receivables and inventories chapter 6 lecture 22

Receivables and Inventories

Chapter 6

Lecture 22

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.

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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.

Regardless of the care used in granting credit and the collection procedure used,

normally a part of the credit sales will not be collectible.

Methods of estimating uncollectible receivables.

LiabilitiesDec. 31

Net Effect

Revenue Net IncomeDec. 31 -3,000

Net Effect -3,000

Trans. Date

Trans. Date

Income StatementExpense

Uncoll. Accts. Expense 3,000

3,000

(Net Income)

-3,000 -3,000

Retained Earnings

Balance SheetAssets Stockholders' Equity

All. for Dbt. Accts. 3,000

Estimate Based on Aging of ReceivablesEstimate Based on Aging of Receivables

Accounts Receivable Aging and UncollectiblesAccounts Receivable Aging and Uncollectibles

Not Days Past DuePast over

Customer Balance Due 1-30 31-60 61-90 91-180 181-365 365

Ashby & Co. 150 150B. T. Barr 610 350 260Brock Co. 470 470

J. Zimmer Co. 160 160

Total 86,300 75,000 4,000 3,100 1,900 1,200 800 300

2%2% 5%5% 10%10% 20%20% 30%30% 50%50% 80% 80%

Uncollectibles

PERCENT

Uncollectible percentages based on experience and industry averages.





Total 86,300 75,000 4,000 3,100 1,900 1,200 800 300


2%2% 5%5% 10%10% 20%20% 30%30% 50%50% 80% 80%

Uncollectibles

PERCENT

AMOUNT 3,390 =3,390 = 1,5001,500 200200 310310 380380 360360 400400 240 240






Total 86,300 75,000 4,000 3,100 1,900 1,200 800 300

LiabilitiesDec. 31

Net Effect

Revenue Net IncomeDec. 31 -2,880

Net Effect -2,880


All. for Dbt. Accts. 2,880

-2,880 -2,880

Retained Earnings

Trans. Date

Trans. Date


Uncoll. Accts. Expense 2,880

2,880

(Net Income)


On January 21 John Parker, one of Richards Company’s receivables, files for bankruptcy. Thus, his account of 6,000 is

deemed uncollectible.

LiabilitiesJan. 21

Jan. 21

Net Effect

Revenue Net Income

Trans. Date

Trans. Date


Retained Earnings

( Net Income)

All. for Dbt. Accts. - 6,000

0


Accounts Rec. - 6,000

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.

LiabilitiesJun. 10

Jun. 10

Jun. 10

Jun. 10

Net Effect

Revenue Net Income

Trans. Date

Trans. Date


Accounts Rec. - 6,000


Accounts Rec. 6,000

0

All. For Dbt. Accts. 6,000

Cash 6,000

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End of Lecture 22

Receivables and Inventories

Chapter 6

Lecture 23

4Describe the common classifications of inventories.

Accounting for Merchandising Business

Lecture 23

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 CompanyIncome Statement

For the Year Ended December 31, 20—Revenue from sales:

Sales 189,300 Less:: Sales returns and allowances 1,700

Sales discounts 500 2,200Net sales 187,100Cost of merchandise sold XXXX 100,000Gross 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 33,150Total operating expenses 50,850

Income from operations 36,250Other expense:

Interest expense 2,000Net income 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

PurchasesLess: purchases returns and allowancesLess: purchases discount=Net purchasesAdd: 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

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End of Lecture 23

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End of Lecture 24

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 materialsDirect labor costsFactory 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

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

5

Three identical units of Item X are purchased during May.

Three identical units of Item X are purchased during May.

Item X Units CostMay 10 Purchase 1 $ 9

18 Purchase 1 1324 Purchase 1 14

Total 3 $36Average cost per unit $12

One unit is sold on May 30 for $20, the unit that was purchased on May 18.

One unit is sold on May 30 for $20, the unit that was purchased on May 18.

The gross profit from this sale would be $7, which is the selling price of $20 less

the May 18th cost of $13.

The gross profit from this sale would be $7, which is the selling price of $20 less

the May 18th cost of $13.

