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Electronic Presentation by Douglas Cloud Pepperdine University

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1 Electronic Presentation by Douglas Cloud Pepperdine University
Survey of Accounting Electronic Presentation by Douglas Cloud Pepperdine University Carl S.Warren

2 Task Force Clip Art included in this electronic presentation is used with the permission of New Vision Technology of Nepean Ontario, Canada.

3 Chapter 6 Receivables and Inventories

4 After studying this chapter, you should be able to:
Learning Objectives 1. Describe the common classifications of receivables. 2. Describe the nature of uncollectible receivables. 3. Describe methods of estimating uncollectible receivables. 4. Describe the common classifications of inventories. After studying this chapter, you should be able to: Continued

5 Learning Objectives 5. Describe the three inventory cost flow assumptions and how they impact the financial statements. 6. Compare and contrast the use of inventory costing methods. 7. Describe how receivables and inventories are reported on the financial statements. 8. Compute and interpret the accounts receivable and inventory turnover ratios.

6 Learning Objective 1 Describe the common classifications of receivables.

7 When merchandise or services are sold on credit, an account receivable is established.

8 Most accounts receivable are expected to be collected in 30 to 60 days; so, they are current assets.

9 Notes receivable are amounts that customers owe for which a formal, written instrument of credit has been issued. Dec. 13, 2005 I promise to pay__________________________________ ____________________________________________ at an interest rate of _____% within ______ days. ________________________ Douglas Cloud One Thousand Dollars and no/100 T. Wood

10 Learning Objective 2 Describe the nature of uncollectible receivables.

11 Often when a company issues its own credit card, it sells its receivables to other companies. This is called factoring and the buyer is called the factor.

12 Regardless of the care used in granting credit and the collection procedure used, normally a part of the credit sales will not be collectible.

13 The two methods of accounting for receivables that appear to be uncollectible are the allowance method and the direct-write-off method.

14 Learning Objective 3 Describe methods of estimating uncollectible receivables.

15 Estimating Uncollectibles
Estimate Based on Sales

16 Estimating Uncollectibles
Estimate Based on Aging of Receivables The process of determining how long a receivable has been outstanding and attaching a percentage to that time period is referred to as aging the receivables.

17 Estimating Uncollectibles
Estimate Based on Aging of Receivables The longer an account has been outstanding, the less like the receivable will be collected.

18 Accounts Receivable Aging and Uncollectibles
Not Days Past Due Past over Customer Balance Due Ashby & Co. $ $ 150 B. T. Barr $ 350 $260 Brock Co. 470 $ 470 J. Zimmer Co Total $86,300 $75, $4,000 $3,100 $1,900 $1,200 $800 $300 Total accounts receivable shown by age.

19 Accounts Receivable Aging and Uncollectibles
Not Days Past Due Past over Customer Balance Due Ashby & Co. $ $ 150 B. T. Barr $ 350 $260 Brock Co. 470 $ 470 J. Zimmer Co Total $86,300 $75, $4,000 $3,100 $1,900 $1,200 $800 $300 Uncollectibles PERCENT 2% 5% 10% 20% 30% 50% 80% Uncollectible percentages based on experience and industry averages.

20 Accounts Receivable Aging and Uncollectibles
Not Days Past Due Past over Customer Balance Due Ashby & Co. $ $ 150 B. T. Barr $ 350 $260 Brock Co. 470 $ 470 J. Zimmer Co Total $86,300 $75, $4,000 $3,100 $1,900 $1,200 $800 $300 Uncollectibles PERCENT 2% 5% 10% 20% 30% 50% 80% AMOUNT $3,390 = $1,500 $200 $310 $380 $360 $400 $240

21 Estimating Uncollectibles
Estimate Based on Aging of Receivables

22 Estimating Uncollectibles
Estimate Based on Aging of Receivables Notice that when the estimation is based on accounts receivable, the calculated amount is the desired ending balance in the allowance account.

23 Write-Offs to the Allowance Account
On January 21 John Parker, one of Richards Company’s receivables, files for bankruptcy. Thus, his account of $6,000 is deemed uncollectible.

24 Collecting a Written-Off Account
John Parker won the state lottery, so he is paying all of his bankruptcy debts. On June 10, Richards Co. receive a check for $6,000.

