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분야
docII. Answers to Questions
1. According to the article, Xerox increased sales by recognizing rentals as equipment sales. Why does this increase revenue in the current period?
2. By recognizing rentals as equipment sales in the current period, does this increase or decrease Xerox’s sales revenue in the future period?
3. What are “exposed receivables?”
4. What is the journal entry needed to estimate and recognize the uncollectibility of some accounts receivables?
5. When Xerox posted the entry in “3)” for some of its subsidiaries in Mexico and throughout Latin America, what was its effect on Xerox’s assets? Net income?
6. If you were a Xerox investor or creditor, would you be concerned about these faulty accounting practices, even if they occurred outside the United States? Why?
7. What should Xerox do to regain the confidence of investors?
8. Would you invest these kinds of companies in the future? Under what conditions would you invest in a company that has used problematic accounting methods?
9. Explain the role of auditing in preventing this kind of situation.
III. Conclusion
Since such creative accounting is basically moving up future revenue boost current revenue, Xerox’s revenue in future periods is expected to decrease. If dealt properly, Xerox would have recorded revenue by $10 each month However, if Xerox records it in the first period at once as sales, it would not have any revenue to record in the later months of the contract because by that entry, Xerox does not own that equipment any more as its lease asset nor does provide any goods or services with it. However, in reality, Xerox is providing rental services each month. These manipulations had the effect of accelerating Xerox's recognition of revenue at the expense of future periods
3. What are “exposed receivables?”
Exposed receivables are account receivables that have become uncollectible. Since Xerox has been recognizing rentals as sales, trying to pump up the short-term sales revenue, the total amount of rentals that was supposed to be received during the contract period has been recognized as account receivables at once. If Xerox managed to receive the total amount of rental-fees during the contract period, the account receivables would have been fully collected. However, if some contracts were not fulfilled and the rentals were stopped from being collected, then all the pre-recognized account receivables would have to turn into exposed receivables.
Some subsidiaries of Xerox throughout Latin America was found to have exposed receivables, and the reason for this could be because of these faulty accounting procedures for recognizing rentals as sales. One major problem that could be caused by excess of exposed receivables is that the company can face liquidity problems. A drop in account receivables implies a decrease in quick assets, and such decrease maybe critical for some companies that does not have enough financial resources to pay back the upcoming current liabilities. This is why Xerox announced that it has set aside reserves for these subsidiaries, in an attempt to alleviate the investors’ anxiety about the company’s liquidity.
