Receivables and Inventories

1. Lecture 22 Chapter 6 Receivables and Inventories

2. 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.

3. 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.

4. Account Receivable When merchandise or services are sold on credit, an account receivable is established.

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

6. Notes receivable are amounts that customers owe for which a formal, written instrument of credit has been issued.

7. 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.

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

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

10. Methods of estimating uncollectible receivables.

11. 2/10 n/30

13. Estimating Uncollectibles Estimate Based on Sales

14. 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.

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

16. Accounts Receivable Aging and Uncollectibles Not Days Past Due Past over Customer Balance Due 1-30 31-60 61-90 91-180 181-365 365 Ashby & Co. 150 150 B. T. Barr 610 350 260 Brock Co. 470 470 J. Zimmer Co. 160 160 Total 86,300 75,000 4,000 3,100 1,900 1,200 800 300 Total accounts receivable shown by age.

17. Accounts Receivable Aging and Uncollectibles Not Days Past Due Past over Customer Balance Due 1-30 31-60 61-90 91-180 181-365 365 Ashby & Co. 150 150 B. T. Barr 610 350 260 Brock Co. 470 470 J. Zimmer Co. 160 160 Total 86,300 75,000 4,000 3,100 1,900 1,200 800 300 Uncollectibles 2% 5% 10% 20% 30% 50% 80% PERCENT Uncollectible percentages based on experience and industry averages.

18. Accounts Receivable Aging and Uncollectibles Not Days Past Due Past over Customer Balance Due 1-30 31-60 61-90 91-180 181-365 365 Ashby & Co. 150 150 B. T. Barr 610 350 260 Brock Co. 470 470 J. Zimmer Co. 160 160 Total 86,300 75,000 4,000 3,100 1,900 1,200 800 300 Uncollectibles 2% 5% 10% 20% 30% 50% 80% PERCENT 3,390 = 1,500 200 310 380 360 400 240 AMOUNT

19. Estimating Uncollectibles Estimate Based on Aging of Receivables

20. 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.

21. 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.

22. 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.

23. End of Lecture 22

24. Lecture 23 Chapter 6 Receivables and Inventories

25. Learning Objective 4 Describe the common classifications of inventories.

26. Accounting for Merchandising Business Lecture 23

27. Merchandising Business • Revenue activities of a merchandising business involve the buying and selling of merchandise • Comparison to service business

28. 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

29. Merchandizing Company Income Statement For the Year Ended December 31, 20— Revenue from sales: Sales 189,300 Less:: Sales returns and allowances 1,700 Sales discounts 5002,200 Net sales 187,100 Cost of merchandise sold XXXX 100,000 Gross profit 87,100 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 50,850 Income from operations 36,250 Other expense: Interest expense 2,000 Net income 34,250

30. 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

31. Balance Sheet Accounts • Merchandise inventory – merchandise on hand at the end of an accounting period.

32. 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

33. 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.

34. Merchandising Terms • Merchandise available for sale = • Beginning merchandise inventory + net purchases • Net purchases = • Purchases minus discounts – returns and allowances

35. 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

37. End of Lecture 23

39. End of Lecture 24

40. Manufacturing Organizations

41. 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

42. 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

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

44. 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. Item X Units Cost May 10 Purchase 1 $ 9 18 Purchase 1 13 24 Purchase 1 14 Total 3 $36 Average cost per unit $12 Specific Identification

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

46. Fifo Method Purchased goods FIFO Sold goods

47. Fifo Method Item X Units Cost May 10 Purchase 1 $ 9 18 Purchase 1 13 24 Purchase 1 14 Total 3 $36 Average cost per unit $12

48. 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

49. Lifo Method Purchased goods Sold goods LIFO

50. Lifo Method Item X Units Cost May 10 Purchase 1 $ 9 18 Purchase 1 13 24 Purchase 1 14 Total 3 $36 Average cost per unit $12