Download Survey_5e_Ch6_Lecture

Chapter 6
Receivables and
Inventory
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
Learning Objectives
(continued)
After studying this chapter, you should be able to…

Describe the common classifications of inventories

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
Learning Objective 1
Describe the common classifications
of receivables
Classifying Receivables
• Accounts Receivable
─ Credit terms extended to customers
• Notes Receivable
─ More formal agreement
─ Includes a maker and payee
• Other Receivables
─ Can include interest receivable, taxes receivable, and receivables from
employees or officers
Accounting for Notes Receivable
Learning Objective 2
Describe the nature of and the
accounting for uncollectible receivables
Uncollectible Receivables
Q. What if a customer does not pay the balance owed
to the company?
A. Companies must recognize an operating expense
for accounts that are not collectible. It is called Bad
Debt Expense.
Bad Debt Expense
Two Methods
Direct
Write-Off
Method
Allowance
Method
Learning Objective 3
Describe the direct write-off method of
accounting for uncollectible receivables
Direct Write-Off Method
• Bad Debt Expense is recorded and the receivable written off
when the account is determined to be worthless.
If payment is collected after the write-off, the write-off
entry is reversed and the cash collection is recorded
Learning Objective 4
Describe the allowance method of
accounting for uncollectible
receivables
Allowance Method
• Required by GAAP for companies with large 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
Estimate of Uncollectible Accounts Receivable:
$30,000
• If the total accounts receivable balance is $200,000,
the new net realizable value is $170,000
Write-Offs to the Allowance Account
• When a customer’s account is identified as uncollectible, it is
written off against the allowance account
If payment is collected after the write-off, the write-off
entry is reversed and the cash collection is recorded.
• Assume a $5,000 account had been previously written off.
Estimating Uncollectible Accounts
• Based on past experiences and forecasts of the future
• Two common methods:
Percent of
Sales
Analysis
of the
Receivables
Sample Aging Schedule
Estimate Based on Percent of Sales
• Assume that on December 31, 2009, the Allowance for
Doubtful Accounts for ExTone Company has a negative
balance of $3,250. In addition, ExTone estimates that 3/4% of
2009 credit sales will be uncollectible. Credit sales for the year
are $3,000,000.
Estimate Based on Analysis of Receivables
• Comparing the $26,490 estimate with the unadjusted balance
in the allowance account determines the needed adjustment for
bad debt expense. Assume the unadjusted balance in the
allowance account is a negative $3,250. $23,240 more is
needed in the allowance account.
Learning Objective 5
Describe the common classifications
of inventory
Inventory Classification for Merchandisers
• In Chapter 4, we learned that merchandise on hand is called
merchandise inventory. Inventory sold becomes the cost of
merchandise sold
• Cost of inventory includes all costs of ownership (e.g.,
purchase price, transportation costs, insurance costs, etc.)
Merchandising Inventories
Manufacturing Inventories
• Materials Inventory
• Raw material used to make the product
• Work In Process Inventory
• Cost of partially completed products
• Finished Goods Inventory
• Total cost of completed goods: material, labor, manufacturing overhead
Manufacturing Inventories
Footnote Disclosure of Manufacturing Inventories
Learning Objective 6
Describe three inventory cost flow
assumptions and how they impact the
financial statements
Inventory Cost Flow
Units Purchased
Units Sold
• 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 a cost flow
assumption
Specific Identification
• If the merchandise can be identified with a specific purchase,
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)
Three Inventory Methods
First-In, First-Out (FIFO)
• One unit is sold on May
30 for $20
Last-In, First-Out (LIFO)
• One unit is sold on May
30 for $20
Average Cost
• One unit is sold on May
30 for $20
Learning Objective 7
Compare and contrast the use of the
three inventory costing methods
Comparing Methods - Rising Prices
METHOD
I/S EFFECT
B/S EFFECT
RESULT
FIFO
Lower COGS
Higher gross profit
Inventory shows
replacement cost
Benefit lost in
higher future costs
LIFO
Higher COGS
Lower gross profit
Lower inventory values
Matches current
cost with current
revenue
AVERAGE
Average (middle)
gross profit
Average inventory value
Compromise
between LIFO &
FIFO
Learning Objective 8
Describe how receivables and
inventory are reported on the
financial statements
Balance Sheet Presentation
Lower of Cost or Market
Reporting Receivables and Inventory
• Accounts Receivable
• Classified as a current asset if collection is expected within 1 year.
• Reported at net realizable value: A/R – Allowance for Doubtful
Accounts
• Inventory
• Reported at the net realizable value
• Net realizable value = selling price – direct costs of disposal
• Reported at Lower of Cost or Market (LCM)
End of Chapter 6