BUSS 213: Intermediate Accounting 1
Conceptual Framework for Financial Reporting
Prof. G-Song Yoo
Conceptual Framework For Financial Reporting
Basics of IFRS: Accrual accounting concepts & Revenue recognition
Financial Accounting
Recording Transactions
(Internal user focus)
Inventories
Property Plant, and Equipment
Income statement
(aka, Statement of
profit or loss)
Retained earnings
statement
Statement of
financial position
CL, Provisions & Contingencies
(aka, Balance sheet)
Time-Value of Money
Statement of
Cash Flows
Non Current Liabilities
Comprehensive
income statement
Financial statement
analysis (External user focus)
Internal Control
Cash and Receivables
Learning Objectives
1.
Explain the objective of financial reporting (Ch.1).
2.
Describe the usefulness of a conceptual framework (Ch.2).
3.
Review the basic assumptions of accounting (Ch.2).
4.
Explain the application of the basic principles of accounting (Ch.2).
5.
Identify the qualitative characteristics of accounting information and the
basic elements of financial statements (Ch.2).
•
Textbook Reading:
Ch.1 – Objective of Financial Reporting (pg. 1-6 and 1-7)
Ch.2 – Whole chapter
3 / 68
Learning Objectives
1.
Explain the objective of financial reporting (Ch.1).
2.
Describe the usefulness of a conceptual framework (Ch.2).
3.
Review the basic assumptions of accounting (Ch.2).
4.
Explain the application of the basic principles of accounting (Ch.2).
5.
Identify the qualitative characteristics of accounting information and the
basic elements of financial statements (Ch.2).
4 / 68
Basic Questions
What is Accounting?
• Accounting is the language
language of business.
What is Financial Accounting?
•
Financial accounting is the process of preparing financial reporting to
people outside the company, including investors, creditors, suppliers,
엘
and customers.
~
5 / 68
Objective of Financial Reporting
The Objective:
financial information about the reporting entity
Provide financial
useful to
that is useful
•
present and potential equity investors,
•
lenders, and
•
other creditors
in making decisions about providing resources to the
mmml
entity.
"
c
loans V 다
xita
,
Cl
6 / 68
Objective of Financial Reporting
(
General Purpose Financial Reporting (GPFR):
special
• Provide financial reporting information to a wide
variety of users.
m
wm
• Provide the most useful information possible at the
least cost
least
cost.
(Equity) investors (aka, shareholders) and creditors are
the primary user group.
7 / 68
Objective of Financial Reporting
Entity Perspective (as part of objective of GPFR):
• Companies viewed as separate and distinct from their owners.
owners
J/E under the “Entity
Perspective”
Case 1:
A company issues (ordinary)
shares for cash
Case 2:
An owner sells his/her
computer to that company
for cash
cash
마
.
cr share
.
br
Capitalordinary
"
Equi
pment
Cr
If companies are NOT
separated from owners
No
J/ E
N.
s1
required
E
cash
Decision-Usefulness:
Investors (i.e., users) are interested in assessing
1
required
모든거
L
래를
의
주주
근데
이너면목해야
함
"
• the company’s ability to generate net cash flows and
(This does NOT mean the cash basis is preferred over the accrual basis)
• management’s ability to protect and enhance the capital providers’
investments
8 / 68
Review Question 1: Objective of Financial Reporting
The objective of financial reporting places most emphasis on:
a. reporting to capital providers.
ㅇ
-
onyforexisting
shareholders
b. reporting on stewardship.
ㅡ
c. providing specific guidance related to specific needs.
,
d. providing information to individuals who are experts in the
ㅡ
field.
Stewardship? how company managers use it resources to create and sustain value.
s
9 / 68
Reflect on “BUSS152 – Principles of Accounting”
When it comes to recording transactions and preparing financial statements,
how do you know:
• Which economic events were accounting transactions?
• How to record transactions?
• When to record revenues and expenses?
• Who you were reporting to? (we just discussed this; see GPFR)
• What to report?
Answer to all those questions is:
IFRS (International Financial Reporting Standards), which involve
1.
Accounting standards
2.
The Conceptual Framework and
3.
Basic assumptions & principles
10 / 68
Hierarchy of IFRS
Based on assumptions
and principles
assumptions
principles of accounting,
along with cost
cost constraints
Conceptual Framework
m
ㅛ
solve
않ounting
ilans
rob
"
does
direct guidance on
Gives direct
indirect and general
Gives indirect
general guidance on
Accounting standards
Gives direct
direct and specific
specific guidance on
Record transactions and prepare
general purpose financial reports
11 / 68
Learning Objectives
1.
Explain the objective of financial reporting (Ch.1).
2.
Describe the usefulness of a conceptual framework (Ch.2).
3.
Review the basic assumptions of accounting (Ch.2).
4.
Explain the application of the basic principles of accounting (Ch.2).
5.
Identify the qualitative characteristics of accounting information and the
basic elements of financial statements (Ch.2).
12 / 68
Conceptual Framework
Conceptual Framework establishes the concepts that underlie financial
reporting. That is, it is a set of concepts defining the nature
nature, purpose, and
cinntent of general-purpose of financial reporting.
content
• Rule-making should build on and relate to an established body of
concepts.
• Enables IASB (International Accounting Standards Board) to issue
more useful and consistent pronouncements over time.
13 / 68
Need for a Conceptual Framework
Illustration:
Mind the GAAP (an online learning start-up) is developing free CPA exam
practice tests. On Oct. 1, Mind the GAAP issues 10,000 shares of its $1 par
value ordinary shares in exchange for cash. Shareholders have ownership
rights over the company. .
Show the journal entry to record the issuance of shares.
Oct. 1
Pr
Cash
10 000
.
.
Cr
(
.
share
rssues
Oct I
-
10 , 000
Capitalt ordinavy
shares
for
,
Lash )
Share
cash
Debit
10 000
-
Credit
capitatordincary
Debit
Credit
Oct I
10 000
.
,
14 / 68
Need for a Conceptual Framework
Illustration:
Mind the GAAP (an online learning start-up) is developing free CPA exam
practice tests. On Oct. 1, Mind the GAAP issues 10,000 digital-tokens ($1 for
each token) in exchange for cash. Tokenholders have consumptive right to
enjoy a premium service that the company will provide (say, ad-free service or
tutoring).
Show the journal entry to record the issuance of digital tokens.
Oct. 1
Dr
.
cash
10 000
,
10 000
crr
,
Unedrned Service
cash
Debit
10 000
.
Credit
Revenue
liability
Debit
Credit
10 000
,
15 / 68
Need for a Conceptual Framework
Illustration:
Mind the GAAP (an online learning start-up) is developing free CPA exam
practice tests. On Oct. 1, Mind the GAAP issues 10,000 shares of its $1 par
value digital-tokens in exchange for cash. Tokenholders have ownership rights
over the company, and consumptive right to enjoy a premium service that the
company will provide (say, ad-free service or tutoring).
Show the journal entry to record the issuance of digital tokens.
Oct. 1
10
cash
태 quity
o
아
,
000
liability
10 000
,
cash
Debit
Credit
Debit
Credit
10 , 000
16 / 68
Need for a Conceptual Framework
Example (Inter Milan Fan Token or $INTER):
SOURCE:
https://www.inter.it/en/news/2021-07-21-socios-new-inter-shirt-partner
https://coinmarketcap.com/currencies/inter-milan-fan-token/
17 / 68
Need for a Conceptual Framework
Example (Inter Milan Fan Token or $INTER):
The live Inter Milan Fan Token price today is $2.79 USD with a 24-hour trading volume
of $636,072 USD. We update our INTER to USD price in real-time. Inter Milan Fan Token
is up 1.03% in the last 24 hours. The current CoinMarketCap ranking is #777, with a live
market cap of $11,700,738 USD. It has a circulating supply of 4,200,081 INTER coins and
the max. supply is not available…
?
fquity
…The INTER Fan Token allows Inter Milan fans to have a tokenized share of influence
on club decisions, purchased through the consumer facing platform, Socios.com, fans
can engage in a wide variety of club decisions for example, choosing a goal celebration
song or deciding which MMA fighters should face off and in doing so, earn rewards and
money can't buy experiences…
,
liability
…Experiences like... having the opportunity to meet and greet with players of their
favourite club, receiving VIP treatment at their favourite stadium & much much more.
To obtain Fan Tokens, fans must purchase Chiliz (CHZ) Tokens via Socios.com which then
can be used to buy INTER Fan Tokens…
SOURCE:
https://www.inter.it/en/news/2021-07-21-socios-new-inter-shirt-partner
https://coinmarketcap.com/currencies/inter-milan-fan-token/
18 / 68
Overview of Conceptual Framework
Three levels
1.
First level: Objective of General Purpose of Financial Reporting (GPFR)
→ to answer “why”
we need accounting information.
nhy
2.
Second level: Qualitative Characteristics and Elements of Financial
Statements
→ bridge between Level 1 and Level 3
3.
Third level: Assumptions, Principles, and Constraints
how
→ to answer “how”
to recognize, measure, and disclose accounting
information.
19 / 68
Overview of Conceptual Framework (in details)
To be covered in the next weeks.
This is new; the rest
of them are already
covered in BUSS 152
20 / 68
Learning Objectives
1.
Explain the objective of financial reporting (Ch.1).
2.
Describe the usefulness of a conceptual framework (Ch.2).
3.
Review the basic assumptions of accounting (Ch.2).
4.
Explain the application of the basic principles of accounting (Ch.2).
5.
Identify the qualitative characteristics of accounting information and the
basic elements of financial statements (Ch.2).
21 / 68
Overview of Conceptual Framework (in details)
22 / 68
Assumptions
• Economic Entity: company keeps its activity separate from its owners and
other business unit (see Entity Perspective in prev. slides).
• Going
Concern: company to last long enough to fulfill objectives and
oing
commitments. Because of this, “current vs. non-current classification” and
“depreciation for non-current assets” are justifiable and appropriate.
올
concarn
• Monetary Unit: money is the common denominator, with an assumption
that the unit of measures (e.g., $) remains stable (not affected by pricelevel changes).
• Periodicity: company can divide its economic activities into time periods.
ccual
• Accrual
Basis of Accounting: transactions are recorded in the periods in
which the events occur (to be discussed more in the next week).
23 / 68
Review Question 2: Assumption
Identify which basic assumption of accounting is best described in each item
below.
a)
The economic activities of FedEx Corporation (USA)
are divided into 12-month periods for the purpose
of issuing annual reports.
b) Total S.A. (FRA) does not adjust amounts in its
financial statements for the effects of inflation.
c)
Barclays (GBR) reports current and non-current
classifications in its statement of financial position.
d) The economic activities of Tokai Rubber Industries
(JPN) and its subsidiaries are merged for accounting
and reporting purposes.
24 / 68
Learning Objectives
1.
Explain the objective of financial reporting (Ch.1).
2.
Describe the usefulness of a conceptual framework (Ch.2).
3.
Review the basic assumptions of accounting (Ch.2).
4.
Explain the application of the basic principles of accounting (Ch.2).
5.
Identify the qualitative characteristics of accounting information and the
basic elements of financial statements (Ch.2).
25 / 68
Overview of Conceptual Framework (in details)
26 / 68
Principles - Measurement
Measurement Principles
• Historical Cost is generally thought to be a faithful representation of the
amount paid for a given item.
• Fair value is defined as “the price that would be received to sell an asset or
paid to transfer a liability in an orderly transaction between market
participants at the measurement date” (i.e. the current market price).
Mar 7 2020
Mar 7 2023
Historical cost of
$500
$500
Fair value of
$500
$355
27 / 68
Principles - Measurement
Fair Value Measurement
• IASB has given companies the “option” to use fair value as the basis for
measurement of financial assets and liabilities.
• IASB established a fair value hierarchy that provides insight into the priority
of valuation.
(This table is not examinable in this course)
Level 3 examples: mortgage-backed securities (MBS), private
equity shares, complex derivatives, etc.
28 / 68
Principles – Revenue and Expense Recognition
Revenue Recognition Principle
• When a company agrees to perform a service or sell a product to a customer,
it has a performance
perfonmanceobligation.
obligation
• Requires that companies recognize revenues in the accounting period in
which the performance obligation is satisfied.
(Details of revenue recognition will be covered in Weeks 3 and 4)
Expense Recognition Principle
• Outflows or “using up” of assets or incurring of liabilities during a period as a
result of delivering or producing goods and/or rendering services.
• Thus, companies tie expense recognition to revenue recognition
→ matching efforts (expenses) with accomplishments (revenues)
This is referred to as a matching principle, which is now removed in the revised C/F (see
FN 12 on page 2-20 for details).
29 / 68
Principles – Full Disclosure
Full Disclosure Principle
• Providing information that is of sufficient importance to influence the
judgment and decisions of an informed user.
• Provided through:
→ Financial Statements
→ Notes to the Financial Statements
→ Supplementary information
30 / 68
Review Question 3: Assumptions and Principles
Identify True or False for the following statements:
A. The accounting period (i.e., periodicity) assumption states that the life of
a business can be divided into periods to more accurately reflect profits
and smooth out seasonal fluctuations.
F
B. The full disclosure principle requires that any information that may be of
interest to users should be disclosed in the financial statements
ㅡ
ㅡ
F
decisionsofa
could impact
C.
The going concern assumption states that financial statements should be
prepared on a going concern basis unless the entity will cease trading or
go into liquidation.
T
D. The accounting entity assumption states that owners personal
transactions should not be accounted for in business records unless they
욱
are a sole trader or partnership as they are not separate legal entities.
31 / 68
Review Question 4: Principles
Identify which basic principle of accounting is best described in each item below.
a) Parmalat (ITA) reports revenue in its income statement
when it delivered goods instead of when the cash is
collected.
b) Google (USA) recognizes depreciation expense for a
machine over the 2-year period during which that
machine helps the company earn revenue.
c)
Oracle Corporation (USA) reports information about
pending lawsuits in the notes to its financial statements.
d) Fuji Film (JPN) reports land on its statement of financial
position at the amount paid to acquire it, even though
the estimated fair market value is greater.
revevivie
reagnition
Expense
recoghition
Fun dislosure
Measurement
32 / 68
Overview of Conceptual Framework (in details)
33 / 68
Cost Constraints
Companies must weigh the costs of providing the information against the
benefits that can be derived from using it.
• Rule-making bodies and governmental agencies use cost-benefit analysis
before making final their informational requirements.
• In order to justify requiring a particular measurement or disclosure, the
benefits perceived to be derived from it must exceed the costs perceived to
be associated with it.
34 / 68
Learning Objectives
1.
Explain the objective of financial reporting (Ch.1).
2.
Describe the usefulness of a conceptual framework (Ch.2).
3.
Review the basic assumptions of accounting (Ch.2).
4.
Explain the application of the basic principles of accounting (Ch.2).
5.
Identify the qualitative characteristics of accounting information and the
basic elements of financial statements (Ch.2).
Note:
• The previous version (3rd edition) was based on the Conceptual Framework issued by the IASB
in 2010 (ours is 4th edition).
• IASB issued a revised conceptual framework in 2018, effective for annual reporting periods
beginning on or after 1 January 2020.
35 / 68
Qualitative Characteristics
IASB identified the Qualitative Characteristics of accounting information that
distinguish better (more useful) information from inferior (less useful)
information for decision-making purposes.
• Consider this “QC” in relation to GPFR (Level 1 of C/F – “why”).
• In the previous picture, “QC” is Level 2, which connects between Level 1
and Level 3 (assumptions, principles, and constraints – “how”).
• Excerpt from IASB’s Conceptual Framework (2018, para 2.4.)
“If financial information is to be useful, it must be relevant and faithfully
represents what it purports to represent. The usefulness of financial
information is enhanced if it is comparable, verifiable, timely and
understandable.”
36 / 68
Overview of Conceptual Framework (in details)
Relevant information about
Asset, Liabilities, and etc.
37 / 68
Fundamental Quality - Relevance
• To be relevant, accounting information must be capable of making a
difference in a decision.
38 / 68
Fundamental Quality – Relevance: Predictive value
• To be relevant, accounting information must be capable of making a
difference in a decision.
Financial information has predictive value if it has value as an input to
predictive processes used by investors to form their own expectations
about the future (making prediction).
→ Note that the information created through financial accounting is entirely
historical (e.g., earnings for 2021 or Asset as of Dec 31 2021); that said, we
can make predictions based on it, provided that it has predictive value. 39 / 68
Fundamental Quality – Relevance: Predictive value
• Can you make predictions of Samsung Electronics’ revenue and profit for
2022 and beyond?
• Can we say this financial information has predictive value?
40 / 68
Fundamental Quality - Relevance: Confirmatory value
• To be relevant, accounting information must be capable of making a
difference in a decision.
correcz
coufi
Relevant information also helps users confirm
or correct
prior
expectations. So it provides feedback about previous evaluation.
나-
41 / 68
Fundamental Quality - Relevance: Confirmatory value
• Can you confirm or correct your prior expectation about Samsung
Electronics’ earnings performance?
• Can we say this financial information has confirmatory value?
42 / 68
Fundamental Quality – Relevance: Materiality
• To be relevant, accounting information must be capable of making a
difference in a decision.
Information is material if omitting it or misstating it could influence
decisions that users make on the basis of the reported financial
information.
• Assessing materiality is challenging. It can be entity-specific, based on the
magnitude or nature, or non-quantitative threshold.
→ Thus, professional judgments are required.
43 / 68
Fundamental Quality – Relevance: Materiality
• On Jan 1, 2022, the accounting department of
Samsung Electronics purchased a calculator for $20.
The expected useful life of the calculator is 10
years.
• The company expensed it on the same day, instead
of depreciating it over its useful life of 10 years (see
the J/E on the left hand side). Will this be okay?
Jan. 1
VS.
Jan. 1
44 / 68
Review Question 5: Materiality
• Determine whether you would classify these transactions as material.
a)
Blair Co. has reported a positive trend in earnings over the
last 3 years. In the current year, it reduces its bad debt
expense to ensure another positive earnings year. The
impact of this adjustment is equal to 3% of net income.
b) Hindi SE has a gain of €3.1 million on the sale of plant assets
and a €3.3 million loss on the sale of investments. It decides
to net the gain and loss because the net effect is considered
immaterial. Hindi SE’s income for the current year was €10
million.
