©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Receivables and Inventory Chapter 6

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Learning Objectives After studying this chapter, you should be able to: Describe the common classifications of receivables Describe the nature of and the accounting for uncollectible receivables Describe the direct write-off method of accounting for uncollectible receivables Describe the allowance method of accounting for uncollectible receivables Describe the common classifications of inventories (continued…)

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Learning Objectives After studying this chapter, you should be able to: Describe three inventory cost flow assumptions and how they impact the financial statements Compare and contrast the use of the three inventory costing methods Describe how receivables and inventory are reported on the financial statements Financial Analysis: Describe and illustrate accounts receivable and inventory turnover and their use in assessing the management of receivables and inventory

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Describe the common classifications of receivables Learning Objective 1

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Classifying Receivables Accounts Receivable ─_______________________ Notes Receivable ─More formal agreement ─Includes a _____ and _____ Other Receivables ─Can include interest receivable, taxes receivable, and receivables from employees or officers

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Promissory Note

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Due Date of a 90-Day Note The maker of the note is Selig Company, and the payee is Pearland Company. The face value of the note is $2,000, and the issuance date is March 16, 20Y7.The term of the note is 90 days, which results in a due date of June 14, 20Y7,as shown:

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Describe the nature of and the accounting for uncollectible receivables Learning Objective 2

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Uncollectible Receivables Some of the credit sales will be uncollectible The operating expense recorded from uncollectible receivables is called ______________, or ______________

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Uncollectible Receivables Some indications that an account may be uncollectible include the following: The receivable is past due The customer does not respond to the company’s attempts to collect The customer files for bankruptcy The customer closes its business The company cannot locate the customer

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Methods of Accounting for Uncollectible Receivables _________________ : records bad debt expense only when an account is determined to be worthless _________________ : records bad debt expense by estimating uncollectible accounts at the end of the accounting period

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Describe the direct write-off method of accounting for uncollectible receivables Learning Objective 3

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Direct Write-Off Method Assume that on May 10 a $4,200 account receivable from Markieff Carson has been determined to be uncollectible Bad debt expense

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Direct Write-Off Method Reinstate accounts receivable Collection of accounts receivable

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Describe the allowance method of accounting for uncollectible receivables Learning Objective 4

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Allowance Method Required by GAAP for companies with large amount of accounts receivable Estimates the accounts receivable that will not be collected and records bad debt expense for this estimate at the end of each period using an allowance account

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Allowance Method If the total accounts receivable balance is $200,000, the new net realizable value is $170,000 Uncollectible accounts receivable

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Allowance Method When a customer’s account is identified as uncollectible, it is written off against the __________ account No affect on net realizable value Net realizable value

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Allowance Method Reinstating account balance Cash collected

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Estimating Uncollectible Accounts Based on past experiences, industry averages and forecasts of the future Two common methods: _________

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Percent of Sales Method Assume that on December 31, 20Y7, the Allowance for Doubtful Accounts for DPS Company has a negative balance of $3,250. In addition, DPS estimates that 3/4% of 2012 credit sales will be uncollectible. Credit sales for the year is $3,000,000 Bad debt expense

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Aging of Receivables Schedule

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Analysis of Receivables Method Comparing the $26,490 estimate of uncollectible account with the unadjusted balance in the allowance account, we determine the adjustment needed for bad debt expense. Assuming that the unadjusted balance in the allowance account is a negative $3,250, the amount to be added to this balance is –$23,240 Bad debt expense

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Comparing Estimation Methods ___________ _______

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Describe the common classifications of inventory Learning Objective 5

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Merchandise Inventory Merchandise inventory: Merchandise on hand (not sold) at the end of the period It is a _____ asset Inventory sold becomes the ________________

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Size of Merchandise Inventory for Merchandising Businesses

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Manufacturing Inventories ________________ Raw material used to make the product ________________ Cost of partially completed products ________________ Total cost of completed goods: material, labor, manufacturing overhead

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Manufacturing Inventories

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Footnote Disclosure of Manufacturing Inventories The Hershey Company recently reported inventories of $815,863 (in thousands) as follows:

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Describe three inventory cost flow assumptions and how they impact the financial statements Learning Objective 6

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Inventory Cost Flow Identical units purchased at different unit costs during a period When units are sold, it is necessary to determine the cost of units sold Cost of units sold can be determined using ________________ Units Purchased Units Sold

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Inventory Methods

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Specific Identification Method If the merchandise can be identified with a _____________, the specific identification method can be used Each unit of merchandise can be identified with a specific purchase price Only practical if each unit has a unique identification number (e.g., VIN for an automobile)

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Specific Identification Method

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. First-In, First-Out (FIFO)

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Last-In, First-Out (LIFO) Balance Sheet May 31 Purchases May 10 May 18 May 24

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Average Cost Method Balance Sheet May 31 Purchases May 10 May 18 May 24

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Use of Inventory Costing Methods

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Compare and contrast the use of the three inventory costing methods Learning Objective 7

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Comparing Methods - Rising Prices METHODI/S EFFECTB/S EFFECTRESULT FIFO ___________ __________________ ________________ LIFO ___________ __________________ ________________ AVERAGE ___________ __________________ ________________

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Describe how receivables and inventory are reported on the financial statements Learning Objective 8

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Receivables and Inventory in Balance Sheet

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Accounts Receivables Classified as a current asset if collection is expected within ___ year

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Inventory Valuation The method of determining the cost of the inventory should be shown on the balance sheet There are two methods of inventory valuation: Valuation at __________

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Valuation at Net Realizable Value Damaged inventory is reported at the net realizable value Net Realizable Value = ____________________ − ___________________ Direct costs of disposal include selling expenses such as special advertising or sales commissions on the sale

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Valuation at Net Realizable Value To illustrate, assume the following data about an item of damaged merchandise: The merchandise should be valued at its net realizable value of $650 as shown below

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Valuation at Lower of Cost or Market Can be applied in one of three ways: ___________________

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Determining Inventory at Lower of Cost or Market

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Financial Analysis: Describe and illustrate accounts receivable and inventory turnover and their use in assessing the management of receivables and inventory Learning Objective 9

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Accounts Receivable and Inventory Turnover The accounts receivable and inventory turnovers are useful in assessing a company’s management of its receivables and inventory

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Accounts Receivable Turnover Ratio Accounts Receivable Turnover __________________ Average Accounts Receivable = ______________+________________ 2

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Accounts Receivable Turnover Ratio Assume the following data for Wolf Custom Furniture Company for a recent year [( _________+ ________) ÷ __ ] Accounts Receivable Turnover ___________ = ==_____ Net sales Beginning receivables $18,750,000 1,200,000 1,800,000Ending receivables

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Number of Days’ Sales in Receivables Assume the following data for Wolf Custom Furniture Company for a recent year ________________________ Net sales Beginning receivables $18,750,000 1,200,000 1,800,000Ending receivables Number of Days’ Sales in Receivables ___________ = ==_____ days

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Inventory Turnover Ratio = _______________+ ________________ 2 Inventory Turnover _____________________ Average Inventory

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Inventory Turnover Ratio Assume the following data for Wolf Custom Furniture Company for a recent year [(_________+ _________) ÷ __ ] Inventory Turnover ___________ = ==______ Cost of merchandise sold Beginning inventory $12,000, , ,000Ending inventory

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Number of Days’ Sales in Inventory Assume the following data for Wolf Custom Furniture Company for a recent year ____________ Number of Days’ Sales in Inventory _________ = ___________ _________ ==_____ days Cost of merchandise sold Beginning inventory $12,000, , ,000Ending inventory

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. End of Chapter 6