25 Learning Objective 4 Describe the common classifications of inventories.

26 Materials inventory consists of the cost of raw materials used in manufacturing a product.
Work in process inventory consists of the costs for partially completed products. Direct materials Direct labor costs Factory overhead

27 Finished goods inventory consists of the costs of direct materials, direct labor, and factory overhead for completed products. When the merchandise is sold, the costs are transferred to Cost of Goods Sold

28 Learning Objective 5 Describe the three inventory cost flow assumptions and how they impact the financial statements.

29 Three identical units of Item X are purchased during May.
One unit is sold on May 30 for $20, the unit that was purchased on May 18. Three identical units of Item X are purchased during May. Item X Units Cost May 10 Purchase 1 $ 9 18 Purchase 1 13 24 Purchase Total 3 $36 Average cost per unit $12 Specific Identification

30 The gross profit from this sale would be $7, which is the selling price of $20 less the May 18th cost of $13.

31 Fifo Method Purchased goods FIFO Sold goods

32 Fifo Method Item X Units Cost May 10 Purchase 1 $ 9 18 Purchase 1 13
Total 3 $36 Average cost per unit $12

33 Effect of Inventory Costing Methods on Financial Statements
Fifo Method Effect of Inventory Costing Methods on Financial Statements $14 13 Balance Sheet Merchandise inventory $27 Income Statement Sales $20 Cost of merchandise sold 9 Gross profit $11

34 Lifo Method Sold goods Purchased goods LIFO

35 Lifo Method Item X Units Cost May 10 Purchase 1 $ 9 18 Purchase 1 13
Total 3 $36 Average cost per unit $12

36 Effect of Inventory Costing Methods on Financial Statements
Lifo Method Effect of Inventory Costing Methods on Financial Statements Income Statement Sales $20 Cost of merchandise sold 14 Gross profit $ 6 $13 9 Balance Sheet Merchandise inventory $22

37 Average Cost Method Purchased goods Sold goods Average Cost

38 Average Cost Method Item X Units Cost May 10 Purchase 1 $ 9
Total 3 $36 Average cost per unit $12

39 Effect of Inventory Costing Methods on Financial Statements
Average Cost Method Effect of Inventory Costing Methods on Financial Statements $12 12 Income Statement Sales $20 Cost of merchandise sold 12 Gross profit $ 8 Balance Sheet Merchandise inventory $24

40 Learning Objective 6 Compare and contrast the use of inventory costing methods.

41 First-In, First-Out Net sales $15,000 Cost of merchandise sold:
Beginning inventory $ 1,800 Purchases 8,600 Merchandise available for sale $10,400 Less ending inventory 3,400 Cost of merchandise sold ,000 Gross profit $ 8,000

42 Average Cost Net sales $15,000 Cost of merchandise sold:
Beginning inventory $ 1,800 Purchases 8,600 Merchandise available for sale $10,400 Less ending inventory 3,120 Cost of merchandise sold ,280 Gross profit $ 7,720

43 Last-In, First-Out Net sales $15,000 Cost of merchandise sold:
Beginning inventory $ 1,800 Purchases 8,600 Merchandise available for sale $10,400 Less ending inventory 2,800 Cost of merchandise sold ,600 Gross profit $ 7,400

44 Inventory Costing Methods
600 500 400 300 200 100 Number of firms (> $1Billion Sales) FIFO LIFO Average cost

45 Learning Objective 7 Describe how receivables and inventories are reported.

46 Starbucks’ ASSETS Sept. 30, 2001 (in thousands) Current assets:
Cash and cash equivalents $113,237 Marketable securities 107,312 Accounts receivable, net of allowance of $4,590 90,425 Inventories 221,253 Prepaid expenses and other current assets ,698 Total current assets $593,925 Starbucks’

47 In the lower-of-cost-or-market method, market is the cost to replace the merchandise on the inventory date.

48 Valuation of Inventory at Lower-of-Cost-or-Market
Unit Unit Inventory Cost Market Total Total Lower Item Quantity Price Price Cost Market C or M $ 3,800 2,700 4,650 3,920 Total $15,520 $15,472 $15,070 A 400 $10.25 $ $ 4,100 $ 3,800 B ,700 2,892 C ,800 4,650 D ,920 4,130 The market decline is either: 1. Based on total inventory ($15,520 – $15,472) = $48 2. Based on individual items ($15,520 – $15,070) = $450

49 Learning Objective 8 Compute and interpret the accounts receivable and inventory turnover ratios.

50 Accounts Receivable Turnover
Net sales on account $1,498,000 $1,200,000 Accounts receivable (net): Beginning of year $ 120,000 $ 140,000 End of year 115, ,000 Total $ 235,000 $ 260,000 Average $ 117,500 $ 130,000 12.7 9.2 Use: To assess the efficiency in collecting receivables and in the management of credit Net Sales Average accounts receivable $1,498,000 $117,500 $1,200,000 $130,000

51 Inventory Turnover Ratios
Safeway Inc. Zale Cost of merchandise sold $22,482,400,000 $920,003,000 Inventories: Beginning of year $2,444,900,000 $571,669,000 End of year $2,508,000,000 $630,450,000 Average $2,476,450,000 $601,059,500 Inventory turnover 9.1 times 1.5 times Cost of merchandise sold Average inventory Use: To assess the efficiency in the management of inventory

52 Chapter 6 The End

53

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