45 / 68
Review Question 5: Materiality
• Determine whether you would classify these transactions as material.
c)
Damon SpA expenses all capital equipment under
€2,500 on the basis that it is immaterial. The company
has followed this practice for a number of years.
46 / 68
Overview of Conceptual Framework (in details)
Faithful representation of
Asset, Liabilities, and etc.
47 / 68
Fundamental Quality – Faithful Representation
• Faithful representation means that the numbers and descriptions match
what really existed or happened (to make accounting information useful
for decision-making).
measurement uncertainty
• Faithful representation is related to measurement
uncertainty, since it is
impossible to be perfectly accurate in all aspects.
48 / 68
Fundamental Quality – Faithful Representation: Completeness
• Faithful representation means that the numbers and descriptions match
what really existed or happened (to make accounting information useful
for decision-making).
,
• Completeness means that all
all the information that is necessary for faithful
representation is provided.
49 / 68
Fundamental Quality – Faithful Representation: Neutrality
• Faithful representation means that the numbers and descriptions match
what really existed or happened (to make accounting information useful
for decision-making).
• Neutrality means that a company cannot select information to favor one
set of interested parties over another.
50 / 68
Fundamental Quality – Faithful Representation: Free from error
• Faithful representation means that the numbers and descriptions match
what really existed or happened (to make accounting information useful
for decision-making).
• An information item that is free from error will be a more accurate
(faithful) representation of a financial item.
51 / 68
Fundamental Quality – Faithful Representation
Illustration of Faithful Representation
• Candy Bars Ltd. produces several varieties of candy and chocolate bars.
• A lawsuit has been brought against Candy Bars by a customer who broke a
tooth while eating one of the company’s chewy chocolate bars.
• It is highly probable that Candy Bars will be liable for $50,000 as a result of
this suit.
• Candy Bars must report contingent liabilities (liabilities with uncertain
timing and amount), and related expenses in its financial statements.
1.
What if Candy Bars do not report contingent liabilities?
complete not
→ Financial information is notnotcomplete,
andnentral
not neutral.
,
2.
3.
What if Candy Bars misstates the losses from the lawsuit (say $15,000)?
fron
eror
free
→ Financial information is notnoffree
from
error.
What it such misstatements was intentional?
nentral
nof neutral.
→ Financial information is not
52 / 68
Overview of Conceptual Framework (in details)
Information of Asset,
Liabilities, and etc. can be
more useful when it can be….
53 / 68
Enhancing Quality – Comparability
• Information that is measured and reported in a similar manner for
different companies is considered comparable.
• Or information is more useful when it can be compared across time.
• Note that comparability is NOT the same as consistency.
(Consistency → a company applies the same accounting treatment to
similar event from time to time).
54 / 68
Enhancing Quality – Verifiability
• Verifiability occurs when independent measurers, using the same
methods, obtain similar results.
consensus
• Different independent observers could reach consensus;
this does not
mean exact figure.
55 / 68
Enhancing Quality – Understandability
• Timeliness means having information available to decision-makers before
it loses its capacity to influence decisions (i.e., the older the information,
the less useful it is).
• Many companies provide quarterly financial reports. Otherwise, users
have to wait another one year for financial information.
56 / 68
Enhancing Quality – Timeliness
• Understandability is the quality of information that lets reasonably
informed
reasonably informed
users see its significance.
• Many companies provide quarterly financial reports. Otherwise, users have
to wait another one year for financial information.
57 / 68
Review Question 6: Conceptual Framework
According to the Conceptual Framework, neutrality is an ingredient of
Faithful representation
a.
Yes
b.
Yes
c.
No
d.
No
080
Relevance
Yes
No
Yes
No
58 / 68
Review Question 7: Conceptual Framework
Which of the following is NOT related with the application of
faithful representation?
a.
O
Have information available to decision-makers in time to be
capable of influencing their decision
b. Determine if information is available and can be faithfully
represented in the financial statements
c. Identify the economic phenomenon that is useful for
decision making
d. Relating to measurement uncertainty as it is impossible to
be perfectly accurate in all aspects
59 / 68
Review Question 8: Basic Elements
Identify the qualitative characteristic(s) to be used given the information
provided.
Characteristics
(a) Qualitative characteristic being displayed
when companies in the same industry are
using the same accounting principles.
Relevance
(b) Quality of information that confirms users
’ earlier expectations.
Confirmatory value
(c) Imperative for providing comparisons of a
company from period to period.
Materiality
(d) Ignores the economic consequences of a s
tandard or rule.
Verifiability
Faithful representation
J
r
Predictive value
Neutrality
Timeliness
Understandability
Comparability
60 / 68
Review Question 8: Basic Elements
Identify the qualitative characteristic(s) to be used given the information
provided.
Characteristics
p
(e) Requires a high degree of consensus amo
ng individuals on a given measurement.
Relevance
(f) Predictive value is an ingredient of this fu
ndamental quality of information.
Predictive value
(g) Four qualitative characteristics that enhan
ce both relevance and faithful representat
ion.
Neutrality
(h) An item is not reported because its effect
on income would not change a decision.
Verifiability
Faithful representation
ㅇ
p
Confirmatory value
Materiality
Timeliness
Understandability
Comparability
61 / 68
Review Question 8: Basic Elements
Identify the qualitative characteristic(s) to be used given the information
provided.
Characteristics
(i) Neutrality is a key ingredient of this funda
mental quality of accounting information.
Relevance
(j) Two fundamental qualities that make acc
ounting information useful for decision-m
aking purposes.
Predictive value
(k) Issuance of interim reports is an example
of what enhancing ingredient?
Materiality
별
Faithful representation
Confirmatory value
Neutrality
Timeliness
f
Verifiability
Understandability
Comparability
62 / 68
Overview of Conceptual Framework (in details)
Definition of Asset, Liabilities, and
etc. (already covered in BUSS 152)
Note that definition (about what) is different
from recognition (about when).
The recognition criteria are under the
“principles” (see the green dotted rectangle).
63 / 68
Basic Elements – Asset
owned
LX
)
A present economic resource controlled by the
entity as a result of past events. An economic
resource is a right with the potential to
produce economic benefits.
ㅡ
ㅡ
Tips: understand the definition of asset in terms of past (as a result
of past event), present (present economic resource), and future
(the potential to produce economic benefit).
64 / 68
Basic Elements – Liability
A present obligation of the entity to transfer an
economic resource as a result of past events.
Tips: understand the definition of liability in terms of past (as a
result of past event), present (present obligation), and future
(future sacrifice of economic benefit due to the transfer of an
economic resources).
65 / 68
Basic Elements – Equity
A
A
100
=
.
-
L
+
L
70
=
E
E
30
The residual interest in the assets of the entity
after deducting all its liabilities.
Tips: understand the definition of income in terms of the
accounting equation. Asset minus Liability = Equity.
66 / 68
Basic Elements – Income
A
=
L+ E
↑ kED
서
d
p
Increases in assets, or decreases in liabilities,
that result in increases in equity,(other than
those relating to contributions from holders of
equity claims.5 share capital ( arises fom issuance
-
of
shares )
Tips: understand the definition of income in terms of its impact on
the accounting equation. For “other than those…” → Share Capital
67 / 68
Basic Elements – Expenses
!
용
아니고
incomeo
벌도
돈
주식으로
expenses
.
도
것
주는
dividend
Decreases in assets, or increases in liabilities,
that result in decreases in equity,(other than
those relating to distributions to holders of
equity claims. ) dividends
Tips: understand the definition of expense in terms of its impact on
the accounting equation. For “other than those…” → Dividends
68 / 68
BUSS 213: Intermediate Accounting 1
Accrual Accounting Concepts
Prof. G-Song Yoo
Conceptual Framework For Financial Reporting
Basics of IFRS: Accrual accounting concepts & Revenue recognition
Financial Accounting
Recording Transactions
(Internal user focus)
Inventories
Property Plant, and Equipment
Income statement
(aka, Statement of
profit or loss)
Retained earnings
statement
Statement of
financial position
CL, Provisions & Contingencies
(aka, Balance sheet)
Time-Value of Money
Statement of
Cash Flows
Non Current Liabilities
Comprehensive
income statement
Financial statement
analysis (External user focus)
Internal Control
Cash and Receivables
Learning Objectives
1.
Describe the basic accounting information system.
2.
Review of the accounting cycle and recording process.
3.
Adjusting process.
4.
Prepare financial statements and closing process .
5. Cash-basis accounting vs. Accrual-basis accounting (Appendix 3A).
X
All L.O.s are the review of accounting basics from BUSS 152.
•
Textbook Reading: Ch.3
(Skim reading “Recording Process Illustrated” from pg. 3-11 to 17, and
“Adjusting entries” from pg. 3-19 to 28)
3 / 40
Learning Objectives
1.
Describe the basic accounting information system.
2.
Record and summarize basic transactions.
3.
Identify and prepare adjusting entries.
4.
Prepare financial statements from the adjusted trial balance and
prepare closing entries.
5.
Cash-basis accounting vs. Accrual-basis accounting (Appendix 3A).
4 / 40
Accounting Information System
Accounting Information System:
•
Collects and processes transaction data.
•
Disseminates financial information to interested
parties.
•
Varies widely from business to business; for instance,
→ Nature of business
→ Type of transactions
→ Size of business
→ Volume of data to be handled
→ Informational demands
Consider this in association with GPFR.
What is the purpose of financial accounting information?
5 / 40
The Accounting Equation
Basic Accounting Equation:
A
E
ㄴ
• Accounting transactions and events must be recorded because they
회계장부에
have an effect on assets, liabilities, and equity. + 그래서 esg 활동은
안 적음
-
• The accounting equation must ALWAYS balance after every transaction
doublerentry system (for every Debit, there must be Credit).
due to the double-entry
Expanded Accounting Equation:
ㅡ
ㅡ
Statement of Financial Position
ㅡ
Income Statement
6 / 40
Review Question 1: The Accounting Equation
Statement of Financial
Position
Asset = Liability + Equity
Debit
(Left)
Credit
(Right)
M
d
Income Statement
Revenue
Expense
d
↓
↓
↑
↑
pn
d
7 / 40
The Accounting Process
Key Terminologies (see pages 3-3 & 4 for more details)
• Journal:
shows the debit and credit effects on specific asset, liability, equity,
revenue, and expense accounts. The process of entering transaction
data in the journal is known as journalizing.
joumalizing
8 / 40
The Accounting Process
Key Terminologies (see pages 3-3 & 4 for more details)
• (General) Ledger:
is the collection of all the asset, liability, equity, and expense account.
The process of transferring amounts from the journal to the ledger
accounts is known as posting.
posting
것까지는
구체일봉안 F
적
,
9 / 40
The Accounting Process
Key Terminologies (see pages 3-3 & 4 for more details)
• Trial balance:
list of accounts and their balances
a list
balances at a given time.
The primary purpose of the trial balance is to prove the mathematical
은
equality of the debits and credits after posting.
↓ 다확신
!
~~
~
"
시
nancittemer
+
웅
이
근데기륭
하다는 없음
.
sta
10 / 40
Accrual-Basis (of accounting)
Quick review of prior learning:
•
To record accounting transactions and events you need to know what to
record (definitions), when
when to record (recognition criteria) and how much
to record (measurement basis).
•
Accrual-Basis of Accounting is associated with “when to record,” and is
linked to the periodicity (aka, the time period assumption).
Periodicity indicates that company can divide its economic activities into
time periods. Thus, it is important to know the time
time period
period in which
revenues and expenses are incurred.
11 / 40
Accrual-Basis of Accounting in Conceptual Framework
Accrual-Basis is linked to
periodicity (aka, the time
period assumption), and it
affects revenue & expense
recognition principles
12 / 40
Accrual-Basis (of accounting)
Once again, Accrual- (vs. cash-) basis of accounting relates to the timing of
recognizing revenue and expense.
•
Accrual-basis:
Transactions are recorded in the periods in which the event occur.
occur
‒ Revenues are recorded when performance obligation is satisfied and
In BUSS 152, we learned that revenues are recorded when they are “earned.” We no
longer use the term “earned.”
The details of performance obligation will be covered in the next week.
‒ Expenses are recorded when incurred (in order to generate revenues).
•
Cash-basis (not in conformity with IFRS)
received from customers and
‒ Revenues are recorded when cash is received
‒ Expenses are recorded when cash is paid
pait to supplies.
•
Thus, under the cash-basis of accounting, net income (or loss) is the
difference between cash-in and cash-out.
13 / 40
Accrual-Basis (of accounting)
• Illustration:
Eser Contractor signs an agreement to construct a garage for ₺22,000. In
January, Eser begins construction, incurs costs of ₺18,000 on credit, and by the
end of January delivers a finished garage to the buyer. In February, Eser
collects ₺22,000 cash from the customer. In March, Eser pays the ₺18,000 due
the creditors.
14 / 40
Review Question 2: Accrual vs. Cash Basis of Accounting
Wing Company had the following transactions during 2021:
•
•
•
•
Sales of $72,000 on account
Collected $32,000 for services to be performed in 2022
Paid $10,000 cash in salaries incurred in 2021
Purchased airline tickets for $4,000 in December for a trip
to take place in 2022
What is Wing’s 2021 net income using accrual basis accounting?
accounts receivable
.
a. $94,000.
sales
.
b. $90,000.
.
c.
O
cashuneamed
Salaries
$62,000.
d. $58,000.
revenue
and
service
wages
cash
prepaid
revenue
expenses
A☆
expenses
cash
15 / 40
Review Question 2: Accrual vs. Cash Basis of Accounting
Wing Company had the following transactions during 2021:
•
•
•
•
Sales of $72,000 on account
Collected $32,000 for services to be performed in 2022
Paid $10,000 cash in salaries incurred in 2021
Purchased airline tickets for $4,000 in December for a trip
to take place in 2022
What is Wing’s 2021 net income using cash basis accounting?
a. $58,000.
72
,
000 t32
,
000
-
10 000
-
4 000
,
,
b. $22,000.
c. $14,000.
d. ($10,000).
16 / 40
The Accounting Cycle
The accounting cycle consists of the four phases
1.
Recording phase
2.
Adjusting phase
3.
Reporting phase
4.
Closing phase
17 / 40
Accounting Cycle: (1) Recording
r
on소
econonioerth
Phase
When
Steps
Recording phase
Daily during the
financial period
1. Identify / recognize and measure
(analyze) the daily business
transactions.
2. Journalize (record) transactions.
3. Post each journal entry to
appropriate ledger.
4. Prepare an unadjusted trial balance.
• See pages 3-9 & 18 for illustrations of the recording process.
18 / 40
Accounting Cycle: (2) Adjusting
Phase
When
Steps
Adjusting phase
Whenever a
1. Identify / recognize and measure
company prepares
(analyze) the adjusting entries.
financial
2. Journalize (record) the adjusting
statements.
entries.
3. Post each adjusting entry to
appropriate ledger accounts.
4. Prepare an adjusted trial balance.
• There are two types of adjusting entries:
1. Deferrals
2. Accruals
• See pages 3-18 & 29 for illustrations of the adjusting process.
19 / 40
Adjusting Entries for Deferrals
• Deferrals are expenses or revenues that are recognized at a date later than
the point when cash was originally exchanged.
• Two types of deferrals
1.
A
Prepaid expenses (insurance, rent, supplies, etc.) tuition (학생의 입장호
Cash Payment
2.
asset
!l
BEFORE
Expense Recorded
Unearned revenue (rent, magazine subscriptions, air tickets, tuition,
etc.)
다때학의 입장
Cash Receipt
BEFORE
Revenue Recorded
20 / 40
Adjusting Entries for Deferrals
• Adjusting Entries for 1. Prepaid Expenses:
Converting Assets (by crediting) to Expenses (by debiting).
• Adjusting Entries for 2. Unearned Revenues:
Converting Liabilities (by debiting) to Revenues (by crediting).
21 / 40
Review Question 3: Deferrals
-
prepaid
expenses
Cara, Inc. purchased supplies costing $2,500 on January 1, 2022 and
recorded the transaction by increasing assets. At the end of the year
$1,000 of the supplies are still on hand.
How will the adjusting entry impact Cara, Inc.’s statement of financial
position at December 31, 2022?
2 500
prepaid expenses
2 500
,
.
cash
a. Decrease Assets $1,000.
b. Increase Equity
X $1,000.
c. Increase Liabilities
X $1,500.
A
L
=
E
U
d
이 등
O
하다가
중
equify
d. Decrease Assets $1,500.
expensef
←
Wef income
↓
)
가
강소하는데
감소함해
refuined camingd
→
equity
d
22 / 40
Review Question 4: Deferrals
Wave Inn is a resort located in Canada. Wave Inn collects cash when guests
make a reservation. During December 2022, Wave Inn collected $90,000 of
cash and recorded the receipt by recognizing unearned revenue.
By the end of the month Wave Inn had satisfied the performance obligation
for one third of this amount, the performance obligation for the other two
thirds will be satisfied during January 2023.
The adjusting entry required at December 31, 2022 would impact the
statement of financial position by
icr
a. Increasing Equity $60,000.
(
"
에세
Gneamedrvenve
ask
.
sasoin
b. Decreasing Liabilities $30,000.
ㅇ
c.
Increasing Assets $90,000.
revenved
r
-
r
-
rnetincome
→
retained
r
→
eqmity
*
eaming
d. Decreasing Equity $30,000.
23 / 40
Adjusting Entries for Accruals
• Accruals are made to record
1. revenues for services performed and
2. expenses incurred in the current accounting period
• Two types of adjusting entries for accruals
1.
ㅡ
Accrued revenues (rent,
interest, service performed etc.)
Revenue Recorded
2.
BEFORE
Cash Receipt
Accrued expenses (rent, taxes, interest, salaries etc.)
ㅡ
Expense Recorded
BEFORE
Cash Payment
24 / 40
Adjusting Entries for Accruals
• Adjusting Entries for 1. Accrued Revenues:
Recognizing Assets (by debiting) and Revenues (by crediting).
AR
• Adjusting Entries for 2. Accrued Expenses:
Recognizing Liabilities (by crediting) and Expenses (by debiting).
AP
25 / 40
Review Question 4: Accruals
머때이
ABC ltd. started a business in March 2022. ABC shows a balance in Salaries
and Wages Payable of ¥48,000 at the end of March 2022.
