Manufactured Homes: Accounting Policies, Evaluation and Current and Future Financial Position
Accounting Policies
Manufactured Homes (MH) uses the installment sales method for recognizing revenue. Using this installment sales method assumes that the customer probably will not default and there is little risk for the company. As cash is supposed to come in, revenues are matched with expenses. However, if the customer defaults, then there are many future expenses that cannot be matched with corresponding revenue. The company usually sold its installment contracts to unrelated financial institutions and was responsible for payments to the financial institution if the customer defaulted. Thus, MH bore risk for the houses it sold. MH charged its customers a portion above the market rate, and the financial institution paid MH a portion of the differential between the stated interest rate and the market rate. Therefore, interest income was a fairly important part of MH's business. MH set up a provision for losses on credit sales account based on historical performance. The company said that since its customers needed these houses, they would work especially hard because these houses were their primary residences and supported this with repossession rates that were much lower than the industry average. However, this might have been a little short sighted. MH did realize that there was a declining economy looming in the future, but we are not sure if the company realized its full effect. This declining economy might drive interest rates down, allowing people to choose conventional homes instead of mobile homes. Furthermore, a bad economy would signal less money invested in mobile homes from people who wanted a second home used for vacations. This poorer economy could also signal problems for the installment sales method, as some people might lose their jobs and not be able to pay for their homes. Repossession rates would increase, and Manufactured Homes might be stuck with many houses that it cannot sell because of the economy. These things were evident in
Manufactured Homes (MH) uses the installment sales method for recognizing revenue. Using this installment sales method assumes that the customer probably will not default and there is little risk for the company. As cash is supposed to come in, revenues are matched with expenses. However, if the customer defaults, then there are many future expenses that cannot be matched with corresponding revenue. The company usually sold its installment contracts to unrelated financial institutions and was responsible for payments to the financial institution if the customer defaulted. Thus, MH bore risk for the houses it sold. MH charged its customers a portion above the market rate, and the financial institution paid MH a portion of the differential between the stated interest rate and the market rate. Therefore, interest income was a fairly important part of MH's business. MH set up a provision for losses on credit sales account based on historical performance. The company said that since its customers needed these houses, they would work especially hard because these houses were their primary residences and supported this with repossession rates that were much lower than the industry average. However, this might have been a little short sighted. MH did realize that there was a declining economy looming in the future, but we are not sure if the company realized its full effect. This declining economy might drive interest rates down, allowing people to choose conventional homes instead of mobile homes. Furthermore, a bad economy would signal less money invested in mobile homes from people who wanted a second home used for vacations. This poorer economy could also signal problems for the installment sales method, as some people might lose their jobs and not be able to pay for their homes. Repossession rates would increase, and Manufactured Homes might be stuck with many houses that it cannot sell because of the economy. These things were evident in