Download Merchandise inventory

Lecture 22
Chapter 6
Receivables and Inventories
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.
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.
6-3
Account Receivable
When merchandise or services
are sold on credit, an account
receivable is established.
Most accounts receivable are
expected to be collected in
30 to 60 days; so, they are
current assets.
Notes receivable are
amounts that customers
owe for which a formal,
written instrument of
credit has been issued.
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.
Regardless of the care used
in granting credit and the
collection procedure used,
normally a part of the credit
sales will not be collectible.
The two methods of accounting for
receivables that appear to be
uncollectible are the allowance
method and the direct-write-off
method.
Methods of estimating
uncollectible receivables.
2/10
n/30
6-12
Estimating Uncollectibles
Estimate Based on Sales
Balance Sheet
Trans.
Date
Assets
Dec. 31
All. for Dbt. Accts. 3,000
Net Effect
Liabilities
Stockholders' Equity
-3,000
-3,000
Retained Earnings
(Net Income)
Trans.
Date
Dec. 31
Net Effect
Income Statement
Revenue
Expense
Uncoll. Accts. Expense
Net Income
3,000
-3,000
3,000
-3,000
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.
Estimating Uncollectibles
Estimate Based on Aging of Receivables
The longer an account has been
outstanding, the less like the
receivable will be collected.
Accounts Receivable Aging and Uncollectibles
Customer
Balance
Ashby & Co.
B. T. Barr
Brock Co.
150
610
470
J. Zimmer Co.
160
Total
86,300
Not
Past
Due
Days Past Due
1-30
31-60
over
61-90 91-180 181-365 365
150
350
260
470
160
75,000
4,000
3,100
1,900
1,200
Total accounts receivable shown by age.
800
300
Accounts Receivable Aging and Uncollectibles
Customer
Balance
Ashby & Co.
B. T. Barr
Brock Co.
150
610
470
J. Zimmer Co.
160
Total
86,300
Not
Past
Due
Days Past Due
1-30
31-60
61-90 91-180 181-365
over
365
150
350
260
470
160
75,000
4,000
3,100
1,900
1,200
800
300
2%
5%
10%
20%
30%
50%
80%
Uncollectibles
PERCENT
Uncollectible percentages based on
experience and industry averages.
Accounts Receivable Aging and Uncollectibles
Customer
Balance
Ashby & Co.
B. T. Barr
Brock Co.
150
610
470
J. Zimmer Co.
160
Total
86,300
Not
Past
Due
Days Past Due
1-30
31-60
61-90
91-180 181-365
over
365
150
350
260
470
160
75,000
4,000
3,100
1,900
1,200
800
300
2%
5%
10%
20%
30%
50%
80%
200
310
Uncollectibles
PERCENT
AMOUNT
3,390 = 1,500
380
360
400
240
Estimating Uncollectibles
Estimate Based on Aging of Receivables
Trans.
Date
Dec. 31
Balance Sheet
Assets
All. f or Dbt. Accts.
Net Ef f ect
Liabilities
Stockholders' Equity
2,880
-2,880
-2,880
Retained Earnings
(Net Income)
Trans.
Date
Dec. 31
Net Ef f ect
Income Statement
Revenue
Expense
Uncoll. Accts. Expense
Net Income
2,880
-2,880
2,880
-2,880
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.
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.
Trans.
Date
Balance Sheet
Assets
Liabilities
Jan. 21
Accounts Rec.
Jan. 21
All. f or Dbt. Accts. - 6,000
Net Ef f ect
Stockholders' Equity
- 6,000
0
Retained Earnings
( Net Income)
Trans.
Date
Income Statement
Revenue
Expense
Net Income
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.
Trans.
Date
Balance Sheet
Assets
Liabilities
Jun. 10
Accounts Rec.
Jun. 10
All. For Dbt. Accts. 6,000
Jun. 10
Jun. 10
Cash
Accounts Rec.
Net Effect
Trans.
Date
Stockholders' Equity
6,000
6,000
- 6,000
0
Income Statement
Revenue
Expense
Net Income
End of Lecture 22
6-23
Lecture 23
Chapter 6
Receivables and Inventories
Learning Objective
4
Describe the
common
classifications of
inventories.
Lecture 23
Accounting for Merchandising
Business
Merchandising Business
• Revenue activities
of a merchandising
business involve
the buying and
selling of
merchandise
• Comparison to
service business
Service Business
Merchandising
Business
Fees earned
Sales
Less Operating
expenses
Less Cost of
merchandise
sold
=Net income
=Gross Profit
Less Operating
expenses
=Net Income
New Accounts on the Income
Statement
– SALES – revenues collected from the sale of
merchandise
– COST OF MERCHANDISE SOLD
– GROSS PROFIT – Sales – Cost of merchandise sold
Merchandizing Company
Income Statement
For the Year Ended December 31, 20—
Revenue from sales:
Sales
Less:: Sales returns and allowances
Sales discounts
189,300
1,700
500
2,200
187,100
100,000
87,100
Net sales
Cost of merchandise sold XXXX
Gross profit
Operating expenses:
Selling expenses:
Sales salaries expense
17,700
Administrative expenses:
Rent expense
7,800
Office salaries expense
22,550
Depreciation expense—office equipment 2,800 33,150
Total operating expenses
Income from operations
Other expense:
Interest expense
Net income
50,850
36,250
2,000
34,250
Computation of Costs
• Computation of Cost of Merchandise Sold
•
Purchases
•
Less merchandise inventory, December 31
•
=Cost of merchandise sold
•
Computation of Cost of Merchandise Purchased
Purchases
Less: purchases returns and allowances
Less: purchases discount
=Net purchases
Add: transportation in
=Cost of merchandise purchased
Balance Sheet Accounts
• Merchandise inventory – merchandise on
hand at the end of an accounting period.