What will be the journal entry to record Salaries and Wages Payable in
March 2022?
=
따끊다
AA
a. Dr Salaries and Wages Expense
Cr Salaries and Wages Payable
48,000
b. Dr Salaries and Wages Expense
Cr Cash
48,000
c.
48,000
Dr Salaries and Wages Payable
Cr Salaries and Wages Expense
d. Dr Cash
,
48,000
48,000
48,000
54,000
Cr Salaries and Wages Payable
54,000
26 / 40
Review Question 5: Accruals
ABC ltd. started a business in March 2022. ABC shows a balance in Salaries
and Wages Payable of ¥48,000 at the end of March 2022. The next payroll
amounting to ¥54,000 is to be paid in April 2022.
What will be the journal entry to record the payment of salaries in April
2022?
a. Dr Salaries and Wages Expense
Cr Salaries and Wages Payable
54,000
b. Dr Salaries and Wages Expense
Cr Cash
54,000
c.
6,000
Dr Salaries and Wages Expense
Cr Cash
D
54,000
54,000
6,000
ncurredi
텍ril
(
d. Dr Salaries and Wages Expense
O
Dr Salaries and Wages Payable
Cr Cash
6,000
48,000
54,000
27 / 40
Accounting Cycle: (3) Reporting
Phase
When
Steps
Reporting phase
Whenever a
1. Prepare financial statements.
company prepares
financial
statements.
directly from the adjusted trial
• Financial statements are prepared directly
balance.
• See pages 3-29 & 30 for illustrations of the reporting process.
28 / 40
Preparing Financial Statements from Adjusted Trial Balance
rrerenneiexnensos
29 / 40
Preparing Financial Statements from Adjusted Trial Balance
30 / 40
Accounting Cycle: (4) Closing
Phase
When
Steps
Closing phase
At the end of the
accounting period
1. Journalize (record) the closing
entries.
2. Post each closing entry to
appropriate ledger accounts.
3. Prepare a post-closing m
trial balance.
…
고
~
3개
필요
:
• Closing temporary accounts (nominal accounts) to permanent account
revenues
(real account).
rexpenses
,
Eero balance, thereby being
• In doing so, temporary accounts have a zero
*
!
ready for the next accounting period.
→ 다응 분기 때는 O 에서 시작해안찮다
ㅡ
!
• See pages 3-30 & 33 for illustrations of the closing process.
31 / 40
Journalizing Closing Entries
1. Debit each revenue account for its balance, and
Credit Income Summary for total revenue
Revenue
accounts
lance
lba
Income
Summary
t
credi
Expense
accounts
ce
lan
aebixba
2. Debit Income Summary for total expense, and
Credit each expense for its balance
32 / 40
Journalizing Closing Entries
☆ 여기서
퀴즈나용다 π ㅠ ☆
3. Debit Income Summary (Rev minus Exp), and
Credit Retained Earnings
(opposite J/E for the net loss case)
Revenue
accounts
Income
Summary
Expense
accounts
Retained
Earnings
②
O
쭈
.
[ 15
*
RE
d
5O
50
대
「
급다없다
에
4. Debit Retained Earnings and
Credit Dividends for the same amount
Dividends.
d
다
pemanent
account
막
.
.
33 / 40
Review Question 6: Closing
Big-Mouth Frog Corporation had revenues of €210,000, expenses of
€120,000, and dividends of €30,000.
When Income Summary is closed to Retained Earnings, the amount of the
debit or credit to Retained Earnings is a
a. debit of €60,000.
b. debit of €90,000.
c.
credit of €60,000.
d.
ㅇ
credit of €90,000.
34 / 40
Review Question 7: Adjusting and Closing Process
Shaggy Roberts operates a pet grooming business (a sole proprietorship)
in the suburbs. Presented below is selected (incomplete) data from the
worksheet at the end of the current financial year, Dec. 31 20x1.
Shaggy Roberts, Pet Grooming
Worksheet as at Dec 31 20x1
Account name
Cash
Accounts receivable
Unadjusted Trial balance
Adjustments
Dr $
Dr $
Cr$
Adjusted Trial balance
Cr$
Dr $
Cr$
7,000
51,000
Prepaid rent
Supplies
168,000
Equipment
300,000
Accumulated depreciation-equi
pment
95,000
Accounts payable
20,000
Wages payable
Shaggy Roberts, Capital Equivalent to Share Capital
Shaggy Roberts, Drawings
140,000
Equivalent to Dividends
Service revenue
Wages expense
190,000
610,000
100,000
Rent expense
50,000
Supplies expense
ㅡ
29,000
Depreciation expense
70,000
915,000
915,000
35 / 40
Review Question 7: Adjusting and Closing Process
The following additional information should be considered:
1. Supplies on hand at Dec. 31 are $18,000.
168 00 여 18
.
000
.
2. Depreciation on equipment that has not been recorded in December is
$3,550.
3. On Dec. 1 20x1, 3-months rent of $11,100 was paid in advance and was
debited to rent expense.
4. Wages earned by Shaggy’s assistant but unpaid, $1,600.
Required:
a) Journalize the adjusting entries (you may omit narrations).
b) Complete the worksheet.
c) Journalize the closing entries, you can use the worksheet to assist you.
36 / 40
Review Question 7: Adjusting and Closing Process
The following additional information should be considered:
1. Supplies on hand at Dec. 31 are $18,000.
AA ☆
2. Depreciation on equipment that has not been recorded in December is
Eapense
$3,550.
Rent
)
ㅅ
3 700
,
Prepaid
3 70 D
kent
,
3. On Dec. 1 20x1, 3-months rent of $11,100 was paid in advance and was
debited to rent expense. 원래대로면 처음에
6
>
-
4. Wages earned by Shaggy’s assistant but unpaid, $1,600.
□
꽁꽁히
읽어야 됨
:
Dr .
2
Renf EaP
cr
③
Renf
EXP
② 원래대로
① 잘못해서
.
.
cash
Required:
Prepaid
11 000
.
( 1000
Rent 11 000
,
Ref ExP
11 000
,
00
M
,
prepaid pent
3 700
.
.
ㅡ
둘
3
합되면
prepaid rent
(7
Rent expense
.
400
n 400
.
a) Journalize the adjusting entries (You may omit narrations).
b) Complete the worksheet.
c) Journalize the closing entries, you can use the worksheet to assist you.
37 / 40
Review Question 7: Adjusting and Closing Process
(a) Journalize the adjusting entries
Date
Account
Debit
12131 / 20 XI
Supplies expense
150
,
Credit
000
150
supplies
12131120 시
pepreciation
expense
2131
20시
prepaid
rent
Rent
3 550
,
n 400
,
7 400
expense
β i 1ol
wages
expensek
Wages Payable
000
3, 550
Acumulated depreciation
(
,
,
1 O 00
,
1
.
000
38 / 40
Review Question 7: Adjusting and Closing Process
(b) Complete the worksheet
Shaggy Roberts, Pet Groomer
Worksheet as at Dec. 31 20x1
Account name
Cash
Accounts receivable
Unadjusted Trial balance
Adjustments
Dr $
Dr $
Cr$
Adjusted Trial balance
Cr$
Dr $
Cr$
7,000
51,000
Prepaid rent
Supplies
168,000
Equipment
300,000
Accumulated depreciationequipment
95,000
Accounts payable
20,000
Wages payable
Shaggy Roberts, Capital
Shaggy Roberts, Drawings
190,000
140,000
Service revenue
Wages expense
610,000
100,000
Rent expense
50,000
Supplies expense
29,000
Depreciation expense
70,000
915,000
915,000
39 / 40
Review Question 7: Adjusting and Closing Process
Note: for sole proprietorship as well as partnership, a "capital" account is used to record both owners' contributed capital
(equivalent to share capital) and retained earnings. Thus, for closing entries, we use "capital " in place of "retained earnings.“
→ This is not examinable
(c) Journalize the closing entries
Date
[ 21311
Account
20
시
Debit
610 000
sunmary
encome
[ 2 / 31 1201
610 . 000
Servierevenue
(close
revenve
.
accounts
)
396
summary
ncome
Credit
,
n 00
wages expense
kent
101
42
expense
1n9
Supplies expense
pepreciation
12 /31 120 시
Iuome
Summa 에
Shaggy
[ 213 1 / 201
Retained
Roberts
,
이
들의 위치도 바뀔수
Capital
( Retained
.
"
,
Prawings
600
O 00
,
,
550
213 250
,
faming )
213 250
,
140 O 00
Earnings
shaggy
,
n3
expense
7
600
,
,
( share Capital
ordinary
에
( 40 000
.
)
40 / 40
BUSS 213: Intermediate Accounting 1
Revenue Recognition
Prof. G-Song Yoo
Conceptual Framework For Financial Reporting
Basics of IFRS: Accrual accounting concepts & Revenue recognition
Financial Accounting
Recording Transactions
(Internal user focus)
Inventories
Property Plant, and Equipment
Income statement
(aka, Statement of
profit or loss)
Retained earnings
statement
Statement of
financial position
CL, Provisions & Contingencies
(aka, Balance sheet)
Time-Value of Money
Statement of
Cash Flows
Non Current Liabilities
Comprehensive
income statement
Financial statement
analysis (External user focus)
Internal Control
Cash and Receivables
Learning Objectives
1.
Understand the fundamental concepts related to revenue recognition
and measurement.
2.
Understand and apply the five-step revenue recognition process.
3.
More discussion on Step 3 - Determine transaction price.
•
Textbook Reading: Ch.18, pg. 1 to 32.
•
We may discuss some issues in “Accounting for Revenue Recognition Issues (pg. 19 - 29)”
whenever required in the later topics.
3 / 48
Fundamentals of Revenue Recognition
Institutional Background
• Both the IASB and the FASB have indicated that the state of reporting for
revenue was unsatisfactory.
→ For IFRS, there was one general standard on revenue recognition.
Note that IFRS is principle-based.
→ For US GAAP, there were numerous standards related to revenue
recognition, which were inconsistent with one another.
Note that US GAAP is rule-based.
• In 2014, both the IASB and FASB issued a converged standard on
revenue recognition entitled Revenue from Contracts with Customers.
4 / 48
Overview of Revenue Recognition
5 / 48
Fundamentals of Revenue Recognition
Objective of New Revenue Recognition Standard:
• To establish the principles that an entity shall apply to report useful
information to users of financial statements about:
→ nature, amount, timing, and uncertainty of
ustomer
contract with a customer.
revenues and cash flows arising from a contract
Scope of New Revenue Recognition Standard:
• This standard is applied to a contract only if
1.
customer and
The counterparty to a contract is a customer,
2.
A customer has contracted with an entity to obtain goods and
services that are an output of the entity’s ordinary
ordinary activities in
exchange for consideration.
VS. gains from a sale of PPE.
6 / 48
Fundamentals of Revenue Recognition
Definition of a Contract:
• A contract is an agreement between two or more parties that create
enforceable rights
rights and obligations.
obligations
Q: What do we record if enforceable rights and obligations are not satisfied
~
in a given accounting period?
Satisfy 되면
→
No
joumal
entry
중
근데 들
하나나도
ent에
필요항
!
• A contract includes promises to transfer goods or services to a customer.
• It can be oral, written, or implied from customary business transaction.
Definition of a Customer:
• A customer is a party that has contracted with an entity to obtain goods
and services that are an output of the entity’s ordinary activities in
exchange for consideration.
7 / 48
Fundamentals of Revenue Recognition
The New Standard is based on an Asset-Liability Approach:
assets or
• Companies account for revenues based on the changes
changes in assets
liabilities due to contracts with customers.
liabilities
• Why is this important?
→ Consistent with the conceptual framework approach to recognition
(i.e., consistent with the definition and recognition of revenue).
Recap: Definition and Recognition Principle of Revenue
• Definition of Revenue: Increases in assets, or decreases in liabilities, that
result in increases in equity from an entity’s ordinary course of business,
other than those relating to contributions from holders of equity claims.
• Recognition of Revenue: An entity recognizes revenues in the accounting
period in which the performance obligation (to a customer) is satisfied.
8 / 48
Review Question 1: Process of Revenue Recognition
•
Number the steps in the correct order
Steps
Determine the transaction price
Identify the contract with customers
Order
3
1
Allocate transaction price to the separate
performance obligations
4
Identify the separate performance obligations
in the contract
2
Recognize revenue when each performance
obligation is satisfied
5
9 / 48
Review Question 2: Contract with a customer
•
On January 15, 2018, Bella Vista Company enters into a contract to
build custom equipment for ABC Carpet Company. The contract
specified a delivery date of March 1.
…
The equipment was not delivered until March 31. The contract required
full payment of €75,000 30 days after delivery. The revenue for this
contract should be
이니까 ! !
*
a.
b.
c.
ㅇ
d.
acemal
basis
recorded on January 15, 2018.
recorded on March 1, 2018.
recorded on March 31, 2018.
recorded on April 30, 2018.
10 / 48
Learning Objectives
1.
Understand the fundamental concepts related to revenue recognition
and measurement.
2.
Understand and apply the five-step revenue recognition process.
3.
More discussion on Step 3 - Determine transaction price.
11 / 48
Five-Step Process for Revenue Recognition
12 / 48
Illustration of Five-Step Process: A simple case
•
Assume that Airbus Corporation signs a contract to sell airplanes to Cathay
Pacific Airlines for €100 million.
13 / 48
Illustration of Five-Step Process: A simple case
•
Assume that Airbus Corporation signs a contract to sell airplanes to Cathay
Pacific Airlines for €100 million.
14 / 48
Illustration of Five-Step Process: A simple case
•
Assume that Airbus Corporation signs a contract to sell airplanes to Cathay
Pacific Airlines for €100 million.
15 / 48
Five-Step Process for Revenue Recognition: Performance Obligation
What is the performance obligation? Let’s discuss.
16 / 48
Five-Step Process for Revenue Recognition: Performance Obligation
Performance Obligation:
distinct product or service to a customer.
• A promise to provide a distinct
distinct when a customer is able to
• A product or service is distinct
1. benefit from a good or service on its own or
2. together with other readily available resources.
Example of a distinct product:
• If you buy a table from IKEA, you expect IKEA to
provide you with the following items:
- Wood panels, Screws, Bolts, and Other pieces
• If you are only given wood panel, the contract
would not be fulfilled.
• A bundle of goods make up one distinct
performance obligation.
17 / 48
Review Question 3: Performance Obligation
A☆ 복습
•
New Age Computers manufactures and sells pagers and radio paging
systems which include a 춰
180-day warranty on product defects.
It also sells an extended warranty which provides an additional two
years of protection. OnMay 10, it sold a paging system for €4,500 and
an extended warranty for another €1,400.
ㅡ
The journal entry to record this transaction would include
ㅡ
a. a credit to Warranty Revenue of €5,900.
b. a credit to Sales of €5,900.
c. a credit to Sales of €4,500 and a credit to Warranty Revenue of
€1,400.
d. a credit to Sales of €4,500 and a credit to Unearned Warranty
ㅇ
Revenue of €1,400.
18 / 48
Illustration of Five-Step Process: An extended case 1
•
Case 1 – BEAN and Tyler
Assume that Tyler Angler (a customer) orders a large cup of black coffee
costing $3 from BEAN (an entity). Tyler gives $3 to a BEAN barista, who pours
the coffee into a large cup and gives it to Tyler.
• Question: How much revenue should BEAN recognize on this transaction?
$
3
19 / 48
Illustration of Five-Step Process: An extended case 1
•
Step 1 - Identifying the Contract with Customers:
We first must determine whether a valid contract exists between BEAN and
Tyler. Here are the components of a valid contract, and how it affects BEAN
and Tyler.
commercial substance: Tyler gives cash for the coffee.
1. The contract has commercial
2. The parties have approved
approved the contract: Tyler agrees to purchase the coffee
and BEAN agrees to sell it.
3. Identification of the rights
rights of the parties is established: Tyler has the right to
the coffee and BEAN has the right to receive $3.
4. Payment
terms are identified: Tyler agrees to pay $3 for the coffee.
aymentterms
5. It is probable
probable that the consideration will be collected: BEAN receives $3
before it delivers the coffee.
From this information, it appears that BEAN and Tyler have a valid contract with
one another.
20 / 48
Illustration of Five-Step Process: An extended case 1
•
Step 2 - Identify the separate performance obligations:
BEAN must allocate the transaction price to all performance obligations.
→ The answer is straightforward—BEAN has a performance obligation to
provide a large cup of coffee to Tyler. BEAN has no other performance
obligation for any other good or service.
•
Step 3 - Determine the transaction price:
BEAN must determine the transaction price related to the sale of the coffee.
→ The price of the coffee is $3, and no discounts or other adjustments are
available. Therefore, the transaction price is $3.
•
Step 4 - Allocate the transaction price to the separate performance
obligations :
→ Given that BEAN has only one performance obligation, no allocation is
necessary.
21 / 48
Illustration of Five-Step Process: An extended case 1
•
•
Step 5 - Recognize revenue when each performance obligation is satisfied:
BEAN satisfies its performance obligation when Tyler obtains control
control of the
coffee.
control of the coffee has passed to Tyler:
The following indicators that control
a. BEAN has the right to payment for the coffee.
b. BEAN has transferred legal
legal title to Tyler.
c. BEAN has transferred physical possession of the coffee.
rewards of
risks (e.g., he might spill the coffee) and rewards
d. Tyler has significant risks
ownership (he gets to drink the coffee).
e. Tyler has accepted the asset.
→ BEAN should recognize $3 in revenue from this transaction when Tyler
receives the coffee.
22 / 48
Illustration of Five-Step Process: An extended case 2
•
Case 2
The following day, Tyler orders another large cup of coffee for $3 and also
purchases two bagels at a price of $5. The barista provides these products and
Tyler pays $8.
• Question: How much revenue should BEAN recognize on this transaction?
8
23 / 48
Illustration of Five-Step Process: An extended case 2
•
Step 1 - Identifying the Contract with Customers:
A valid contract exists as it meets the five conditions necessary for a contract
to be enforceable as discussed in the previous example.
•
Step 2 - Identify the separate performance obligations :
BEAN must determine whether the sale of the coffee and the sale of the two
bagels involve one or two performance obligations.
