JUST THE REPLIES: You will create a thread on one of the assigned cases. Each th

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JUST THE REPLIES: You will create a thread on one of the assigned cases. Each thread must be at least 500 words and
demonstrate course-related knowledge. You must support your assertions with at least 2 citations
other than the textbooks; the Bible may be 1 of those sources. The composition must be attached
as a word document within a new thread. Put the chapter and case in the subject line of your
thread, as in “Chapter 1 Case 1-1.” In addition to the thread, the student will reply to the thread
of at least 1 classmate. The reply must be at least 250 words. Citations for the replies are not
required but are encouraged. Everything must be in current APA format.
Note: Due to constant updates and revisions, you must always consult the most current style
guide in completing citations and formatting. The sample provided is the work of a student and
must not be used as an official sample.
DB#1
Marilyn Merricks
SaturdayMay 28 at 2:20pm
Manage Discussion Entry
Chapter 4, Judgement Case 4-1
Marilyn Merricks
Liberty University
ACCT 301- Intermediate Accounting I
Chapter 4, Judgement Case 4-1
Earnings quality is defined in the text as, “the ability of reported earnings or income to predict a company’s future earnings.” (Spiceland et al, p.173). These earnings are specific for financial investors to review and determine if they can predict an organization’s ability to produce income in future quarters. There are many arguments that feel that the definition provided above is too closed off and that there are many ways to define and even measure earnings quality (Nelson & Skinner, 2013, p. 35). The idea behind earnings quality is to provide potential investors or creditors the opportunity to be large scale framework of what is making up the bottom link in the income statement for an organization. Organizations separate temporary earnings from permanent earnings to make it easier for investors to separate income and build better predictive models that truly show the organizations ability to earn income. Temporary earnings are just as they sound, they are earrings that will not occur in the foreseeable future. Whereas permanent earnings arise from operational income that is expected to continuously produce income for the organization years into the future (Spiceland et al, p.173). There are certain practices that allow organization to shift their income to either make them appear more favorable or even more steady. These practices are referred to as income smoothing and classification. Income smoothing is a practice that assists in building predictive frameworks, but it has a habit of hiding underlying issues that investors would ultimately want to be aware of. Classification is when an organization alters the classification of an item on the income statement incorrectly. This typically increase the numbers for performance and makes the organization look like they are more efficient and producing more than its costing to make items. These two practices while allowable under GAAP can lead to unclear earing quality due to the modifications that were made shifting the originally predictive framework.
Manufacturing Annual Income Statement
When looking at the annual income statement and whether including the large gain from a sale of securities should be included as permanent earnings requires the organization to consider many options. One being if this is to be an isolated event or if it is something that the manufacturing organization plans to take advantage of for the next several years. As stated in the text, it is not always necessary to list all items if the event is unusual or infrequent (Spiceland et al, p.173). Another consideration that must be analyzed is whether this gain is going to have an impact on the market value of the company. If reporting this item is going to drastically change the market value of the company the organization may look to list the item as a temporary and unusual gain to keep their market value steady and not increase, it drastically when they may not be able to reach the same level in the next reporting year. This is not an easy assumption to make and would need to be highly reviewing, especially if the organization had an ideal year with drastically reduced costs and increased income—there are already instances in this case where the organization will want to overestimate expenses to make the difference between the two less. As a whole leaning to the side of listing the item as an unusual one time gain may benefit the organization better with such limited details about their current financial state.
References
Nelson, M. W., & Skinner, D. J. (2013). How should we think about earnings quality? A discussion of “Earnings quality: Evidence from the field”. Journal of Accounting & Economics, 56(2-3), 34-41. https://doi.org/10.1016/j.jacceco.2013.10.003
Spiceland, J. D., Nelson, M., &; Thomas, W. (2020). Intermediate accounting (10e ed.). McGraw-Hill Education.
DB#2
Megan L.
“Chapter 3 Case 3-3”
Should the production, process and selling of the Red Hen Company fresh chicken eggs be considered a current asset or classified as property, plant, and equipment? The controller of this company is willing to argue that the flock of chickens should be labeled as ‘inventory’ under the current asset section of the companies’ balance sheet. He believes this because the chickens are “goods awaiting sale” because once the life span of the two years is up for the chicken, they are then sold to soup companies. Though, the chief financial officer begs to differ that the flock of chickens should be classified as property, plant, and equipment due to the hens because used as ‘production of product’, they produce the eggs that are sold.
Both the controller and the chief financial officer are right in their assumptions for where the chickens/egg producing chickens should be placed on the companies’ balance sheet. The controller believes that the chickens are ‘goods awaiting sale’ and truthfully, they are. The chicken itself is given a two-year operating cycle and then eventually will be sold. Once the chicken is sold, it then will be considered inventory. “Inventory is another type of current asset; it refers to the goods or raw materials a company has on hand that it can sell or use to produce products for sale. Then those products are sold, producing revenue.” (Kennon, J. 2021, October 21)
The chief financial officer wants the chickens to be put until property, plant, and equipment in the companies’ balance sheet. The primary benefit that we are gaining from the chickens are the eggs themselves, not the actual chicken. I believe that the eggs produced can go under this category due be considered a fixed asset. “The term fixed asset refers to a long-term tangible piece of property or equipment that a firm owns and uses in its operations to generate income. The general assumption about fixed assets is that they are expected to last, be consumed, or be converted into cash after at least one year. As such, companies are able to depreciate the value of these assets to account for natural wear and tear. Fixed assets most commonly appear on the balance sheet as property, plant, and equipment (PP&E).” (Kenton, W.2022, March 17).
I truly am unsure if there is really a right or wrong answer when it comes to wanting to know where to correctly place the chickens on the company balance sheet. I believe that if you were to look at several different companies and the several different uses they have for chickens, they would probably have them placed in different categories on their company’s balance sheets. As long as your company is consistent with its placement, there shouldn’t be that be of an issue.
Kennon, J. (2021, October 21). Understanding current assets on a business balance sheet. The Balance. Retrieved May 26, 2022, from https://www.thebalance.com/current-assets-on-the-balance-sheet-357272
Kenton, W. (2022, March 17). Fixed asset definition. Investopedia. Retrieved May 26, 2022, from https://www.investopedia.com/terms/f/fixedasset.asp

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