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GRAPHIC APPAREL CORPORATION

DISCUSSION QUESTIONS FOR STUDENT GUIDANCE
1. What are the key changes affecting GAC this year?
1. Who owns GAC?

Ans: Nicki owns GAC since January 2014.

2. Who uses GAC's financial statements?

Ans:The bank and other lenders uses GAC’s financial statements.

3. What is significant about GAC's business relationship with its new user?

Ans:GAC’s business relationship with its new customers is very important for the
company to grow and increase or maintain its sales because the company has already lost
its many sales to former and reliable customers.

2. What are the big events to account for in 2014?
1. How is the custom shirt business working out?

Ans:The custom out shirt business is working out pretty well.Nicki worked tirelessly to
secure more custom orders from local teams and community organizations. At the end of
August 2014, GAC secured $10,000 of sales order. So, considering this GAC seems to be
doing well in sales of custom shirts.

2. What do we know about GAC's customer base?

Ans:GAC’s customers are start-up clothing stores,retailers, local sports teams and
community organizations.

3. How is the new graphic design working out?

Ans:The new ‘bold’ and ‘inspiring’ graphic shirts were able to attract new customers
but the old customers didn't like the idea, so they cut back the order for the 2014
season.However, sought new customers and applied aggressive marketing strategy which
helped her to get new customers to replace old ones.

4. What happened at the warehouse this year?

Ans: There was leakage at the warehouse’s roof.

3. What is the revenue principle? At what point does GAAP indicate revenue should be recognized?
Provide the FASB ACS citation(s).

d)Liabilities will be lower. then the following changes will occur in GAC’s financial statement: a)Net income will be nonexistent in the first years and higher in the last year. When does GAC report its revenue from custom orders? Under what circumstances would this be appropriate? GAC reports its revenue from custom orders when a signed order and payment is received from a customer. What alternative point in time exists for reporting revenue from custom orders? Ans. How would changing to this alternative method affect GAC's financial statements? How would changing to this alternative method affect GAC's current ratio? Ans: If you change method to completed contract method . Ans: The revenue principle states that revenue should be recognized when the earnings process is virtually complete and collection is reasonably assured. c)Total assets will be greater. b)Net Income will be less volatile. revenue should be recognized when buyer of company’s product agrees to purchase and the amount customer is going to pay is determined. c)Total assets will be smaller. b)Net income will be very volatile. . 4. GAC can report revenue from custom orders at the point of delivery.As an alternative. Under revenue recognition based on IFRS this circumstance is appropriate. According to GAAP. The reasons are: a) Net Income will be higher in first years but lower in the last years. What method do you think is best for recognizing revenue from custom shirts? What arguments support that method? Ans:Percentage-of -completed contract method is best for recognizing revenue from custom shirts. FASB ASC 650 Revenue Recognition 4. 5. 6.

which is material compare to $15000 sales. d)Liabilities will be higher (no recognition of retained earnings). This method is okay when specific customer’s order is identified as uncollectible and when we really can predict what percent of sales cannot be uncollected.the 2014 gross margin is smaller than 2013 gross margin even 2014 sales are bigger than 2013’s. f)Stockholders equity will be more volatile. FASB ASC 310 10 25 8. Ans:GAAP requires accounts receivable to be reported at fair-value option. Direct write-off method. 9. that’s because the company were using direct write-off method and it directly reduce sales with cost of good sold stays the same. Has anything changed this year to suggest this approach is no longer acceptable? What do you learn from the number of days to collect receivables in 2014 versus 2013? This year Nikki made changes to the company’s customers so she expects $3000 uncollectable debt. Changing to this alternative method will lower the current ratio. 10. What method of accounting for bad debts do you think GAC should use? Allowance. . In 2013. 7. What alternative method could GAC use for bad debts? Does any evidence suggest it is better? Allowance Method. since the bank requires financial statements in accordance with GAAP. It is okay when the uncollectable account is immaterial. e)Stockholders equity will be lower. At what value does GAAP require accounts receivable to be reported? Provide the FASB ACS citation(s). 11. What method of accounting for bad debts does GAC use? When is this method okay? Ans: GAC uses Allowance method in accounting for bad debts. customers were more able to pay within the collection period.

