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ACC - Financial statements and related footnotes of Pearson plc.,




Question;Download the financial statements and related footnotes of Pearson plc., as presented in its 2012 Form20-F filing with the SEC, at the following URL: prepare to discuss the following questions about the company, based on what is reported therein:1. What is accounts receivable, and what other names does this asset go by?2. In general, how do accounts receivable differ from notes receivable?3. What is a contra account, and why is it used?4.What contra accounts are associated with Pearson?s trade receivables (see Note 22 on page F-51)? Further:a. What types of activities are captured in each of these contra accounts?b. Describe factors that managers might consider when deciding how to estimate the balance in each of these accounts.c. Two commonly used approaches for estimating uncollectible accounts receivable are the percentage-of-sales procedure and the aging-of-accounts procedure. Briefly describethese two approaches, and indicate which one you believe results in the most accurate estimate of net accounts receivable5. Discuss the risks that managers must consider with respect to accounts receivable and creditsales policies.6. Note 22 reports the balance in Pearson?s provision for bad and doubtful debts (its tradereceivables) and reports the account activity (?movements?) during the years 2012 and 2011.Note that Pearson refers to this contra account as a ?provision,? which is IFRS terminology.Under US GAAP, such an account typically is referred to as an ?allowance, while the term?provision? is used to describe a current period income statement charge, such as bad debtexpense or income tax expense.a. Use the information in Note 22 to complete a T-account that shows the activity inPearson?s provision for bad and doubtful debts during 2012. Explain, in your own words,the line items that reconcile the change in the account during 2012.b. Prepare the journal entries that Pearson recorded during 2012 to capture (1) bad anddoubtful debts expense for the year, and (2) the write-off of accounts receivable duringthe year. For each account in your journal entries, indicate whether the account is abalance sheet account or an income statement account.7. Note 22 reports that the balance in Pearson?s provision for sales returns was ?351 million atDecember 31, 2011 and ?187 million at December 31, 2012. Under US GAAP, this contraaccount is typically referred to as an ?Allowance? and reflects the company?s anticipated salesreturns.a. Complete the T-account that shows the activity in the provision for sales returns accountduring 2012. Assume that Pearson estimated returns relating to 2012 Sales to be ?62million. In reconciling the change in the account, two types of journal entries arerequired, one to record the estimated amount of sales returns for the year and another torecord the amount of actual book returns.b. Prepare the journal entries that Pearson recorded during 2012 to capture (1) the 2012estimated sales returns, and (2) the amount of actual book returns during 2012. In youranswer, note whether each account in the entries is a balance sheet account or anincome statement account.c. In which income statement line item does the amount of Pearson?s 2012 estimated salesreturns?8. Create A T-account for total or gross trade receivables (i.e., before deducting the provision forbad and doubtful debts and the provision for sales returns). Analyze the change in the T-accountbetween December 31, 2011 and December 31, 2012. (Hint: Your solutions to questions 6 and 7will be useful here.) Assume that all sales in 2012 were on account. You may also assume thatthere were no changes to the account due to business combinations or foreign exchange ratechanges. Prepare the journal entries to capture the sales on account and accounts receivablecollection activity in this account during 2012.9. Analysts typically evaluate the time it takes for a company to collect its average accountsreceivable balance. One common measure, accounts receivable turnover, is computed as Netcredit sales, divided by the Average gross accounts receivable. This ratio indicates how manytimes per period receivables ?turn over? (i.e., are collected. Similarly, this ratio leads to anothermeasure, average collection period in days, which is computed as 365, divided Accountsreceivable turnover.Use the table below to compute the average collection period for Pearson during 2012 and 2011.Assume that all sales are on credit and that Pearson?s total (gross) trade receivables balance onDecember 31, 2010 was ?1,111 million.20122011Credit sales, netAverage gross trade receivablesAccounts receivable turnoverAverage collection period10. Referring to the table you completed in question 9., above:a. Comment on the trend you observe.b. Provide possible reasons for any change in the average collection period from 2011 to 2012.c. Suppose, at the end of 2012, you discovered that Pearson?s average collection period was materially longer than one of its chief competitors. What action steps might you recommend Pearson consider to reduce its collection period? What risks are involved in taking these steps?


Paper#44079 | Written in 18-Jul-2015

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