Multiple performance obligations exist when the following two conditions are
satisfied:
1. BEAN must provide a distinct product or service.
•
2.
BEAN’s products are distinct within the contract. If the performance
obligation is
a) not highly dependent on, or
b) interrelated with
other promises in the contract, then each performance obligation
should be accounted for separately.
→ BEAN has two performance obligations.
24 / 48
Illustration of Five-Step Process: An extended case 2
•
Step 3 - Determine the transaction price:
→ The transaction price is $8 ($3 + $5).
•
Step 4 - Allocate the transaction price to the separate performance
obligations :
→ Each obligation is distinct and not interrelated (and priced separately);
thus, no allocation of the transaction price is necessary.
→ The coffee sale is recorded at $3 and the sale of the bagels is priced at $5.
•
Step 5 - Recognize revenue when each performance obligation is satisfied:
→ BEAN has satisfied both performance obligations when the coffee and
bagels are given to Tyler (control of the product has passed to the customer).
→ BEAN should recognize $8 in revenue from this transaction when Tyler
receives the coffee and bagel.
25 / 48
Illustration of Five-Step Process: An extended case 3
•
Case 3
BEAN is interested in stimulating sales of its Smoke Jumper coffee beans on
Tuesdays, a slow business day for the store. Normally, these beans sell for $10
for a 12-ounce bag, but BEAN decides to cut the price by $1 when customers
buy them on Tuesdays (the discounted price is now $9 per bag). Tyler has
come to the store on a Tuesday, decides to purchase a bag of Smoke Jumper
beans, and pays BEAN $9.
ㅡ
ㅡ
ㅡ
ㅡ
• Question: How much revenue should BEAN recognize on this transaction?
26 / 48
Illustration of Five-Step Process: An extended case 3
•
Step 1 - Identifying the Contract with Customers:
A valid contract exists as it meets the five conditions necessary for a contract
to be enforceable as discussed in the previous example.
•
Step 2 - Identify the separate performance obligations :
→ BEAN has a performance obligation to provide a bag of Smoke Jumper coffee
beans to Tyler.
→ BEAN has no other performance obligation to provide a product or service.
ㅡ
ㅡ
ㅡ
•
Step 3 - Determine the transaction price:
q not $10.
→ The transaction for a bag of Smoke Jumper beans sold to Tyler is $9,
27 / 48
Illustration of Five-Step Process: An extended case 3
•
Step 4 - Allocate the transaction price to the separate performance
obligations :
→ There is only one performance obligation, no allocation is necessary.
ㅡ
ㅡ
•
Step 5 - Recognize revenue when each performance obligation is satisfied:
@ performance obligationsd when Tyler receives the
→ BEAN has satisfied umm
both
Smoke Jumper coffee beans (control of the product has passed to the
customer).
ㅡ
a
→
BEAN should recognize $9g in revenue from this transaction
28 / 48
Illustration of Five-Step Process: An extended case 4
•
Case 4
Transaction price is allocated to the various performance obligations based on
standalone selling
relative standalone
their relative
selling prices.
prces
BEAN offers customers a $2 discount on the purchase of a large cup of coffee
when they buy a bag of its premium Motor Moka beans (which normally sell
for $12) at the same time. As indicated earlier, a large cup of coffee normally
retails for $3 at BEAN.
• Question: How much revenue should BEAN recognize on this transaction?
29 / 48
Illustration of Five-Step Process: An extended case 4
•
Step 1 - Identifying the Contract with Customers:
A valid contract exists as it meets the five conditions necessary for a contract
to be enforceable as discussed in the previous example.
•
Step 2 - Identify the separate performance obligations :
→ The bag of Motor Moka beans and the large cup of coffee are distinct from
one another and are NOT highly dependent on or highly interrelated with
the other.
→ BEAN can sell a bag of the Motor Moka beans and a large cup of coffee
separately. Furthermore, Tyler benefits separately from both the large cup
of coffee and the Motor Moka coffee beans.
tww performance obligation(s).
→ BEAN has two
ㅡ
풋
•
Step 3 - Determine the transaction price:
→ BEAN’s transaction price is $13 ($12 for the bag of Motor Moka beans and
$1 for the large cup of coffee).
30 / 48
Illustration of Five-Step Process: An extended case 4
•
Step 4 - Allocate the transaction price to the separate performance
obligations :
→ BEAN allocates the transaction price to the two performance obligations
based on their relative standalone selling prices as follows.
Standalone
Product
Beans (one bag)
Large cup of coffee
Total
→
Selling Price
12
$
$12
54
Percentage
15 )
( 12 ÷ ÷
% ($12
80
80%
$15)
33
20
%
20%
15
$15
100%
($3 ÷ $15)
Allocated price
10 40
%)
$ B X ×8080%)
( ($13
$ 10.40
.
60 ( ($13
% )
X
$ 3.
2.60
×2020%)
2
.
$ 13.00
Total transaction price ($13) is allocated $10.40 to the bag of Motor Moka
beans and $2.60 to the large cup of coffee.
31 / 48
Illustration of Five-Step Process: An extended case 4
•
Step 5 - Recognize revenue when each performance obligation is satisfied:
→ BEAN has satisfied both performance obligations as control of the bag of
Motor Moka beans and the large cup of coffee has passed to Tyler.
→ BEAN should recognize revenue of $13, comprised of revenue from the
10 40 and the sale of the large cup of
sale of the Motor Moka beans at $10.40
2 00
coffee at $2.60.
,
.
.
32 / 48
Review Question 4: Transaction price
•
Bella Pool Company sells prefabricated pools that cost £80,000 to
customers forㅇ
£144,000. The sales price includes an installation fee,
which is valued at £20,000. The fair value of the pool is £128,000.
ㅡ
ㅡ
ㅡ
The installation is considered a separate performance obligation and is
expected to take 3 months to complete. The transaction price allocated
to the pool and the installation is
uma
"8
pool
revenue
(
응)
installation [이건 unearned
"
revenue
임
3
달 걸리니까 !
)
…
a. £124,541 and £19,459 respectively.
ㅇ
b. £144,000 and £20,000 respectively.
c. £128,000 and £20,000 respectively.
d. £110,702 and £17,298 respectively.
sellingprnice
installationfepoduct
20
0
으
o
allocated price
pefcentage
ㅡ
ㅡ
000
,
128 000
,
」
148
,
000
installafiony 144
144
.
20
.
000 X
,
000
D 00
여
148 0
.
33 / 48
Review Question 5: Revenue recognition
•
t 여기선 price
( 팔 때도
allocation 필요없음 ! !
가격이
같으니까
…
)
Seadrill Engineering licensed software to oil-drilling firms forㅇ
5 years. In
addition to providing the software, the company also provides
consulting services and support to ensure smooth operation of the
software. consulting
ㅡ
ㅡ
120 000
.
t
.r.
300 000
,
.
.. .
The total transaction price is €420,000. Based on standalone values, the
company estimates the consulting services and support have a value of
€120,000 and the software license has a value of→
€300,000.
O
δ
-
ㅡ
Assuming the performance obligations are not interdependent, the
journal entry to record the transaction includes
ㅡ
a. a credit to Sales Revenue for €300,000 and
ㅇ
a credit to Unearned Service Revenue of $120,000.
b. a credit to Service Revenue of €120,000.
c. a credit to Unearned Service Revenue of €120,000.
d. a credit to Sales Revenue of €420,000.
34 / 48
Learning Objectives
1.
Understand the fundamental concepts related to revenue recognition
and measurement.
2.
Understand and apply the five-step revenue recognition process.
3.
More discussion on Step 3 - Determine transaction price.
35 / 48
Step 3 - Determining Transaction Price
Transaction Price:
☆
☆
Amount of consideration that a@
company
expects to receive from aD
customer.
compay
나
→
~
ㅡ
Transaction price may not be the same as a company's suggested retail
price (e.g., MSRP)
들이
바뀌면
안됨 ! !
• In a contract is often easily determined because customer agrees to pay a
fixed amount (like the BEAN cases).
• In some cases, however, companies may have to take into account:
a.
Variable consideration
b.
Time value of money
c.
Non-cash consideration
d.
Consideration paid or payable to customers
36 / 48
Transaction Price: Variable consideration
☆ 다시
Variable Consideration:
Price dependent on future events such as price increases, volume discounts,
rebates, credits, performance bonuses, or royalties.
• Companies estimate amount of revenue to recognize:
•
a.
Expected value (or Probability-weighted amount)
b.
Most likely amount - The single most likely amount in a range of
possible consideration outcomes
Companies only recognize variable consideration if it is reasonably assured
that it will be entitled to the amount (e.g., they estimate probabilities
based on their prior experience).
37 / 48
Transaction Price: Variable consideration
•
Case: Variable consideration
Peabody Construction Co. enters into a contract with a customer to build a
warehouse for $100,000, with a performance bonus of $50,000 that will be
paid based on the timing of completion.
→ The amount of the performance bonus decreases by 10% per week for every
week beyond the agreed-upon completion date. The contract requirements
are similar to contracts that Peabody has performed previously, and
management believes that such experience is predictive for this contract.
→ Management estimates
that there is a 60% probability that the contract will
be completed by the agreed-upon completion date, a 30% probability that it
will be completed 1 week late, and only a 10% probability that it will be
completed 2 weeks late.
• Question: How should Peabody account for this revenue arrangement?
38 / 48
Transaction Price: Variable consideration
Under the probability-weighted method, the total transaction price will be
computed as follows:
15
On time: 60
60% chance of $150,000
=
145
1 week late: 30
30% chance of $145,000
=
140
2 weeks late: O10% chance of $140,000
=
$ 90
90,000
43 500
$ 43,500
14 000
14,000
147 500
$147,500
O
,
000
,
,
,
Under the Most likely outcome, if management believes they will meet the
deadline and receive the $50,000 bonus, the total transaction price would be?
(
$
50.000 (
theoutcome with60
%
probabili 5 y )
39 / 48
Transaction Price: Time value of money
Time value of money:
The details of time value of money will be discussed in later
topics (in association with Non-Current Liabilities).
time and money,
• It indicates a relationship between time
as $100 today does
money
not have the same value as $100 to be received in 2032.
• When contract (sales transaction) involves a significant financing
component:
•
a.
Interest accrued on consideration to be paid over time.
b.
Fair value determined either by measuring the consideration
received or by discounting the payment using an imputed interest
rate.
c.
Company reports as interest expense or interest revenue.
However, time value of money can be ignored for a short-term contract.
(e.g., interests for the next three months are not reported as their
present values)
40 / 48
Transaction Price: Non-cash consideration
Non-cash consideration:
• Examples:
a.
Companies sometimes receive contributions (e.g., donations and gifts).
b.
Customers sometimes contribute goods or services, such as equipment
or labor, as consideration for goods provided or services performed.
fairvalue
• Companies generally recognize revenue on the basis of the fair
value of
received rather than the fair value of what is provided.
what is received,
Because transaction price is amount of consideration that a company expects to
receive from a customer.AA
입장에서는
S $
Company provides a product with
FV of $10
Customer
Company
소비자
vanv
o
.
Case A: Receives Cash $10
Revenne " s
$
lo농비자입장
Case B: Receives services with FV of $8
Revenue
:
$8
사입장
41 / 48
Transaction Price: Consideration paid or payable
Consideration paid or payable:
• Examples:
a.
discounts, volume rebates, coupons, free products, or services.
• In general, these elements reduce the consideration received and the
revenue to be recognized.
Again, transaction price is amount of consideration that a company expects to
receive from a customer.
• See the extended case 3 in prev. slide (price discount). The transaction for a
bag of Smoke Jumper beans sold to Tyler is $9, not $10.
42 / 48
Review Question 6: Revenue Recognition Case
•
Windsor Windows manufactures and sells custom storm windows for
enclosed porches.
•
Windsor also provides installation service for the windows.
•
The installation process does NOT involve changes in the windows, so this
service can be provided by other vendors.
43 / 48
Review Question 6: Revenue Recognition Case
Windsor enters into the following contract onJ
Jun. 1, 2021, with a local
homeowner.
•
•
•
The customer purchases windows for a price of £4,700 and chooses Windsor
to do the installation. Windsor charges the same price for the windows
irrespective of whether it does the installation or not.
The price of the installation service is estimated to have a fair value of
£1,200.
rcogs
The customer pays Windsor £4,000 (which equals the fair value of the
windows, which have a cost of £2,300) upon delivery and the remaining
balance upon installation of the windows.
The windows are delivered on,
Aug. 1, 2021, Windsor completes installation
on0
Sep. 15, 2021, and the customer pays the balance due.
ㅡ
ㅡ
•
Prepare the journal entries for Windsor in 2021 (Round amounts to nearest $).
44 / 48
Review Question 6: Revenue Recognition Case
Jun. 1, 2021
Aug. 1, 2021
Sep. 15, 2021
No
entry
-
neither
party
has
perfomeduadercontract
try required
태
Eatru
required
45 / 48
Review Question 6: Revenue Recognition Case
For Aug. 1, 2021
Q: How many performance obligation(s) does Windsor have?
2
Kdelivem
of aindows
xinstallation
Q: Do the price allocation
Standalone
Selling Price
2300
windows
Windows
/ 2oo
Installation
installation
n
@0v
4$4,000
.
1
200
1,200
,
200
5$5,200
,
Percentage
76 92 %
76.92%
.
÷ 5200 )
( 4000
($4k
÷ $5.2k)
Allocated Price
$
÷ 5200 )
23 08 % ( 1200
23.08%
($1.2k ÷ $5.2k)
Rirevenue
85
1,085.00
$
.
.
0.
(
.
%
100
100%
)
*
00 × n 6X92
3,615.00(4n76.92%
4,700
3 615
맞응
23.08% X 4,700
DOO
44,700.00
,
46 / 48
Review Question 6: Revenue Recognition Case
For Aug. 1, 2021
Q: Do the journal for Aug. 1 2021 transaction
Cash
4,000
Accounts Receivable
cash
Sales Revenue
700
4 000
3,615
.
1700
Receivable Service Revenue
Accounfs Unearned
1,085
Revenue
3 615
Sewice
CostOnearned
of Goods
SoldRevenue
1 085
Sales
Inventory
soldDAA
잊지
말기
Cost of Go ds
,
.
2
,
2,300
2,300
300
0
2
,
300
cnventory
47 / 48
Review Question 6: Revenue Recognition Case
For Sep. 15, 2021
Q: Do the journal for Sep. 15 2021 transaction
0
Do
cash
CashUneamed
Sevice Revenuer
Unearned Service
Receivable
Sewice Revenue
1 085
700
,
1,085
Receivable
ServiceAccounts
Revenue
1,085
Accounts Receivable
700
⑤
Qn
확인
48 / 48
BUSS 213: Intermediate Accounting 1
Statement of Financial Position
Prof. G-Song Yoo
Conceptual Framework For Financial Reporting
Basics of IFRS: Accrual accounting concepts & Revenue recognition
Financial Accounting
Recording Transactions
(Internal user focus)
Inventories
Property Plant, and Equipment
Income statement
(aka, Statement of
profit or loss)
Retained earnings
statement
Statement of
financial position
CL, Provisions & Contingencies
(aka, Balance sheet)
Time-Value of Money
Statement of
Cash Flows
Non Current Liabilities
Comprehensive
income statement
Financial statement
analysis (External user focus)
Internal Control
Cash and Receivables
Learning Objectives
1.
Explain the uses, limitations, and content of the statement of financial
position.
2.
Prepare a classified statement of financial position.
•
Textbook Reading: Ch.5, pg. 1 to 15.
3 / 30
Learning Objectives
1.
Explain the uses, limitations, and content of the statement of financial
position.
2.
Prepare a classified statement of financial position.
4 / 30
Overview of the Statement of Financial Position
Statement of Financial Position:
• Reports assets, liabilities, and equity at a specific date
(e.g., as of Dec 31, 2021 or as of Mar 31, 2022)
• Provides information about resources, obligations to creditors, and
equity in net resources.
• Therefore, it helps in predicting amounts, timing, and uncertainty of
future cash flows.
Q: Which element of the Qualitative Characteristics matches this description?
Predictive
Value
→
ingredient
of
relevance
5 / 30
Statement of Financial Position Illustrated
Two
culumn
foromat
*
는
rnutt* *
-
6 / 30
Statement of Financial Position Illustrated
7 / 30
Usefulness of the Statement of Financial Position
Usefulness of the Statement of Financial Position:
• Computing the rate of return
(e.g., Return on Asset / Return on Equity)
• Evaluating the capital structure
(e.g., Debt to Equity ratio)
• Assessing risk and future cash flows
(e.g., Cash Debt Coverage ratio)
• Assessing the company’s
몰
non - tiguidbuildin
바꿀수있는지
→ Liquidity연금으로
short term
…
-
(e.g., Current ratio / Quick ratio)
longtern
→ Solvency, and
(e.g., Debt to Equity ratio / Debt to Asset ratio)
→ Financial Flexibility
(e.g., Cash Debt Coverage)
-
니만 낸 부채를 현금로 수 있는지 …
낼
See pg. 5. 30 and 31 for the details of the above ratios.
They will be discussed in each relevant topic.
8 / 30
Limitations of the Statement of Financial Position
Limitations of the Statement of Financial Position:
historical cost
• Most assets and liabilities are reported at historical
cost.
Q: Which element of the Qualitative Characteristics matches this description?
measurement
principles
• Use of judgments and estimates.
depreciation
'
estimated
depreciation
• Many items of financial value are omitted.
.
cial
responsibility
등동
9 / 30
Review Question 1: Statement of Financial Position
________ describes the amount of time that is expected to lapse
until an asset is realized or otherwise converted into cash or until a
liability has to be paid.
a. Financial flexibility.
b. Profitability.
c. Liquidity.
ㅇ
d. Solvency.
10 / 30
Review Question 2: Statement of Financial Position
A limitation of the statement of financial position that is NOT also a
limitation of the income statement is.
a. the use of judgments and estimates.
b. omitted items.
c. the numbers are affected by the accounting methods
employed.
d. valuation of items at historical cost.
O
11 / 30
Elements of the Statement of Financial Position
ASSET
LIABILITY
EQUITY
• Resource controlled by the entity.
• Result of past events.
• Future economic benefits are expected to flow to the entity.