What does GAAP recommend under these new circumstances? to reduce sales revenue and account receivable by the amount of returns in the period of sale. 13. current ratio will be smaller.other presentation matters. GAC also is currently using the weighted average cost method. 17. Using what measurement does GAAP require inventory to be reported? Provide the appropriate FASB ASC citation(s). Which method of accounting for sales returns do you think is best? record in the sales period 18. retailer didnt have trouble selling most of the t-shirts so there weren’t material amount of returns but this year in 2014. FASB ASC 605-15-45-1(Revenue recognition.12. net income will be bigger.general) 14. How would changing to this alternative method affect GAC's financial statements? How would changing to this alternative method affect GAC's current ratio? net income for 2014 will be smaller. 20. inventories are being recorded at cost. How would changing to this alternative method affect GAC's financial statements? How would changing to this alternative method affect GAC's current ratio? A/R will be bigger. a lot of t-shirts are not sold at the end. Should GAC consider this alternative? Why? Are sales returns material to the key external user? yes. 19. This is . This method is acceptable if the return amount is not anticipated to be material. When does GAC report sales returns? Under what circumstances is that method acceptable? Provide the appropriate FASB ASC citation(s). In the month that goods are returned. Using what measurement has GAC been reporting its inventory? When is this appropriate? GAC’s policy has been reporting its inventory at lower of cost or market. GAAP requires Inventory to be reported at lower of cost or market.products. Currently. Have circumstances surrounding returns changed in 2014? How? yes. Current ratio will be bigger. recognizing returns and allowances only as they occur could cause profit to be overstated in the period of the sale and understated in the return period. in 2013. 16. FASB ASC 330-10. 15.

It may be required though. Damaged inventory in this case would then be reported at market value. They then sell it over the course of the year. how would GAC's current ratio change? GAC’s current ratio would fall below 1. Since this has not changed this inventory measurement is still appropriate. Because her customers cut back on orders during 2014 versus 2013. stock piling a large quantity of inventory during the winter. due to damage to some shirts to take into account the fact that some shirts may have to be discounted. This change would reduce GAC’s current ratio. 22. How much additional equity would Nicki need to contribute to return GAC to a current ratio of 1. inventory is currently being reported at cost.0? . What do you think GAC should do when reporting its inventory of graphic shirts? It would be beneficial for GAC to report their inventory using at lower of cost or market. 24. How would changing to the alternative method affect GAC's financial statements? How would changing to this alternative method affect GAC's current ratio? Since. the number of days to sell inventory likely lengthened. 26. Is there any evidence to suggest that GAC will have to mark down its selling price below cost? What does the gross profit percentage in 2014 indicate about the margin of difference between selling price and cost? The damage to GAC’s inventory of shirts provides some evidence that the selling price may have to be marked down below cost on those shirts. changing to a market value for shirts damaged and then printed on will reduce the value of GAC’s inventory by roughly 50%. 25. Her efforts to replace these orders with new customers probably helped to reduce the impact of those cutbacks though. The gross profit percentage in 2014 declined roughly 4% which could be indicative of lower selling prices and the return of unsatisfactory merchandise. Has anything changed this year to suggest this approach is no longer acceptable? What do you learn from the number of days to sell inventory in 2014 versus 2013? GAC still acquires inventory in the same way which they always have. This would help identify any issues with inventory that is damaged.0. 21. 23. If all the proposed changes were made. Revenues for those shirts would then have to be matched. most appropriate when a company wishes to assume that items sold and items in ending inventory come from a mixture of all goods available for sale.

A restating of 2014’s financial statements would benefit GAC as well in order to more accurately reflect damaged inventory items. Continue relationships with loyal customers and find a balance between the edgy new designs and more conservative designs they were happy with. this will allow your business to grow. The effect would be an increase in current assets which would increase GAC’s current ratio to the acceptable minimum level. As your business grows so will theirs if they continue to order your shirts. . What next steps would you recommend for Nicki? Finance continuing operations using debt. 27. Additional equity equal to the amount of the inventory decrease would have to be invested into the business. Continue to grow relationships with new customers and tailor orders specifically for them.