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CASE 9: Financial Reporting Cycle headquarters until Monday afternoon for the

preceding week. Thus the last week's cash receipts


from these three regions are estimated. The cash
SharpEdge, Inc. is a manufacturer of cutlery and receipts for the Midwestern region are available
hand tools that are sold to retail hardware through the Thursday immediately preceding the
stores. SharpEdge also manufactures a line of Friday closing date.
industrial-quality tools that are sold to
commercial establishments. The firm's single Hourly personnel (all manufacturing and clerical
manufacturing plant and corporate support in the administrative offices) are paid
headquarters are located in the Midwest. weekly. The payroll is run on Wednesday and
Regional sales offices and firm-owned distributed on Thursday for the prior week. Thus
warehouses are located on the East and West actual payroll data for these people are not
coasts and in the South. available for the last week of each month.
Administrative personnel are paid monthly on the
SharpEdge initiated a new monthly closing last calendar day of the month; however, each
and reporting procedure for calendar year 2015. monthly salary is known and is included as of the
The books are always closed on a Friday. In monthly closing, even if the payment date is after
addition, each quarter consists of two four-week the designated monthly closing.
months and one five-week month; the five-week
month is always the middle month of the The manufacturing records are updated on
quarter. Thus each month for internal reporting Thursday of each week after the payroll is
purposes is not necessarily the end of the completed. Thus the actual manufacturing data
calendar month, and each four or five week are not available for the last week of the monthly
reporting month may include days from two period.
calendar months. The monthly reports and All payments on account are paid out of
schedules are to be prepared and ready for the corporate headquarters. All payables are entered
executive management meeting, which is held into the accounting system each week on
on the Friday following the monthly closing Wednesday. The payables represent all
date. Prior to these changes, SharpEdge closed transactions that have been received from
its books on the last day of each month, and the Wednesday of the prior week through the following
executive management meeting was not Tuesday. Thus, three days of payables are not
scheduled until all data were compiled. This fre- recorded during the last week of each monthly
quently resulted in the executive management period.
meeting being held as late as three weeks after
the closing date. Required
When the new closing procedure was a. SharpEdge has elected a quarterly reporting
implemented. SharpEdge's accounting period consisting of two four-week periods and
department had to implement some artificial one five-week period. Discuss the advantages
cutoffs in order to ensure that the monthly of this type of schedule.
reports would be completed for the executive b. The accounting department of SharpEdge,
management meeting. The schedule that was Inc., must make several adjustments to
implemented is outlined as follows: accommodate the new monthly reporting and
Sales data from the regional offices are closing procedures. Explain why SharpEdge's
telexed to headquarters on the Monday top management is likely to accept these
morning following the closing date. Rather limitations in the monthly operating reports
than wait for data regarding returned sales as and results.
was previously done, the regional offices submit c. For each of the data constraints described in
gross sales data. The gross sales are adjusted for the question, discuss how errors in the
returns during the closing procedures for the estimates implemented by SharpEdge's
next month. accounting department could affect the
Cash receipts are deposited daily. However, a current asset and/or current liability account
lockbox system is employed for the eastern, balances on the firm's Statement of Financial
western, and southern regional sales offices, and Position.
this lockbox report is not received at corporate (CMA Adapted)