This definition is from the Conceptual Framework.
12 / 30
Elements of the Statement of Financial Position
ASSET
LIABILITY
EQUITY
• Present obligation of the entity.
• Arising from past events.
• Settlement is expected to result in an outflow of resources
embodying economic benefits.
13 / 30
Elements of the Statement of Financial Position
ASSET
LIABILITY
EQUITY
• Residual interest in the assets of the entity after deducting all its
liabilities.
14 / 30
Classification in the Statement of Financial Position
Classification:
• Statement of Financial Position accounts are classified in terms of Asset,
Liability, and Equity
• Companies group accounts with similar characteristics and separate
accounts with different characteristics.
Q: Which element of the Qualitative Characteristics matches this description?
understandability
Sub-Classification (for illustration):
Note that most companies report current assets first on the statement of financial
position (see a box on textbook pg. 5-6).
15 / 30
Current Assets
Current Assets:
Cash and other assets a company expects to convert into cash, sell, or
consume either in one
one year or in the operating cycle, whichever is longer.
year
LCNRV
.
*
*Cash equivalents: short-term, highly liquid investments that mature three months or less.
b
이리지만
현금은
현금으로
AR
봉
100
× les Revcnne
100
Bad deht EXP
Alovance
0
머셉디
or Do
t,
16 / 30
ㅨ
Review Question 3: Current Assets
Stine Corp.'s trial balance reflected the following account balances at Dec. 31,
2019:
Accounts receivable (net)
R$24,000
Trading securities
6,000
;
Accumulated depreciation—equipment
15,000
Cash
21,000
팔린다고 가정
Inventory →보통 1 년
30,000
더
Equipment
25,000
Patent
4,000 기얘도 년 넘게 쓰
Prepaid expenses
2,000
Land held for future business site
18,000
+
+
+
안에
-
+
…
쓰니까
-
←
~
→
1
ㅡ
Liabilityteauition
@
In Stine's Dec. 31, 2019 statement of financial position, the current assets total is
」
24 000 + 6000
+
21000
+
30000 + 2000
.
⑩
83
.
000
17 / 30
Non-Current Assets
Non-Current Assets generally consist of
• Long-Term Investments
• Property, Plant, and Equipment (PPE)
• Intangible Assets
• Other Assets (which vary widely in practice)
18 / 30
Non-Current Assets: Long-Term Investments
Long-Term Investments:
• Securities
(e.g., bonds, ordinary shares, or long-term notes)
• Tangible assets not currently used in operations
(e.g., land held for speculation)
스트스미래를
• Special funds
위든
(e.g., sinking fund, pension fund, or plant expansion fund)
ㅡ
• Non-consolidated subsidiaries or associated companies
19 / 30
Non-Current Assets: Long-Term Investments
A
다시
듣기
• Companies group investments in debt and equity securities into three
separate portfolios for valuation and reporting purposes:
Portfolio
Held-forCollection
Type
Valuation
기말 범위
Debt
Trading
Debt or Equity
Non-Trading
Equity
Equity
Amortized Cost
w
Manket
Classification
Current or
Non-current
value
Fair Value
Current
Fair Value
Current or
Non-current
ㅡ
Further details (Textbook chapter 17) will be covered in BUSS 214 – Intermediate Accounting 2.
20 / 30
Non-Current Assets: Property, Plant, and Equipment
Property, Plant, and Equipment:
Tangible long-lived assets (to be) used
used in the regular operations of the
business.
ynof for
salesinvestment
• Physical property such as land, buildings, machinery, furniture, tools, and
wasting resources (minerals).
land a company either depreciates (e.g., buildings)
• With the exception of land,
or depletes (e.g., oil reserves) these assets.
동물들도
PP 팅
21 / 30
Non-Current Assets: Intangible Assets
A
다시듣기
Intangible Assets:
Lack physical substance and are not financial instruments.
• Patents, copyrights, franchises, goodwill, trademarks, trade names, and
?
customer lists.
뭐라고 ? ?
이게
→
-
…
• Amortize limited-life intangible assets over their useful lives.
• Periodically assess indefinite-life intangibles for impairment.
Further details “may” be covered in BUSS 214 – Intermediate Accounting 2.
22 / 30
Non-Current Assets: Other Assets
Other Assets:
Items vary in practice. Can include
• Long-term prepaid expenses.
• Non-current receivables.
• Assets in special funds.
• Property held for sale.
estricted cash*or securities.
• Restricted
"
restricted
b
cash
(
Us
held
"
regular
for
a
) cash
particular
pupoes
for
a
longtime
23 / 30
Review Question 4: Current Assets
지전에퀴제염음
Fulton Company owns the following investments:
Trading securities (fair value)
Non-trading securities (fair value)
Held-for-collection securities (amortized cost)
€70,000
€35,000
€47,000
Fulton will report investments in its current assets section of
a. €0.
b. exactly €70,000.
c.
O
€70,000 or an amount greater than $70,000,
depending on the circumstances.
d. exactly €105,000.
24 / 30
Current Liabilities
Current Liabilities:
Obligations that a company generally expects to settle in its normal
operating cycle or one year
year, whichever is longer. Includes
one
급통
1년
…
• Payables resulting from the acquisition of goods and services.
• Collections received in advance for the delivery of goods or performance
of services.
• Other liabilities whose liquidation will take place within the operating
cycle or one year.
25 / 30
Non-Current Liabilities
Non-Current Liabilities:
Obligations that a company does NOT reasonably expect to liquidate within
the longer of one year or the normal operating cycle. Three types
• Obligations arising from specific financing situations.
V
• Obligations arising from the ordinary operations of the company.
• Obligations that depend on the occurrence or non-occurrence of one or
more future events to confirm the amount payable, or the payee, or the
date payable.
26 / 30
Equity
Equity:
• Share Capital - The par or stated value of shares issued. It includes
ordinary shares (sometimes referred to as common shares) and
preference shares (sometimes referred to as preferred shares).
• Share Premium - The excess of amounts paid-in over the par or stated
value.
• Retained Earnings - The company’s undistributed earnings.
• Accumulated Other Comprehensive Income *- The aggregate amount of
the other comprehensive income items.
• Treasury Shares - Generally, the amount of ordinary shares repurchased.
• Non-Controlling Interest (minority Interest)*- A portion of the equity of
subsidiaries not owned by the reporting company.
Items with asterisk* will be covered in BUSS 214 – Intermediate Accounting 2.
27 / 30
Learning Objectives
1.
Explain the uses, limitations, and content of the statement of financial
position.
2.
Prepare a classified statement of financial position.
28 / 30
Preparation of the Statement of Financial Position
Account Form vs. Report Form:
IFRS does not specify the order or format of the items in the statement.
• Two general forms
1.
Accounts Form:
Assets on left side and Equity and Liabilities on right side
2.
Report form:
Listing Assets, followed by Equity and Liabilities directly below, on
the same page (see the Hyundai Motor case).
29 / 30
Review Question 5: Statement of Financial Position
ASSETS
EQUITY and LIABILITIES
a.
Investments
f.
Share capital
b.
Plant and equipment
g.
Share premium
c.
Intangibles
h.
Accumulated comprehensive income
d.
Other assets
i.
Retained earnings
e.
Current assets
j.
Non-current liabilities
k.
Current liabilities
l.
Items excluded from statement of financial position
Using the letters above, classify the following accounts according to the preferred
and ordinary statement of financial position presentation.
___ 1. Bond Sinking fund
___ 7. Securities owned by another company
which are collateral for that company's note
___ 2. Prepaid pension cost
___ 8. Trading securities
___ 3. Restricted retained earnings
___ 9. Inventory
___ 4. Current maturity of long-term debt
___ 10. Mortgage payable
___ 5. Bonds payable (due in 3 years)
___ 11. Patent
___ 6. Unrealized gain on non-trading securities
___ 12. Unearned rent revenue
30 / 30
BUSS 213: Intermediate Accounting 1
Cash and Receivables
Prof. G-Song Yoo
Conceptual Framework For Financial Reporting
Basics of IFRS: Accrual accounting concepts & Revenue recognition
Financial Accounting
Recording Transactions
(Internal user focus)
Inventories
Property Plant, and Equipment
Income statement
(aka, Statement of
profit or loss)
Retained earnings
statement
Statement of
financial position
CL, Provisions & Contingencies
(aka, Balance sheet)
Time-Value of Money
Statement of
Cash Flows
Non Current Liabilities
Comprehensive
income statement
Financial statement
analysis (External user focus)
Internal Control
Cash and Receivables
Learning Objectives
1.
Indicate how to report cash and related items.
2.
Define receivables and explain accounting issues related to their
recognition.
3.
Explain accounting issues related to valuation of accounts receivable.
4.
Explain accounting issues related to recognition and valuation of notes
receivable (skim).
5.
Explain additional accounting issues related to accounts and notes
receivables.
•
Textbook Reading: Ch.7 (excluding pg. 15 to 19: Recognition of notes receivable).
3 / 73
Learning Objectives
1.
Indicate how to report cash and related items.
2.
Define receivables and explain accounting issues related to their
recognition.
3.
Explain accounting issues related to valuation of accounts receivable.
4.
Explain accounting issues related to recognition and valuation of notes
receivable.
5.
Explain additional accounting issues related to accounts and notes
receivables.
4 / 73
Cash and Cash Equivalent in the Statement
5 / 73
Cash
What is “Cash” in financial accounting?
• Most liquid asset.
• Standard medium of exchange.
• Basis of measuring and accounting for all other items.
→ Monetary
unit assumption
Monetary unit
→ Cash-Basis of Accounting (applied for the Cash Flow Statement only)
• Current asset.
6 / 73
Cash
예의에
Examples of Cash:
• Coin, currency,
-
not cwin
이렇목하기
!
AA
)
만
-
→ Note that crypto-currencies (e.g., Bitcoin and Dogecoin) are NOT
classified as cash under the current IFRS. They are instead recognized as
investments (financial assets) or inventories (depending on the purpose).
• available funds on deposit at the bank, money orders,
• certified checks, cashier’s checks, personal checks,
• bank drafts and savings accounts.
)
애내ㆍ안중요
잘보기
1 ÷
Non-Cash Items:
☆
• Postdated checks, and I.O.Us
→ Accounting Receivables
• Travel advances to employees
→ Other Receivables or Prepaid Expenses
• Postage stamps on hand
→ Supplies or Prepaid Expenses
7 / 73
Review Question 1: Cash
Kraft Enterprises owns the following assets at December 31, 2021
Items
Amount
Cash in bank – saving accounts
Cash on hand
Tax refund due
$68,000
$9,300
-
>Receivable (cash아님 )
Checking account balance
Postdated checks
>
-
$31,400
$17,000
$750
AR
Certificate of deposit (CD) (180-day)
$90,000
하지만
받기는
안에
수는난
4
O
뜰
O
X
당장받을
What amount should be reported as cash?
총일
8 / 73
Reporting Cash
Cash Equivalents:
A short-term, highly liquid investments that are both
• Readily convertible to cash, and
• so near their maturity that they present insignificant risk of changes in
value. Generally, investments with original maturities withthree
three months
or less.
• Examples: Government bonds, commercial paper, and money market
fund (MMF).
d
ㅡ
ㅡ
.
ㄲ
묑
월 예
funads
nvest fundy
↑
mutual
fn 사
않
…
9 / 73
Reporting Cash
Restricted Cash:
restricted cash from “regular” cash for reporting
• Companies segregate restricted
purpose.
• Examples, restricted for:
Plant expansion, retirement for long-term debt, and compensating
balance (see below for example).
10 / 73
Reporting Cash
강사합니다
Bank Overdrafts:
Company sometimes writes a check for more than the amount in its cash
account.
여라
*
curreni liability.
• Generally reported as a current
liabiliiy
이건
너무
용
안
)
• However, they can be included as “a component of cash” if such
overdrafts are repayable on demand* and are an integral part of a
company’s cash management (e.g., establishing off-setting arrangements
against other accounts at the same bank).
N
[
• Overdrafts not meeting those two conditions should be reported as a
current liability.
)
*Repayable on demand:
The bank can ask for the money back in full, at any time.
11 / 73
Summary of Cash and Cash Equivalents
12 / 73
Learning Objectives
1.
Indicate how to report cash and related items.
2.
Define receivables and explain accounting issues related to their
recognition.
3.
Explain accounting issues related to valuation of accounts receivable.
4.
Explain accounting issues related to recognition and valuation of notes
receivable.
5.
Explain additional accounting issues related to accounts and notes
receivables.
13 / 73
Receivables
Receivables - Claims held against customers and others for
money, goods, or services.
oral promises of the
Oral
purchaser to pay for goods
and services sold.
Written
written promises to pay a
certain sum of money on a
specified future date.
Accounts
Receivable
Notes
Receivable
L
가
이지
주로
"
있음
14 / 73
Receivables
Non-Trade Receivables:
Examples are
• Advances to officers and employees.
• Advances to subsidiaries.
• Deposits paid to cover potential damages or losses.
• Deposits paid as a guarantee of performance or payment.
• Dividends and interest receivable.
• Claims against: Insurance companies for casualties sustained, defendants
under suit, governmental bodies for tax refunds, etc.
15 / 73
Recognition of Receivables
Recognition of Receivables (when do we record receivables?):
• Accounts receivable generally arise as part of a revenue arrangement.
• Revenue recognition principle:
A company should recognize revenue when it satisfies its performance
obligation by transferring the good or service to the customer.
• We will focus on sales revenues and related receivables.
16 / 73
Recap: Revenue Recognition Principle
17 / 73
Recognition of Receivables
Illustration
• Lululemon Athletica, Inc. sells a yoga outfit to Jennifer Burian for $100 on
account, the yoga outfit is transferred when Jennifer obtains control of
this outfit.
• When this change in control occurs, Lululemon should recognize an
account receivable and sales revenue.
Lululemon makes the following entry.
Accounts Receivable
Sales Revenue
100
100
(Date(s) and Narration(s) are omitted for brevity)
In the next slide, we will again discuss five indicators that control of the yoga
outfit has passed to Jennifer.
18 / 73
Recognition of Receivables
Key indicators that Lululemon has transferred and that Jennifer has
obtained control of the yoga outfit:
a. Lululemon has the right to payment
payment from Jennifer.
b. Lululemon has transferred legal
legal title to Jennifer.
c. Lululemon has transferred physical possession of the yoga outfit.
d. Lululemon no longer has significant risks
risks and rewards
rewards of ownership of
the yoga outfit.
e. Jennifer has accepted the yoga outfit.
19 / 73
Measurement of Receivable
Measurement of Receivable (i.e., transaction price of receivable):
• The transaction price is the amount of consideration that a company
expects to receive from a customer in exchange for transferring goods or
services.
• While it often comes with a fixed amount, companies must take into
account variable consideration. This is because the price of a good or
service is sometimes dependent on future events.
• These future events often include such items as discounts, returns and
allowances, rebates, and performance bonuses.
20 / 73
Measurement of Receivable: Trade Discounts
Trade Discounts:
• are a % reduction in the list price of inventory sold and are NOT recorded in
the records of either the buyer or the seller, the net
net amount is recorded.
할인된 패센트를작성함과
• They are not contingent on any further action on the part of the buyer.
• This is used to
- avoid frequent changes in catalogs.
- alter prices for different quantities purchased.
- hide the true invoice price from competitors.
10 %
Discount
for new
Retail
Store
Customers
21 / 73
Review Question 2: Trade Discounts
Illustration:
• Assume Alpha. Corp, an equipment distributor, sells a piece of machinery with
a list price of £800,000 to Beta Inc.
• Alpha Corp. normally sells this type of equipment for 90% of list price.
• Beta Inc. paid £850,000, including sales taxes.
How much should be recorded as sales revenue?
a.
O
£720,000
b.
£765,000
c.
£800,000
d.
£850,000
신경
가격
원래
720
안 씀
000
.
세금 포함된 가격도
,
신경 안 씀
A☆
Pr cash
850
Cr sales
.
cr
.
,
000
ReV
n 20 000
,
.
sales taxes
Payable
130
,
000
22 / 73
Measurement of Receivable: Sales Discounts
Cash Discounts (or Sales Discounts) ≠ Trade Discounts (discussed ealier):
• Offered to induce prompt payment.
EoM 은
-
안
물어봉
• With (credit) terms such as 2/10,5
n/30, 2/10, E.O.M., or net 30, E.O.M.
ㅡ
-
(Can you recall how to read these credit terms?)
d
물어볼게임 ! !
Gross Method vs. Net Method (see the next slide)
얘내
•
23 / 73
Measurement of Receivable: Sales Discounts
Cash Discounts (or Sales Discounts):
Entries under Gross Method and Net Methods of recording cash discounts
-
새로
할거라
배음
모두
10
일
내에
지본정
I
ㅇ
i
d
*
↑ Covered in BUSS 152
d
↑ This is NEW
D
fotal
:
10100
말 9920
98 )
.
4 O 00
of
D
total
=
o
ag 2
*Sales Discounts Forfeited: Other revenues
24 / 73
Measurement of Receivable: Sales Returns and Allowance
Sales Returns and Allowances:
• Usually, right of return is granted for product for various reasons (e.g.,
dissatisfaction with product).
• In BUSS 152, we studied that when there are (actual) sales returns or
allowances, we credit “Sales Returns and Allowances,” which is a contra
revenue account to Sales Revenue.
• Company returning the product receives any combination of the following:
1. Full or partial refund of any consideration paid (we focus on this).
2.
Credit that can be applied against amounts owed, or that will be
owed, to the seller.
3.
Another product in exchange.
25 / 73
Measurement of Receivable: Variable Consideration
ㅠ
ㅠ
Illustration (Cr. Sales Returns and Allowances case)
• Assume that Max Glass sells hurricane glass to Oliver Builders. As part of
the sales agreement, Max includes a provision that if Oliver is dissatisfied
with the product, Max will grant an~
allowance on the sales price or agree to
take the product back.
retur
@
• On January 4, 2022, Max sells $5,000 of hurricane glass to Oliver on
account. The cost of sold glasses is $1,000.
Max records the sale on account as follows.
