. According to the definition of FASB, revenue is recognized when assets are created or liabilities are extinguished (FASB, 2005).
Mr. White was not able to seclude the liabilities on their revenue. By allowing his friends and families to make credit purchases and eventually returning the bike to the company after two months would just mean that assets “virtually” increased by the months November and December and on reality sense it is not the way it is since that raise in the assets of Best Bike was just “artificial” due to the fact that friends and family of Mr. White do not have the intention of paying the bikes that they purchased on credit. As a consequence, in the long run, Best Bike would suffer on major inventory surplus, and if Mr.
White was not able to find long term solution to their problem, probably they would incur large amount of losses due to the sluggish turnover of Best Bike’s inventories. Answer C In order for Best Bike to Increase their net income, first, they should be able to find ways in cutting their costs of producing a unit of bike. With this, they would now subtract fewer expenses on their total revenue. Another way by which Best Bike could improve their net income would be through cutting their average number of days for inventory turns over. With this, sales would eventually increase giving way for the revenue of the company to increase.
Lastly, Best Bike’s bad debts in 19X7 as compared to the previous year have decreased. With this, expenses of Best Bike will decrease making the net income of the company to increase since there would be fewer expenses that will be deducted to the total revenue, assuming that the total revenue is constant. Answer D I think Best Bike would face a problem regarding their cash flow since they have a lot of collectible from their customers and to make things worst, the time it take for the company to collect all the collectibles is about 98 days.
That’s too long and would decrease the cash in hand that the company could use to finance its other operation. Furthermore, inventory turn over of the company is in not good condition. They inventories have to take 130 days before they were all sold to the market. Being able to sell this inventory on a shorter period would mean that they could easily turn their Bikes easily into cash. It is just tantamount to increasing the sales of the company since there would be no bikes to stock in the warehouses if the sales turnover of the company is high.