Receivables and Inventory

1
Receivables and Inventory

• Chapter 6

2
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)

3
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

4

• Learning Objective 1

• Describe the common classifications of receivables

5
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

6
Promissory Note
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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

8

• Learning Objective 2

• Describe the nature of and the accounting for
  uncollectible receivables

9
Uncollectible Receivables

• Some of the credit sales will be uncollectible
• The operating expense recorded from uncollectible
  receivables is called
• ______________, or
• ______________, or
• ______________

10
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 companys
  attempts to collect
• The customer files for bankruptcy
• The customer closes its business
• The company cannot locate the customer

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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

12

• Learning Objective 3

• Describe the direct write-off method of
  accounting for uncollectible receivables

13
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
14
Direct Write-Off Method
Reinstate accounts receivable
Collection of accounts receivable
15

• Learning Objective 4

• Describe the allowance method of accounting for
  uncollectible receivables

16
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

17
Allowance Method

• If the total accounts receivable balance is
  200,000, the new net realizable value is
  170,000

Uncollectible accounts receivable
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Allowance Method

• When a customers account is identified as
  uncollectible, it is written off against the
  __________ account

Net realizable value
No affect on net realizable value
19
Allowance Method
Reinstating account balance
Cash collected
20
Estimating Uncollectible Accounts

• Based on past experiences, industry averages and
  forecasts of the future
• Two common methods

_________
_________
21
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
22
Aging of Receivables Schedule
23
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
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Comparing Estimation Methods
_______
___________
_______
___________
25

• Learning Objective 5

• Describe the common classifications of inventory

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Merchandise Inventory

• Merchandise inventory
• Merchandise on hand (not sold) at the end of
  the
• period
• It is a _____ asset
• Inventory sold becomes the ________________

27
Size of Merchandise Inventory for Merchandising
Businesses
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Manufacturing Inventories

• ________________
• Raw material used to make the product
• ________________
• Cost of partially completed products
• ________________
• Total cost of completed goods material, labor,
  manufacturing overhead

29
Manufacturing Inventories
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Footnote Disclosure of Manufacturing Inventories

• The Hershey Company recently reported inventories
  of 815,863 (in thousands) as follows

31

• Learning Objective 6

• Describe three inventory cost flow assumptions
  and how they impact the financial statements

32
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
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Inventory Methods
34
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)

35
Specific Identification Method
36
First-In, First-Out (FIFO)
37
Last-In, First-Out (LIFO)
38
Average Cost Method
39
Use of Inventory Costing Methods
40

• Learning Objective 7

• Compare and contrast the use of the three
  inventory costing methods

41
Comparing Methods - Rising Prices
METHOD I/S EFFECT B/S EFFECT RESULT
FIFO ___________ ___________ __________________ __________________ ________________ ________________
LIFO ___________ ___________ __________________ __________________ ________________ ________________
AVERAGE ___________ ___________ __________________ __________________ ________________________________
42

• Learning Objective 8

• Describe how receivables and inventory are
  reported on the financial statements

43
Receivables and Inventory in Balance Sheet
44
Accounts Receivables

• Classified as a current asset if collection is
  expected within ___ year

45
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 __________
• Valuation at __________

46
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

47
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

48
Valuation at Lower of Cost or Market

• Can be applied in one of three ways
• ___________________
• ___________________
• ___________________

49
Determining Inventory at Lower of Cost or Market
50

• Learning Objective 9

• Financial Analysis Describe and illustrate
  accounts receivable and inventory turnover and
  their use in assessing the management of
  receivables and inventory

51
Accounts Receivable and Inventory Turnover

• The accounts receivable and inventory turnovers
  are useful in assessing a companys management of
  its receivables and inventory

52
Accounts Receivable Turnover Ratio
__________________
Accounts Receivable Turnover

Average Accounts Receivable
______________________________
2
53
Accounts Receivable Turnover Ratio

• Assume the following data for Wolf Custom
  Furniture Company for a recent year

___________
Accounts Receivable Turnover

( _________ ________) __
___________


_____
___________
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Number of Days Sales in Receivables

• Assume the following data for Wolf Custom
  Furniture Company for a recent year

___________
Number of Days Sales in Receivables

________________________
___________


_____ days
___________
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Inventory Turnover Ratio
_____________________
Inventory Turnover

Average Inventory
_______________ ________________
2
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Inventory Turnover Ratio

• Assume the following data for Wolf Custom
  Furniture Company for a recent year

___________
Inventory Turnover

(_________ _________) __
___________


______
___________
57
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
___________
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End of Chapter 6