Accounts
Receivable
5000
5000
Salkl시
→
oAj
여빼먹 nnvocot
600
X
mm
00
00
"
&
.t
000,
해
614
26 / 73
Measurement of Receivable: Variable Consideration
Illustration (Cr. Sales Returns and Allowances case)
• On January 16, 2022, Oliver returns inventories of $300 to Max because
some of the hurricane glass is defective. The original cost of returned goods
are $60.
The entry to record this transaction is as follows.
Sale :Rsetums
and
Acount
300
Allowances
300
R
, eceivable
배했
.
0.
N
t
↓
assumptions
lO
6000
f
.
s
.
s. ld
안써도 되는
.
:
경우
poducts
cost of recoverning
②
retumed
-
broducts
!
?
…
: imnaterial
팔릴 수
가 다시
있다
!
27 / 73
Measurement of Receivable: Variable Consideration
Sales Returns and Allowances:
estimated at the time of sale, and in
• Sales Returns and Allowances can be estimated
such cases, “Return Liability” account is credited.
• Sales Revenue is reduced by the estimated amount of returns (rather than
the actual return days).
• The use of the “Return Liability” account helps to identify potential
problems associated with inferior merchandise, inefficiencies in filling
orders, and delivery or shipment mistakes.
• If actual returns later prove to be higher or lower than the estimated
X
amount, Sales Revenue is adjusted.
>
-
시험안
나응
28 / 73
Measurement of Receivable: Variable Consideration
Illustration (Cr. Return Liability case)
• We use the same case discussed previously.
• In addition, at the time of the sale, Max expects, based on past experience
and current market conditions, that $400 of the glasses will be~turned. 전이랑은
'
re
• On January 4, 2022, Max sells $5,000 of hurricane glass to Oliver on
account. The cost of sold glasses is $1,000.
달리 예측을
함
Max records the sale on account as follows.
Receivable
Acounts
Sales
5000
4
Revenue
600
.
4OD
Return
COGS
Liability
1 OoO
cnventory
100 o
29 / 73
Measurement of Receivable: Variable Consideration
Illustration (Cr. Return Liability case)
On January 16, 2022, Max grants an allowance of $300 to Oliver because some
of the hurricane glass is defective. The original cost of returned goods are $60.
The entry to record this transaction is as follows.
Return
300
liability
엘
Accounts
M
Receivable
0
O
cnventory
cost
3O
of
Goods
sold
60
30 / 73
Measurement of Receivable: Time Value of Money
Time Value of Money:
• Theoretically, any revenue after the period of sale is interest revenue.
• Ideally, companies should measure receivable in terms of their present
value.
• However, companies ignore interest revenue related to accounts receivable
because the amount of the discount is not usually material in relation to
the net income for the period.
Q: Which element of the Qualitative Characteristics matches this description?
materiality
cfrelevanceingredient
-
31 / 73
Learning Objectives
1.
Indicate how to report cash and related items.
2.
Define receivables and explain accounting issues related to their
recognition.
3.
Explain accounting issues related to valuation of accounts receivable.
4.
Explain accounting issues related to recognition and valuation of notes
receivable.
5.
Explain additional accounting issues related to accounts and notes
receivables.
32 / 73
Recap: Basis of Valuation for Asset Items
33 / 73
Valuation of Account Receivable
Uncollectible Accounts Receivable:
• Record credit losses as debits to “Bad Debt Expense”.
• Normal and necessary risk of doing business on credit.
• Two methods to account for uncollectible accounts
1. Direct write-off method
2. Allowance method
cindirect
34 / 73
Valuation of Accounts Receivable
Methods of Accounting for Uncollectible Accounts
rusualy notallowed
Direct Write-Off Method
Theoretically deficient:

ARd
-
Fails to record expenses as
→예측해도 미미 못 적응이
incurred. -

Receivable NOT stated at cash
realizable value.

Not appropriate when amount
uncollectible is material.
Allowance Method
estimated
Losses are estimated:

Percentage-of-sales.

Percentage-of-receivables.

IFRS requires when bad debts
are material in amount.
35 / 73
Valuation of Accounts Receivable
Bad Debt Decision Flow Chart
Methods used in accounting for bad debts
Direct write-off method
or
Allowance method
Methods for estimating the doubtful
debts allowance
Percentage of
Percentage of
or
receivables
het sales
___________
method
__________
method
(Aka, Aging of total receivable method)
36 / 73
Direct Write-Off Method
Bad Debt Decision Flow Chart
Methods used in accounting for bad debts
Direct write-off method
or
Allowance method
Methods for estimating the doubtful
debts allowance
Percentage of
receivables method
or
Percentage of
net sales method
(Aka, Aging of total receivable method)
37 / 73
Direct Write-Off Method
Illustration:
• When a company determines a particular account to be uncollectible, it
charges the loss to Bad Debt Expense.
materal
이라는
전제가깔려있음산
아다
iality
)
ma
• Assume, for example, that on December
0 10, 2022, Cruz Ltd. writes off as
uncollectible Yusado’s NT$8,000,000 balance.
The entry is as follows.
Bad
bebt
Eapense
Accounits Receivable
8 000 000
,
,
8 000
,
,
000
38 / 73
Allowance Method
Bad Debt Decision Flow Chart
Methods used in accounting for bad debts
Direct write-off method
or
Allowance method
Methods for estimating the doubtful
debts allowance
Percentage of
receivables method
or
Percentage of
net sales method
(Aka, Aging of total receivable method)
39 / 73
Allowance Method
Allowance Method:
• This method involves estimating uncollectible accounts at the end of each
period.
• It ensures that companies state receivables on the statement of financial
position at their realizablecash
cash realizable value.
L
AR 으로부터
실제로 받을
거라랭각하는금액
!!
• Companies estimate uncollectible accounts and cash realizable value using
information about past and current events as well as forecasts of future
collectability.
40 / 73
Allowance Method
Illustration:
• Assume that Brown Furniture in 2022, its first year of operations, has credit
sales of £1,800,000.
• Of this amount, £150,000 remains uncollected at December 31. The credit
manager estimates that £10,000 of these sales will be uncollectible.
ㅡ
I
The adjusting entry to record the estimated uncollectibles (assuming a zero
balance in the allowance account) is:
아님 !
150
Bad
Debt
Expense
Allowance
,
000
!
10 000
,
for Poubfful Accounts
41 / 73
Allowance Method
Illustration:
• Assume that Brown Furniture in 2022, its first year of operations, has credit
sales of £1,800,000.
• Of this amount, £150,000 remains uncollected at December 31. The credit
manager estimates that £10,000 of these sales will be uncollectible.
존재로
Depuntelinm
The amount of £140,000 represents the cash realizable value of the accounts
receivable at the statement date.
42 / 73
Allowance Method
Allowance Method for Uncollectible Account:
• When companies have exhausted all means of collecting a past-due
account and collection appears impossible, the company should write off
the account.
Illustration:
• The financial vice president of Brown Furniture authorizes a write-off of the
£1,000 balance owed by Randall plc on March 1, 2023.
The entry to record the write-off is:
Allowance
!
for
Poubfful Acconats
Accounfs
Receivable
1
.
O 00
OOO
(
7
Baddeb가쓸필요가
다시
expense
43 / 73
Allowance Method
Illustration:
• The financial vice president of Brown Furniture authorizes a write-off of the
£1,000 balance owed by Randall plc on March 1, 2023.
149,000
9,000
The cash realizable value is still £140,000.
44 / 73
Allowance Method
Illustration:
• Assume that on July 1, Randall plc pays the £1,000 amount that Brown had
written off on March 1.
These are the entries:
keeeivab
Accounts
Allowance
for
boubfful
Acounts
1 OOO
1 OO 0
cash
keceivabo
Aecounts
*
revert
에
하기 위해ent두
!
개 필요함 !
45 / 73
Allowance Method
Bad Debt Decision Flow Chart
Methods used in accounting for bad debts
Direct write-off method
or
Allowance method
Methods for estimating the doubtful
debts allowance
Percentage of
receivables method
or
Percentage of
net sales method
(Aka, Aging of total receivable method)
46 / 73
Allowance Method
Percentage-Of-Receivable Approach:
• Reports estimate of receivables at cash realizable value.
• Companies may apply this method using
1.
one composite rate, or
2.
an aging schedule using different rates.
47 / 73
Allowance Method
Illustration:
Gexpected
Bad
pebt
value
20 610
Expense
(Allowance
What entry would Wilson
make assuming that the
allowance account had a
zero balance?
,
for
Poubfful Aecounfs
26
,
610
48 / 73
Allowance Method
Allowance
Illustration
s
credit
balanced
What entry would Wilson
make assuming that the
allowance account had
had a credit balance of
€800 before adjustment?
Note that the allowance
account also can have a
debit balance.
d
write off
-
fhan
Bud
pebt
25
Expense
Allowance for
,
810
(26
01 0
.
,
-
25
,
greater
estimationd
800 )
다)
~
is
870
padnentENAM
..
ㄱ
n
00100
.
세
k
49 / 73
Percentage of Net Sales Method
Bad Debt Decision Flow Chart
Methods used in accounting for bad debts
Direct write-off method
or
Allowance method
Methods for estimating the doubtful
debts allowance
Percentage of
receivables method
or
Percentage of
net sales method
(Aka, Aging of total receivable method)
50 / 73
Percentage of Net Sales Method
Percentage-of-Net Sales Method:
•
This method recognizes and records an estimated amount of extra bad
debts based on the net credit sales made in that period.
•
It ignores
ignores the existing balance in Allowance for Doubtful accounts (which
are caused by the credit sales made in prior periods; that is, the net sales
( 416 )
only relates to the current period).
ARy assef
0
( 2
라 때문에accumnlafed
!
"
어떤
여기서
함정
낸다고
Illustration: Bad debts are estimated at 1% of all credit sales.
Credit sales (for the month of June) = $56,000
Sales Returns (of credit sales made in June) = $2,000
debif/ credit
balance
Bad
f
adowance -
bebf
→
신경
안
서도
됨!!
for
항정으로
[
540
tapense
Allowance
⇒ 근데
Doubfful
Accouats
existing
( 56
,
000
-
balance
2000 )
하졌는데
못 들
써 용을 수
,
응ㅠ
근데
무시해야됨 ! !
시 %
]
540
51 / 73
Review Question 3: Allowance Method
Illustration:
Duncan SA reports the following financial information before adjustments.
Prepare the journal entry to record Bad Debt Expense assuming Duncan
Company estimates bad debts at (a) 5% of accounts receivable and (b) 5% of
accounts receivable but Allowance for Doubtful Accounts had a $1,500 debit
balance.
52 / 73
Review Question 3: Allowance Method
Illustration:
Duncan SA reports the following financial information before adjustments.
Prepare the journal entry to record Bad Debt Expense assuming Duncan
Company estimates bad debts at (a) 5% of accounts receivable and (b) 5% of
accounts receivable but Allowance for Doubtful Accounts had a $1,500 debit
balance.
Bad
Debt
3000
Expense
( Allowance for
Doubf ful
Accounts
3000
53 / 73
Review Question 3: Allowance Method
Illustration:
Duncan SA reports the following financial information before adjustments.
Prepare the journal entry to record Bad Debt Expense assuming Duncan
Company estimates bad debts at (a) 5% of accounts receivable and (b) 5% of
accounts receivable but Allowance for Doubtful Accounts had a $1,500 debit
balance.
Bad
Debf
6 500
Expense
for
(Allovance
( 00 000 x
0
.
05
.
=
5000
Doubfful
t
1500
=
Accounts
6
500
,
6500
.
54 / 73
Learning Objectives
1.
Indicate how to report cash and related items.
2.
Define receivables and explain accounting issues related to their
recognition.
3.
Explain accounting issues related to valuation of accounts receivable.
4.
Explain accounting issues related to recognition and valuation of notes
receivable (skim).
5.
Explain additional accounting issues related to accounts and notes
receivables.
55 / 73
Notes Receivable
accounts
receivable
~
이자
없음 ! !
Notes Receivable:
Supported by a formal promissory note.
• written
Written promise to pay a certain sum of money at a specific future date.
• A negotiable instrument.
-
돈열의무가
있는 사람
• Maker signs in favor of a Payee.
mm
• Interest-bearing (has a stated rate of interest) or Zero-interest-bearing
(interest included in face amount).
It generally originates from
• Customers who need to extend payment period of an outstanding
receivable.
• High-risk or new customers.
• Loans to employees and subsidiaries.
• Sales of property, plant, and equipment.
• Lending transactions (the majority of notes).
56 / 73
Recognition of Notes Receivable
(?
시험 안 나응
σ
나중에
)
비웅
The relationship between interest rates and the present value of note will be
discussed in T11 – Non-Current Liabilities.
57 / 73
Learning Objectives
1.
Indicate how to report cash and related items.
2.
Define receivables and explain accounting issues related to their
recognition.
3.
Explain accounting issues related to valuation of accounts receivable.
4.
Explain accounting issues related to recognition and valuation of notes
receivable.
5.
Explain additional accounting issues related to accounts and notes
receivables.
58 / 73
Derecognition of Receivable
Derecognition of Receivable:
-
-
-
. (미
있는 걸 지웅
.
• When the receivable no longer has any value; that is, the contractual rights
to the cash flows of the receivable no longer exist.
rfactorc ? )
• (When a company transfers (e.g., sells) a receivable to another company,]
thereby transferring the risks and rewards
rewards of ownership to this other
ri
s
tky
1
company.
받을
위험
온못 받을
돈
앞으로
예정인거
!
59 / 73
Transfer of Receivable
Transfer of Receivable:
Various reasons for transfer of receivables to another party
• Accelerate the receipt of cash.
• Competition
• Sell receivables because money is tight
• Billing / collection are time-consuming and costly.
) 생더만지면청게
"
Transfer of receivables for cash happens in two ways:
1.
Sales of receivables.
2.
Secured borrowing.
60 / 73
Sales of Receivable
Sales of Receivable:
exx
credit card
Factors are finance companies or banks that buy receivables from
businesses for a fee.
61 / 73
Sale of Receivable (without Guarantee)
Sale of Receivable – without Guarantee:
-
위험까지정
?.
이전함
• Purchaser (Factor) assumes risk
risk of collection and absorbs any credit losses.
• Transfer is outright sale of receivable.
• Seller records loss on sale.
rrisk
still
ramains
• Seller uses a “Due from Factor” (receivable) account to cover probable
sales discounts, sales returns, and sales allowances.
62 / 73
Sale of Receivable (without Guarantee) Alovance
ier
sales
Illustration:
prr
crAk
• Crest Textiles, Inc. factors €500,000 of accounts receivable with Commercial
Factors, Inc., on a non-guarantee basis.
• Commercial Factors assesses a finance charge of 3 percent of the amount
of accounts receivable and retains an amount equal to 5 percent of the
accounts receivable (for probable adjustments).
Crest Textiles and Commercial Factors make the following journal entries for
하기
the receivables transferred without guarantee:
참고만
AK
혹시
임해임가지고
일부는
는
보르니가
h
시때문에
↑
주목
)(
)
!
과
(I
때
10
건
어거에
63 / 73
Sale of Receivable (with Guarantee)
Sale of Receivable – with Guarantee (or with Recourse):
• Seller guarantees payment to purchaser.
:
riskis hof
fransferved get
• That is, the risks and rewards of receivables remain with sellers (not
factors).
• Transfer is considered a borrowing—sometimes
referred to as a failed sale.
borrowing
• As a result, a seller continues to recognize the receivable on its books, and
additionally recognize a liability called “Recourse Liability.”
64 / 73
Sale of Receivable (with Guarantee)
Illustration:
• Assume Crest Textiles sold the receivables on a with guarantee basis,
holding other things constant.
(
잘 보기! !
A 이쪽을
!
nize
derec
않음
!
을
지
1
~
both
have
AR
in
their
statements
A
65 / 73
Secured Borrowing
Secured Borrowing:
• A company often uses receivables as collateral in a borrowing transaction.
…
66 / 73
Secured Borrowing
Illustration:
• On March 1, 2022, Meng Mills, Inc. provides (assigns) NT$700,000 of its
collateral
accounts receivable to Sino Bank as collateral for a NT$500,000 note.
~
ㅡ
• Meng Mills continues to collect the accounts receivable; the account
debtors are not notified of the arrangement.
• Sino Bank assesses a finance charge of 1 percent of the accounts receivable
and interest on the note of 12 percent.
• Meng Mills makes monthly payments to the bank for all cash it collects on
the receivables.
See the next slide for J/Es
67 / 73
Secured Borrowing
Illustration:
Meng Mills continues to recognize the accounts receivable.
험에한.
X
68 / 73
Review Question 4: Secured Borrowing
,
Illustration:
평때
중요함이
• On April 1, 2022, Prince Company assigns $500,000 of its accounts receivable
to the Hibernia Bank as collateral for a $300,000 loan due July 1, 2022.
• The assignment agreement calls for Prince Company to continue to collect the
receivables.
• Hibernia Bank assesses a finance charge of 2% of the accounts receivable, and
interest on the loan is 10% (a realistic rate of interest for a note of this type).
Instructions:
a) Prepare the April 1, 2022, journal entry for Prince Company.
b)Prepare the journal entry for Prince’s collection of $350,000 of the accounts
receivable during the period from April 1, 2022, through June 30, 2022.
c) On July 1, 2022, Prince paid Hibernia all that was due from the loan it secured
on April 1, 2022.
69 / 73
Review Question 4: Secured Borrowing
Instructions:
a) Prepare the April 1, 2022, journal entry for Prince Company.
b)Prepare the journal entry for Prince’s collection of $350,000 of the accounts
receivable during the period from April 1, 2022, through June 30, 2022.
c) On July 1, 2022, Prince paid Hibernia all that was due from the loan it secured
on April 1, 2022.
70 / 73
Summary of Transfer
71 / 73
Presentation and Analysis
General rules in classifying receivables are:
Skim it over
• Segregate and report carrying amounts of different categories of receivables.
• Indicate receivables classified as current and non-current in the statement of
financial position.
• Appropriately offset the valuation accounts for receivables that are impaired,
including a discussion of individual and collectively determined impairments.
• Disclose the fair value of receivables in such a way that permits them to be
compared with their carrying amount.
• Disclose information to assess the credit risk inherent in the receivables.
• Disclose any receivables pledged as collateral.
• Disclose all significant concentrations of credit risk arising from receivables.