Merchandising Terms
• Sales – total amount
charged to customers for
merchandise sold
• Sales returns and
allowances – are granted
by the seller to customers
for damaged or defective
merchandise
• Sales discount – are
granted by the seller to
customers for early
• Net sales = Sales –returns
- discount
Merchandising Terms
• Cost of goods sold
– Cost of merchandise sold to customers
• Purchases discounts
– Offered by the seller to buyer
– For early payment
• Purchases allowances and returns
– Buyer may receive a reduction in the intial price at
which the merchandise is purchased.
Merchandising Terms
• Merchandise available for sale =
– Beginning merchandise inventory + net purchases
• Net purchases =
– Purchases minus discounts – returns and
allowances
Closing Entries
– Accounts that must be closed
•
•
•
•
•
•
•
Sales
Rent revenue
Sales returns and allowances
Sales discounts
Cost of merchandise sold
All expenses and revenues
Dividends
6-36
End of Lecture 23
6-37
6-38
End of Lecture 24
6-39
Manufacturing Organizations
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
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
Learning Objective
5
Describe the three
inventory cost flow
assumptions and how
they impact the
financial statements.
One
Three
unit identical
is sold onunits
Mayof30Item
for $20,
X arethe
unit that
purchased
was purchased
during on
May.
May 18.
May 10
18
24
Total
Item X
Purchase
Purchase
Purchase
Units
1
1
1
3
Average cost per unit
Specific Identification
Cost
$ 9
13
14
$36
$12
The gross profit from this sale would be
$7, which is the selling price of $20 less
the May 18th cost of $13.
Fifo Method
Purchased
goods
Sold
goods
Fifo Method
May 10
18
24
Total
Item X
Purchase
Purchase
Purchase
Units
1
1
1
3
Average cost per unit
Cost
$ 9
13
14
$36
$12
6-47
Fifo Method
Effect of Inventory
Costing Methods on
Financial Statements
Income Statement
Sales
Cost of merchandise
sold
Gross profit
$14
13
Balance Sheet
Merchandise
inventory
$27
$20
9
$11
6-48
Lifo Method
Purchased
Sold
goods
6-49
Lifo Method
May 10
18
24
Total
Item X
Purchase
Purchase
Purchase
Units
1
1
1
3
Average cost per unit
Cost
$ 9
13
14
$36
$12
6-50
Lifo Method
Income Statement
Sales
Cost of merchandise
sold
Gross profit
Effect of Inventory
Costing Methods on
Financial Statements
$20
14
$ 6
$13
9
Balance Sheet
Merchandise
inventory
$22
6-51
Average Cost Method
Purchased
goods
Sold
goods
6-52
Average Cost Method
May 10
18
24
Total
Item X
Purchase
Purchase
Purchase
Units
1
1
1
3
Average cost per unit
Cost
$ 9
13
14
$36
$12
6-53
Average Cost Method
Effect of Inventory Costing Methods on
Financial Statements
$12
12
Balance Sheet
Merchandise
inventory
$24
Income Statement
Sales
Cost of merchandise
sold
Gross profit
$20
12
$ 8
6-54
Learning Objective
6
Compare and
contrast the use of
inventory costing
methods.
6-55
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
7,000
Gross profit
$ 8,000
6-56
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
7,280
Gross profit
$ 7,720
6-57
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
7,600
Gross profit
$ 7,400
6-58
Inventory Costing Methods
600
500
400
300
200
100
0
FIFO
LIFO Average cost
6-59
Learning Objective
7
Describe how
receivables and
inventories are reported.
6-60
Starbucks’
ASSETS
Current assets:
Cash and cash equivalents
Marketable securities
Accounts receivable, net of
allowance of $4,590
Inventories
Prepaid expenses and other
current assets
Total current assets
Sept. 30, 2001
(in thousands)
$113,237
107,312
90,425
221,253
61,698
$593,925
6-61
In the lower-of-cost-or-market
method, market is the cost to
replace the merchandise on the
inventory date.
6-62
Valuation of Inventory at Lower-of-Cost-or-Market
Inventory
Item Quantity
A
B
C
D
Total
400
120
600
280
Unit
Cost
Price
$10.25
22.50
8.00
14.00
Unit
Market
Price
$ 9.50
24.10
7.75
14.75
Total
Cost
$ 4,100
2,700
4,800
3,920
$15,520
Total
Market
$ 3,800
2,892
4,650
4,130
$15,472
Lower
C or M
$ 3,800
2,700
4,650
3,920
$15,070
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
6-63
Learning Objective
8
Compute and interpret
the accounts receivable
and inventory turnover
ratios.
6-64
Accounts Receivable Turnover
Net sales on account
Accounts receivable (net):
Beginning of year
End of year
Total
Average
Use: To assess the efficiency
Net Sales
in collecting
receivables
Average
accounts
receivable
and in
the management
of credit
2006
$1,498,000
2005
$1,200,000
$ 120,000
115,500
$ 235,000
$ 117,500
$ 140,000
120,000
$ 260,000
$ 130,000
12.7
9.2
$1,498,000 $1,200,000
$117,500
$130,000
6-65
Inventory Turnover Ratios
Cost of merchandise sold
Inventories:
Beginning of year
End of year
Average
Inventory turnover
Safeway Inc.
Zale
$22,482,400,000
$920,003,000
$2,444,900,000
$2,508,000,000
$2,476,450,000
$571,669,000
$630,450,000
$601,059,500
9.1 times
1.5 times
of merchandise
soldin the
Use: Cost
To assess
the efficiency
Average inventory
management
of inventory
6-66
Chapter 6
The End
6-67
6-68