Purchased goods

Purchased goods

Sold goods

Sold goods

Fifo MethodFifo MethodFifo MethodFifo Method

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Income StatementSales $20Cost of merchandise sold 9Gross profit $11

Balance SheetMerchandise inventory $27

$14 $14 1313

Effect of Inventory Costing Methods on

Financial Statements

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Purchased goods

Purchased goods

Sold goods

Sold goods

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Income StatementSales $20Cost of merchandise sold 14Gross profit $ 6

$13 $13 99 Balance Sheet

Merchandise inventory $22

Effect of Inventory Costing Methods on

Financial Statements

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Purchased goods

Purchased goods Sold

goods

Sold goods

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$12 $12 1212

Income StatementSales $20Cost of merchandise sold 12Gross profit $ 8

Balance SheetMerchandise inventory $24

Effect of Inventory Costing Methods on Financial Statements

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Compare and contrast the use of inventory costing methods.6

Learning ObjectiveLearning ObjectiveLearning ObjectiveLearning Objective

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First-In, First-OutFirst-In, First-Out

Net sales $15,000Cost of merchandise sold:

Beginning inventory $ 1,800Purchases 8,600Merchandise available for sale $10,400Less ending inventory 3,400 Cost of merchandise sold 7,000

Gross profit $ 8,000

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Average CostAverage Cost




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Last-In, First-OutLast-In, First-Out




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Inventory Costing MethodsInventory Costing MethodsInventory Costing MethodsInventory Costing Methods

600

500

400

300

200

100

0FIFO LIFO Average cost

Num

ber

of f

irm

s (>

$1B

illio

n S

ales

)

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Describe how receivables and inventories are reported.7


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Starbucks’ASSETS Sept. 30, 2001 (in thousands)Current assets:

Cash and cash equivalents $113,237Marketable securities 107,312Accounts receivable, net of allowance of $4,590 90,425Inventories 221,253Prepaid expenses and other current assets 61,698

Total current assets $593,925

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In the lower-of-cost-or-market method, market is the cost to

replace the merchandise on the inventory date.

In the lower-of-cost-or-market method, market is the cost to

replace the merchandise on the inventory date.

$ 3,8002,7004,6503,920

Total $15,520 $15,472 $15,070

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Valuation of Inventory at Lower-of-Cost-or-MarketValuation of Inventory at Lower-of-Cost-or-Market

A 400 $10.25 $ 9.50 $ 4,100 $ 3,800

B 120 22.50 24.10 2,700 2,892

C 600 8.00 7.75 4,800 4,650

D 280 14.00 14.75 3,920 4,130

Unit UnitInventory Cost Market Total Total Lower

Item Quantity Price Price Cost Market C or M

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

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Compute and interpret the accounts receivable and inventory turnover ratios.8


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Accounts Receivable TurnoverAccounts Receivable TurnoverAccounts Receivable TurnoverAccounts Receivable Turnover

2006 2005Net sales on account $1,498,000 $1,200,000Accounts receivable (net):

Beginning of year $ 120,000 $ 140,000End of year 115,500 120,000Total $ 235,000 $ 260,000

Average $ 117,500 $ 130,000

$1,498,000$117,500

$1,200,000$130,000

Net Sales

Average accounts receivable

Use: To assess the efficiency in collecting receivables and in the management of credit

Use: To assess the efficiency in collecting receivables and in the management of credit

12.7 9.2

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Inventory Turnover RatiosInventory Turnover RatiosInventory Turnover RatiosInventory Turnover Ratios

Safeway Inc. ZaleCost of merchandise sold $22,482,400,000 $920,003,000Inventories:

Beginning of year $2,444,900,000 $571,669,000End of year $2,508,000,000 $630,450,000Average $2,476,450,000 $601,059,500

Inventory turnoverInventory turnover 9.1 times9.1 times 1.5 times1.5 times

Cost of merchandise sold

Average inventoryUse: To assess the efficiency in the

management of inventory

Use: To assess the efficiency in the management of inventory

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The EndThe End

Chapter 6Chapter 6

receivables and inventories chapter 6 lecture 22

Documents

uncollectibles slide

net income slide

aging of receivables

accounts receivable

credit sales

richards companys receivables

merchandising business

sales discounts