72 / 73
Presentation and Analysis
셩에
Accounts Receivable Turnover:
짝미지수에
나
• Assess the liquidity
liquidity of the receivables.
• Measure the number of times, on average, a company collects receivables
during the period.
Illustration:
• Louis Vuitton (LVMH Group) reported net sales of €35,664 million. Its
beginning and ending (net) accounts receivable balances were €2,274
million an €2,521 million, respectively.
The computation of its accounts receivable turnover is as follows.
등
counts
73 / 73
BUSS 213: Intermediate Accounting 1
Inventories
Prof. G-Song Yoo
Conceptual Framework For Financial Reporting
Basics of IFRS: Accrual accounting concepts & Revenue recognition
Financial Accounting
Recording Transactions
(Internal user focus)
Inventories
Property Plant, and Equipment
Income statement
(aka, Statement of
profit or loss)
Retained earnings
statement
Statement of
financial position
CL, Provisions & Contingencies
(aka, Balance sheet)
Time-Value of Money
Statement of
Cash Flows
Non Current Liabilities
Comprehensive
income statement
Financial statement
analysis (External user focus)
Internal Control
Cash and Receivables
Learning Objectives
1.
Describe inventory classifications and different inventory systems.
2.
Identify the goods and costs included in inventory.
3.
Compare the cost flow assumptions used to account for inventories.
4.
Determine the effects of inventory errors on the financial statements.
5.
Describe and apply the lower-of-cost-or-net realizable value rule.
6.
Determine ending inventory by applying the gross profit method.
7.
Determine ending inventory by applying the retail inventory method.
8.
Explain how to report and analyze inventory.
•
Textbook Reading: Ch.8 for (L.Os 1 to 5) and
Ch.9 for (L.Os 6 to 9)
•
Excluding “Valuation Bases” on pg. 9-7 to 12 and
“Special Items relating to Retail Method” on pg. 9-19 to20.
3 / 86
Learning Objectives
1.
Describe inventory classifications and different inventory systems.
2.
Identify the goods and costs included in inventory.
3.
Compare the cost flow assumptions used to account for inventories.
4.
Determine the effects of inventory errors on the financial statements.
5.
Describe and apply the lower-of-cost-or-net realizable value rule.
6.
Determine ending inventory by applying the gross profit method.
7.
Determine ending inventory by applying the retail inventory method.
8.
Explain how to report and analyze inventory.
4 / 86
Inventory Issues
Classification of Inventory:
held for
for sale
use in the ordinary course of
• Inventories are asset items held
business, or
ased in the production of (final) goods to be sold.
• goods to be used
5 / 86
Inventory Issues
Classification of Inventory:
• One inventory account.
• Purchase merchandise (goods)
in a form ready for sale.
6 / 86
Inventory Cost Flow
Flow of Costs through Manufacturing and Merchandising Companies:
Details are covered in
BUSS 244 – Managerial
Accounting.
7 / 86
Inventory Cost Flow: Perpetual vs. Periodic System
Perpetual System:
time there is a movement of inventory into or out of the
• Every
very time
merchandising entity, a journal entry is required.
continuous record of the balance in both the “Inventory”
• It provides a continuous
and “Cost of Goods Sold” accounts.
Periodic System:
• Cost of inventories on hand (ending inventories) and Cost of Goods Sold
are determined by a physical inventory count at the end
end of the period.
A☆
→ Key difference between periodic and perpetual inventory systems is the
point at which the COGS is computed.
8 / 86
Comparison of Entries: Perpetual vs. Periodic
ㅡ
이거를
Skim it over; already covered in BUSS152.
아주
묻지는
자세히
아응
옹
Entries in Purchaser’s Records
TRANSACTION
PERPETUAL SYSTEM
May 5 Purchase of
Inventory (Asset )
inventory on A/C A/Cs Payable
PERIODIC SYSTEM
3800
Purchases
3800 A/Cs Payable
3800
3800
9 / 86
Comparison of Entries: Perpetual vs. Periodic
Entries in Purchaser’s Records
TRANSACTION
PERPETUAL SYSTEM
PERIODIC SYSTEM
May 5 Purchase of
Inventory
inventory on A/C A/Cs Payable
3800
Purchases
3800 A/Cs Payable
May 6 Freight costs on Inventory 150
purchases
Cash
Freight-in
150 Cash
3800
3800
150
150
10 / 86
Comparison of Entries: Perpetual vs. Periodic
Entries in Purchaser’s Records
TRANSACTION
PERPETUAL SYSTEM
PERIODIC SYSTEM
May 5 Purchase of
Inventory
inventory on A/C A/Cs Payable
3800
Purchases
3800 A/Cs Payable
May 6 Freight costs on Inventory 150
purchases
Cash
Freight-in
150 Cash
May 8 Purchases
returns and
allowances
A/Cs Payable
Inventory
300
A/Cs Payable
300 Purchase
Ret. & Allow.
3800
3800
150
150
300
300
11 / 86
Comparison of Entries: Perpetual vs. Periodic
)
!
하목 물봉
여기
가
,
ㅇ
아
은
이름
U
안
녕
개
PERPETUAL SYSTEM
May 5 Purchase of
Inventory
inventory on A/C A/Cs Payable
F
전
NPERIODIC SYSTEM
태
3800
Purchases P
~
3800 A/Cs Payable
-
May 6 Freight costs on Inventory 150
purchases
Cash
May 8 Purchases
returns and
allowances
않 찮다노보장서
c0
Entries in Purchaser’s Records
TRANSACTION
□ 응
도
Freight-in
150 Cash
A/Cs Payable
Inventory
300
May 12 Payment on
A/Cs Payable
account with a
Cash
discount
Inventory
3500
)
-
EXP
3800
3800
150
150
A/Cs Payable
300
300 Purchase contra expense
Ret. & Allow.
300
→
A/Cs Payable 3500
3430 Cash
3430
70 Purchase disc.
70
(
4ype
of
contraraspet
12 / 86
Comparison of Entries: Perpetual vs. Periodic
Entries in Seller‘s Supplies Records
TRANSACTION
PERPETUAL SYSTEM
PERIODIC SYSTEM
May 5 Sales of
A/Cs Receivable 3800
A/Cs Receivable 3800
inventory on A/C Sales
3800 Sales
3800
COGS vexpenses 2400
No entry for COGS
Inventory uasset
2400
13 / 86
Comparison of Entries: Perpetual vs. Periodic
Entries in Seller‘s Supplies Records
TRANSACTION
PERPETUAL SYSTEM
PERIODIC SYSTEM
May 5 Sales of
A/Cs Receivable 3800
A/Cs Receivable 3800
inventory on A/C Sales
3800 Sales
3800
COGS
2400
No entry for COGS
Inventory
2400
May 8 Return of
Sales Returns
Sales Returns
inventory sold
and Allowances 300
and Allowances 300
A/Cs Receivable
300 A/Cs Receivable
300
Inventory
140
No entry for COGS
COGS
140
14 / 86
Comparison of Entries: Perpetual vs. Periodic
Then, how do we determine COGS under the periodic system?
Entries in Seller‘s Supplies Records
TRANSACTION
PERPETUAL SYSTEM
PERIODIC SYSTEM
May 5 Sales of
A/Cs Receivable 3800
A/Cs Receivable 3800
inventory on A/C Sales
3800 Sales
3800
COGS
2400
No entry for COGS
Inventory
2400
May 8 Return of
Sales Returns
Sales Returns
inventory sold
and Allowances 300
and Allowances 300
A/Cs Receivable
300 A/Cs Receivable
300
Inventory
140
No entry for COGS
COGS
140
May 12 Cash received Cash
3430
Cash
3430
on account
Sales discounts
70
Sales discounts
70
with a discount
A/Cs Receivable
3500
A/Cs Receivable
3500
15 / 86
Inventory Cost Flow: Perpetual vs. Periodic System
Computation of COGS under Periodic System:
Beg. Inventory
Cost of Goods
Purchased
Cost of Goods
available for sale
Cost of Goods
Sold
End. Inventory
Ending inventories are determined
by physical count.
a
16 / 86
Review Question 1: Inventory Cost Flow
The following information is available for XYZ Company for 2022:
Item
Beginning Inventory
(at cost)
=
Purchases
Purchase returns
Utility expenses
Q
~
Ending Inventory (at sales price)
$
e
100,000
458
)
350,000
1430
20,000
,
e
0
000
.
000
30,000
X
150,000 - →원래
다
cost
:
100
.
000
ㄱ
The
sales price of inventory is equal to 150% of the cost of inventory.
렉함
What is the cost of goods sold?
@
330 ,00
Z50 000
,
280
,
000
17 / 86
Inventory Control
Inventory Control:
All companies need periodic verification of the inventory records, regardless of
whether perpetual or periodic system is employed.
• by actual count, weight, or measurement, with
• counts compared with detailed inventory records.
Companies should take the physical inventory
• near the end of their fiscal year,
• to properly report inventory quantities in their annual accounting reports.
18 / 86
Inventory Control
Inventory Over and Short under Perpetual System:
• For companies with a perpetual system, the inventory balance might be
different from the physical inventory count (possibly due to theft,
damage, and recording errors).
• In such cases, we need an entry called “Inventory Over and Short” to
adjust this. Thus, “Inventory Over and Short” can be either expenses or
contra-expenses.
Q: Companies using a periodic system do NOT report Inventory Over and Short. Why?
왜냐연 이게
Perpetual
의
단점을
보완하는
것이라
때문 !
• “Inventory Over and Short” adjusts Cost of Goods Sold. That means,
“Inventory Over and Short” can be aggregated into COGS. In practice,
however, companies often report “Inventory Over and Short” in the
“Other income and expense” section of the income statement.
19 / 86
Inventory Control
Illustration:
Assume that at the end of the reporting period, the perpetual inventory
account reported an inventory balance of $4,000. However, a physical count
indicates inventory of $3,800 is actually on hand.
The entry to record the necessary write-down is as follow.
:
expensest
cnventory
!
아닝
over
l
and short
cnrentory
200
200
근데이게
없다ive
른져
20 / 86
Learning Objectives
1.
Describe inventory classifications and different inventory systems.
2.
Identify the goods and costs included in inventory.
3.
Compare the cost flow assumptions used to account for inventories.
4.
Determine the effects of inventory errors on the financial statements.
5.
Describe and apply the lower-of-cost-or-net realizable value rule.
6.
Determine ending inventory by applying the gross profit method.
7.
Determine ending inventory by applying the retail inventory method.
8.
Explain how to report and analyze inventory.
21 / 86
Goods (and Costs) included in Inventory
Goods (and Costs) included in Inventory:
• A company recognizes inventory and accounts payable at the time it controls
the asset.
• Passage of (legal)
title is often used to determine control because the rights
legaltitle
and obligations are established.
-
runsfer
of
wentory
d
Recap - the indicators for the transfer of control:
a. Seller has the right to payment for the inventory.
b. Seller has transferred legal title to a purchaser.
c. Seller has transferred physical possession of the inventory.
d. Purchaser has significant risks and rewards of ownership of the inventory.
e. Purchaser has accepted the inventory.
22 / 86
Goods (and Costs) included in Inventory
-적송품
Consigned Goods:
xjoumal
entry 묻지는 않을텐데
팔리기
어쨋들
아직
상태 (
전 애매한
saller
'
s
?)
inventovy 라는
알아야됨
적
!!
Companies market certain product through consignment.
Williams Art Gallery (the consignor) ships various art merchandise to Sotheby’s
Holdings (the consignee), who acts as Williams’ agent in selling the consigned
goods
liability except to
without any
• Sotheby’s agrees to accept the goods without
any liability,
exercise due care and reasonable protection from loss or damage, until it
sells the goods to a third party.
• When Sotheby’s sells the goods, it remits the revenue, less a selling
commission and expenses incurred in accomplishing the sale, to Williams.
• Goods out on consignment remain the property of the consignor (Williams).
For related J/Es, see page 18-26 (J/Es are not examinable).
23 / 86
Goods (and Costs) included in Inventory
inventory
as
collateral
:
Sales with Repurchase Agreement:
Hill Enterprises transfers (“sells”) inventory to Chase plc and simultaneously
agrees to repurchase this merchandise at a specified price over a specified
period of time. Chase then uses the inventory as collateral and borrows
against it.
• Essence of transaction is that Hill Enterprises is financing its inventory—
retains control
and retains
control of the inventory—even though it transferred to Chase
technical legal title to the merchandise.
• Often described in practice as a “parking transaction.”
Lbut stil mined
• Hill should report the inventory and related liability on its books
For related J/Es, see page 18-23 (J/Es are not examinable).
24 / 86
Goods (and Costs) included in Inventory
r
relationship
blw
publishers
aud
bookstores
Sales with High Rates of Return:
Quality Publishing Company sells textbooks to Campus Bookstores with an
agreement that Campus Bookstores may return for full credit any books not
sold. Historically, Campus Bookstores returned approximately 25 % of the
textbooks from Quality Publishing. There are two ways:
r
publishers
말하는 거임
1.
Record sales revenue at the amount it expects to receive from the
transaction. This transaction involves variable consideration and thus the
transaction price is adjusted to recognize that a portion of these textbooks
will be returned.
2.
Establish an estimated inventory return account to recognize that some of
its textbooks will be returned.
number
• For instance, # of books sold: 100, selling price for each: $2
4
ㅡ
sentout
to bookstore
(
ARCor
cash )
sales
Refund
( Retuu
"00
Revenue
Liability
Liability
이름을 물어보지는
)
압음 ( ?
)
.
이님 ! ! )
25 / 86
Goods (and Costs) included in Inventory
Product Cost:
)
(%)
• Costs directly
directly connected with bringing the goods to the buyer’s place of
business and converting such goods to a salable condition.
필수적인
-
값인지
생각해보면 구분될
Cost of purchase includes all of:
• The purchase price.
W
• Import duties and other taxes.
•
freightout
Transportation costs (i.e.,( freight-in).
• Handling costs directly related to the acquisition of the goods.
26 / 86
Goods (and Costs) included in Inventory
Period Cost:
• Costs that are indirectly related to the acquisition or production of goods.
Period costs such as:
rnot
nded
inc
램 cost
inven
• selling expenses (including m
freight-out) and
• general and administrative expenses
-
gases
,
4
utilities "
are not included as part of inventory cost.
27 / 86
Goods (and Costs) included in Inventory
Treatment Purchase Discount:
• Purchase or trade discounts are reductions in the selling prices granted to
customers.
• IASB requires these discounts to be recorded as a reduction from the cost of
inventories
그렇게
In case of the periodic system
0
많요
한듯
"
ww
*
나을수로
지일레은건용가능성큼
(
ㅡ
직접반
*
↑ Covered in BUSS 152
↑ This is NEW
*Purchase Discounts: Contra expenses
*Purchase Discounts Lost: Other expenses
28 / 86
Review Question 2: Goods included in Inventory
r
AA 중요
⑪
시아브
Bell Inc. took a physical inventory at the end of 20x1 and determined that
€650,000 of goods were on hand. In addition, the following items were not
included in the physical count.
• Goods shipped f.o.b. destination on December 26, 20x1 from Bell to a
customer were received on January 2, 20x2. The→
invoice cost was €50,000
ㅇ
• The company had €75,000 of goods out on consignment.
ㅡ
• Goods shipped f.o.b. shipping point on December 28, 20x1 from Bell to
another customer were received on January 5, 20x2. The invoice cost was
€25,000.
What amount should Bell report as inventory at the end of 20x1?
nn
g
500
29 / 86
Learning Objectives
1.
Describe inventory classifications and different inventory systems.
2.
Identify the goods and costs included in inventory.
3.
Compare the cost flow assumptions used to account for inventories.
4.
Determine the effects of inventory errors on the financial statements.
5.
Describe and apply the lower-of-cost-or-net realizable value rule.
6.
Determine ending inventory by applying the gross profit method.
7.
Determine ending inventory by applying the retail inventory method.
8.
Explain how to report and analyze inventory.
30 / 86
Cost Flow Assumptions
Cost Flow Methods:
• Specific Identification or
• Two cost flow assumptions (under the IFRS)
1.
First-in, First-out (FIFO) or
2.
Average Cost
31 / 86
Cost Flow Assumptions
Illustration:
Assume that Call-Mart SpA had the following transactions in its first month of
operations.
Calculate Goods Available for Sale:
:
32 / 86
Cost Flow Assumptions – Specific Identification
r
Specific Identification:
itemsaredistfomeach
inct
wnen
-
other !
• Method may be used only in instances where it is practical to separate
physically the different purchases made. Cost of goods sold includes costs
of the specific items sold.
• Used when handling a relatively small number of costly, easily
distinguishable items.
• Matches actual costs against actual revenue.
• May allow a company to manipulate net income.
33 / 86
Cost Flow Assumptions – Specific Identification
Illustration:
Call-Mart’s 6,000 units of (ending) inventory consists of 1,000 units from the
March 2 purchase, 3,000 from the March 15 purchase, and 2,000 from the March
30 purchase.
Compute the amount of ending inventory and cost of goods sold.
에
삼던를힘들
OJ
…
안 팔린
34 / 86
Cost Flow Assumptions – Average Cost
Average Cost:
• Prices items in the inventory on the basis of the average cost of all similar
goods available during the period.
albovedce
• Not as subject to income manipulation.
coos
manipulationnot
• Measuring a specific physical flow of inventory is often impossible.
35 / 86
Cost Flow Assumptions – Average Cost
N
Illustration - Periodic System:
ending inventory
&
O
first
,
followed by
COGS
OvX
②
@
• Only one average cost (€4.39) is used for both ending inventory and COGS
36 / 86
Cost Flow Assumptions – Average Cost
-
~
coos
first then
.
ending
inventory
Illustration - Perpetual System:
d
unit
costis
updated
for
-
evenl
purchases
회원때
중간고사
문제
…
• A new average (the moving average) must be calculated every time a
purchase
purchases is made (See the March 15 case; it is now €4.30).
• The new average is applied to both COGS and ending inventory.
37 / 86
Cost Flow Assumptions – First-in, First-Out (FIFO)
First-in, First-Out (FIFO):
• Assumes goods are used in the order in which they are purchased.
• Approximates the physical flow of goods.
• Ending inventory is close to current cost.
(Ending inventory = newest inventories which reflect the current cost)
ㅏpnsundcons
"
• Fails to match current costs against current revenues on the income
statement.
(Current Revenues match with the cost of oldest inventories, i.e., COGS)
38 / 86
Cost Flow Assumptions – First-in, First-Out (FIFO)
Illustration – Periodic:
→
figure
out
ending inventory
(
• Determine cost of ending inventory by taking the cost of the most recent
purchase and working back until it accounts for all units in the inventory.
39 / 86
Cost Flow Assumptions – First-in, First-Out (FIFO)
Illustration – Perpetual:
A☆
중요함 !
>
figure
out
coGs
□ 다시
!
(
• In all cases where FIFO is used, the inventory and cost of goods sold would
be the same at the end of the month whether a perpetual or periodic
system is used.
40 / 86
Comparison of Average-Cost and FIFO
이시험
×
Illustration :
Assumes periodic inventory procedures and the following selected data.
41 / 86
Comparison of Average-Cost and FIFO
Illustration :
Assumes periodic inventory procedures and the following selected data.
←
et
.
- →>
42 / 86
Average-Cost vs. FIFO in terms of Financial Statement Effects
A 다시
…
쌈)
Effects of cost flow methods on Income Statement:
In periods of increasing prices (inflation)
!
ourchases는 가격이
L
rearlies
더
이때
그래서
(
• FIFO reports higher net income because COGS was costed at the earliest
(thus lowest) prices.
m
• FIFO results in higher income taxes than the average-cost method.
asset
in
the
end
ofthe
period
orepor t
Effects of cost flow methods on the Statement of financial position:
In periods of increasing prices (inflation)
fnvantortasseth
• For FIFO, costs allocated to ending inventory will approximate their
current cost (the cost of unsold inventories = newest inventories)
• For the average-cost method, costs allocated to ending inventory may be
understated in terms of current cost.
43 / 86
Learning Objectives
1.
Describe inventory classifications and different inventory systems.
2.
Identify the goods and costs included in inventory.
3.
Compare the cost flow assumptions used to account for inventories.
4.
Determine the effects of inventory errors on the financial statements.
5.
Describe and apply the lower-of-cost-or-net realizable value rule.
6.
Determine ending inventory by applying the gross profit method.
7.
Determine ending inventory by applying the retail inventory method.
8.
Explain how to report and analyze inventory.
44 / 86
Effects of Inventory Errors on the Financial Statement
Ending Inventory Misstated:
U
Working capital = d CA (incl. inventory) - CL
d Current
ratio = CA / CL
다
current
asset
d
어
Beginning inventory XX
+ Purchases, net XX
- Ending inventory XX
= Cost of goods sold
인
Net
income
,
45 / 86
Effects of Inventory Errors on the Financial Statement
Effect of Ending Inventory Error on Two Periods:
• An error in ending inventory of current period will have a reverse effect on
net income of next accounting period.
• Over two years, total net income is correct because errors offset each
other.
들이
같은 값임
!!
ㄱ
22’ Beginning inventory XX
+ 22’ COG Purchased XX
d - 22’ Ending inventory XX
서 = 22’ Cost of goods sold (↔d NI)
23’ Beginning inventory XX d
+ 23’ COG Purchased XX
- 23’ Ending inventory XX
= d 23’ Cost of goods sold (↔서 NI)
ㅡ
그래서 결국
2년
뒤에
상매된
46 / 86
Effects of Inventory Errors on the Financial Statement
Illustration:
P
교수님이
!!
제일 좋아하시는 문제임
시험에
나올 듀
πㅠ
d
a
47 / 86
Effects of Inventory Errors on the Financial Statement
Purchases and Inventory Misstated:
Suppose that company does not record as a purchase (on account) certain
goods that it owns and does not count them in ending inventory.
ㅡ
ㆆ
asset
raccounts
Working capital = d CA (incl. inventory) –dCL (incl. AP)
ㅡ
k
Current ratio = d CA (incl. inventory) /d CL
ex )
00 -
-
월
-
⑤
+
④
4
2
payable
Beginning inventory XX
d + Purchases, net XX
V - Ending inventory XX
ㆆ = Cost of goods sold
25
.
• The understatement does not affect cost of goods sold and net income
because the errors offset one another.
48 / 86
Review Question 3: Effect of Inventory Errors
☆ 시험에
나주
중요항 ☆Y AxA
Hudson, Inc. is a calendar-year corporation. Its financial statements for the
years 2022 and 2021 contained errors as follows:
A☆
2022
2021
Ending inventory
€3,000 overstated
€8,000 overstated
Depreciation expense
€2,000 understated
€6,000 overstated
(a) Assume that the proper correcting entries were made at December 31,
2021. By how much will 2022 income before taxes be overstated or
understated?
α 완성본 장고
ㅡ
a.
€1,000 understated
inventoyseo
ginning
net
purchases
,
b.
€1,000 overstated
Endinginventory
c.
€2,000 overstated
cost of
d. €5,000 overstated
ㅇ
Depreciation
goods
ExP
sold
,
49 / 86
Review Question 3: Effect of Inventory Errors
A☆
중요 ! !
A 어려움
"
Hudson, Inc. is a calendar-year corporation. Its financial statements for the
years 2022 and 2021 contained errors as follows:
빼고 생각해도핑
이건
2022 때
2022
누
자퇴
이
떼
ont
도
문제품도됨
한
상쇄 생각
D
"
Nr
7
(? )
β
에
년
2021
Ending inventory
€3,000 overstated
€8,000 overstated
Depreciation expense
€2,000 understated
€6,000 overstated
2021
ending invento
의
에
위
가202
beginming
…
에
ㅡ
..
2000
어
이
(b) Assume that no correcting entries were made at December 31, 2021.
Ignoring income taxes, by how much will retained earnings at December 31,
t 이서 이전의 2022 be overstated or understated?
.
-
m마
a. €1,000 understated
ㅇ
b.
€5,000 overstated
c.
€5,000 understated
d.
€9,000 understated
발응 ! !
차고
완성본
O
ㅇ
nef
inome 은
understated by
ε
expenses
tNet
income
overstated
by
one
-
year impati
2 000
.
← 2 000
.
50 / 86
ㅋ
F
Review Question 3: Effect of Inventory Errors
☆
모르겠음
Hudson, Inc. is a calendar-year corporation. Its financial statements for the
years 2022 and 2021 contained errors as follows:
2022
2021
Ending inventory
€3,000 overstated
€8,000 overstated
Depreciation expense
€2,000 understated
€6,000 overstated
(c) Assume that no correcting entries were made at December 31, 2021, or
December 31, 2022 and that no additional errors occurred in 2023. Ignoring
income taxes, by how much will working capital at December 31, 2023 be
overstated or understated?
a. €0
ㅇ
b.
€2,000 overstated
c.
€2,000 understated
d.
€5,000 understated
51 / 86
Learning Objectives
1.
Describe inventory classifications and different inventory systems.
2.
Identify the goods and costs included in inventory.
3.
Compare the cost flow assumptions used to account for inventories.
4.
Determine the effects of inventory errors on the financial statements.
5.
Describe and apply the lower-of-cost-or-net realizable value rule.
6.
Determine ending inventory by applying the gross profit method.
7.
Determine ending inventory by applying the retail inventory method.
8.
Explain how to report and analyze inventory.
52 / 86
Recap: Basis of Valuation for Asset Items
LCNRV
53 / 86
Lower-of-Cost-or-Net Realizable Value (LCNRV)
Lower-of-Cost-or-Net Realizable Value:
• A company abandons the historical cost principle when the future utility
(revenue-producing ability) of the asset drops below its original cost.
Net Realizable Value?
>
Net
selling
Price
• Estimated selling price in the normal course of business less
ㅡ
ㅇ Estimated costs to complete and
e Estimated costs to make a sale.
54 / 86
Lower-of-Cost-or-Net Realizable Value (LCNRV)
Illustration:
Assume that Mander AG has unfinished inventory with aD
cost of €950, a sales
value of €1,000, estimated cost of completion of €50, and estimated selling costs
of €200.
ㅡ
ㅡ
ㅡ
Mander’s net realizable value is computed as follows:
• Mander reports inventory on its statement of financial position at €750.
• In its income statement, Mander reports a Loss on Inventory Write-Down of
€200 (€950 − €750).
55 / 86
Lower-of-Cost-or-Net Realizable Value (LCNRV)
Determining Final Inventory Value:
• In most situations, companies price inventory on an item-by-item basis.
• Tax rules in some countries require that companies use an individual-item
basis.
• Individual-item approach gives the lowest valuation for statement of financial
position purposes.
• Method should be applied consistently from one period to another.
Q: Which element of the Qualitative Characteristics matches this description?
comparability
ccompare
between
periods
56 / 86
Lower-of-Cost-or-Net Realizable Value (LCNRV)
Illustration:
Jinn-Feng Foods computes its inventory at LCNRV (amounts in thousands).
Assume that Jinn-Feng Foods separates its food products into two major groups,
frozen and canned
낮은
자고르기
~
그냥
ㅇ
O
ㅇ
VS
ㅇ
@
i ,
57 / 86
Recording NRV instead of Cost
'
*
Illustration:
Data for Ricardo SpA
'
cnventory
Contol
참고
!!
A
COGS vs. Loss method of Reducing Inventory to NRW:
58 / 86
Recording NRV instead of Cost
COGS vs. Loss method of Reducing Inventory to NRW (cont’d):
• Income Statement Presentation
59 / 86
Use of an Allowance to Reduce Inventory
↓ 시험
Allowance to Reduce Inventory to NRV:
안
나주 ! !
() etailX
• Instead of crediting the Inventory account for NRV adjustments, companies
generally use an allowance account.
Illustration:
Using an allowance account under the loss method, Ricardo SpA makes the
following entry to record the inventory write-down to NRV.
Loss
Due
t.
Decdine of
cnventory
to
~
~
60 / 86
Use of an Allowance to Reduce Inventory
Recovery of Inventory Loss:
petailX
• Amount of write-down is reversed.
• Reversal limited to amount of original write-down.
• Allowance account is adjusted in subsequent periods, such that inventory is
reported at the LCNRV.
Illustration:
Continuing the Ricardo example, assume the net realizable value increases to
€74,000 (an increase of €4,000).
Ricardo makes the following entry, using the loss method.
~
~
61 / 86
Evaluation of LCM Rule
Some Conceptual Deficiencies:
간단하게만
,
( skimoer
)
• A company recognizes decreases in the value of the asset and the charge to
expense in the period in which the loss in utility occurs—not in the period of
sale.
• Application of the rule results in inconsistency because a company may value
the inventory at cost in one year and at net realizable value in the next year.
• LCNRV values the inventory in the statement of financial position
conservatively, but its effect on the income statement may or may not be
conservative. Net income for the year in which a company takes the loss is
definitely lower. Net income of the subsequent period may be higher than
normal if the expected reductions in sales price do not materialize.
62 / 86
Review Question 4: LCNRV
A☆
혼자 풀기
A 중요
Remmers SE manufactures desks. Most of the company’s desks are standard
models and are sold on the basis of catalog prices. At December, 2022, the
following finished desks appear in the company’s inventory.
ㅡ
Finished Desks
A
B
C
D
€450
€480
€900
€1,050
FIFO cost per inventory list 12/31/22
470
450
830
960
Estimated cost to complete and sell
50
110
260
200
500
540
900
1,200
2022 catalog selling price
2023 catalog selling price
The 2022 catalog was in effect through November 2022, and the 2023 catalog
is effective as of December 1, 2022. All catalog prices are net of the usual
discounts.
63 / 86
Review Question 4: LCNRV
At what amount should each of the four desks appear in the company’s
December 31, 2022, inventory, assuming that the company has adopted a
lower-of-FIFO-cost-or-net realizable value approach for valuation of
inventories on an individual-item basis?
ㅡ
=
Item
Cost
Net Realizable Value
Lower-of-Cost-or-NRV
A
€470
4n 0
€450
450
48
€450
B
45탕
450
430
430
430
430
C
830
830
여
640
64
640
640
D
960
960
1,000
oo
10
960
960
64 / 86
Learning Objectives
1.
Describe inventory classifications and different inventory systems.
2.
Identify the goods and costs included in inventory.
3.
Compare the cost flow assumptions used to account for inventories.
4.
Determine the effects of inventory errors on the financial statements.
5.
Describe and apply the lower-of-cost-or-net realizable value rule.
6.
Determine ending inventory by applying the gross profit method.
7.
Determine ending inventory by applying the retail inventory method.
8.
Explain how to report and analyze inventory.
65 / 86
Gross Profit Method of Estimating Inventory t 이
두 문제
주제에서
나응
Gross Profit Method:
This is measured at retail
(sales price).
Our goal is to estimate its cost.
• A method of estimating
estimating the cost of ending inventory by applying a gross
profit rate to net sales
• Taking a physical inventory is sometimes impractical. In some cases,
companies use substitute measure to approximate inventory.
• Given information
1.
Sales (or net sales)
2.
Gross profit rate (or estimated gross profit)
3.
Beginning inventory at cost
4.
Cost of Goods Purchased
1. minus 2. for estimated COGS
-
→
of last year
ending inventory
3. and 4. combined for COG available for sale
Finally, estimated COGS less COG available
for sale = ending inventory (at cost)
66 / 86
Gross Profit Method of Estimating Inventory
뒤에
이해한
Gross Profit Method:
우기
…
@ from Beg. Inventory + COG
This
Purchased (both of which are given)
Get this from Step 1
Step 1:
Net Sales
Step 2:
Cost of Goods
Available
for Sale
Get this from Step 2
-
Estimated
Gross
Profit
-
Estimated
Cost of
Goods Sold
=
Estimated
Cost of
Goods Sold
=
Estimated
Cost of
Ending Inventory
67 / 86
Gross Profit Method of Estimating Inventory
Illustration:
Cetus SE has a beginning inventory of €60,000 and purchases of €200,000,
both at cost. Sales at selling price amount to €280,000. The gross profit on
selling price is 30 percent.
Cetus applies the gross margin method as follow:
Step 1:
Net Sales
28D
Step 2:
,
-
000
84
Cost of Goods
Available
for Sale
200
.
Estimated
Gross
Profit
000
-
,
=
( ab ooO
000
,
Estimated
Cost of
Goods Sold
.
000 +
64 000
196 000
60 000
.
)
Estimated
Cost of
Ending Inventory
=
,
(200
Estimated
Cost of
Goods Sold
V
검산용으로
필할다
.
.
임음
68 / 86
Computation of Gross Profit Percentage
시험키
☆
Illustration:
In the previous illustration, the gross profit was a given. But how did Cetus
derive that figure?
To see how to compute a gross profit percentage, assume that an article cost
€15 and sells for €20, a gross profit of €5.
sellingG
lost
블
.
뭐라
에게 하였지
ㅇ
↓
문제에
selling 할때 = 25% on selling price
0
ve
이라고
시험
☆
나응
D
d
문제에
~
cost
할
이라
때
pn
69 / 86
Computation of Gross Profit Percentage
Formulas Relating to Gross Profit and Application of Formulas:
svcost
"
vselling
price
70 / 86
Evaluation of Gross Profit Method
Disadvantages:
• Provides an estimate of ending inventory.
• Uses past percentages in calculation.
• A blanket gross profit rate may not be representative.
• Normally unacceptable for financial reporting purposes because it
provides only an estimate
IFRS requires a physical inventory as additional verification of the inventory
indicated in the records.
Note that the gross profit method will follow closely the inventory method
used (FIFO or average-cost) because it relies on historical costs.
71 / 86
Review Question 5: Gross Profit Method
Astaire ASA uses the gross profit method to estimate inventory for monthly
reporting purposes. Presented below is information for the month of May.
Inventory, May 1
Purchases (gross)
Freight-in
€ 160,000 Sales
640,000 Sales returns
30,000 Purchases discounts
€ 1,000,000
70,000
12,000
Instructions:
a. Compute the estimated inventory at May 31, assuming that the gross profit
is 25% of sales.
b. Compute the estimated inventory at May 31, assuming that the gross profit
is 25% on cost.
72 / 86
Review Question 5: Gross Profit Method
Instructions:
a. Compute the estimated inventory at May 31, assuming that the gross profit
is 25% of sales.
Step 1:
Net Sales
Step 2:
Cost of Goods
Available
for Sale
-
Estimated
Gross
Profit
-
Estimated
Cost of
Goods Sold
=
Estimated
Cost of
Goods Sold
=
Estimated
Cost of
Ending Inventory
73 / 86
Review Question 5: Gross Profit Method
답지창고
Instructions:
b. Compute the estimated inventory at May 31, assuming that the gross profit
is 25% on cost.
Step 1:
Net Sales
Step 2:
Cost of Goods
Available
for Sale
-
Estimated
Gross
Profit
-
Estimated
Cost of
Goods Sold
=
Estimated
Cost of
Goods Sold
=
Estimated
Cost of
Ending Inventory
74 / 86
Learning Objectives
1.
Describe inventory classifications and different inventory systems.
2.
Identify the goods and costs included in inventory.
3.
Compare the cost flow assumptions used to account for inventories.
4.
Determine the effects of inventory errors on the financial statements.
5.
Describe and apply the lower-of-cost-or-net realizable value rule.
6.
Determine ending inventory by applying the gross profit method.
7.
Determine ending inventory by applying the retail inventory method.
8.
Explain how to report and analyze inventory.
75 / 86
Retail Inventory Method
A
Retail Inventory Method:
다시
Our goal is to estimate
its cost. But its retail
value is NOT given.
• Retail companies establish a relationship between cost and sales price in
terms of markup and markdown.
• Applies cost-to-retail ratio to ending inventory at retail prices to
x)
determine inventory at cost
• Given information
noraimportant
.
r
…
-
1.
Sales (or net sales)
2.
Goods available for sale (Beg. inventory + Goods purchased) at retail
3.
Goods available for sale (Beg. inventory + Goods purchased) at cost
있음
없주어며
시
2. minus 1. for ending inventory at retail
3. over 2. for cost-to-retail ratio
Finally, the ratio is applied to the ending
inventory at retail for its cost value.
76 / 86
Retail Inventory Method
Step 1:
Goods Available
for Sale at Retail
-
Net Sales
D
Ending Inventory
=
at Retail
교
Step 2:
Step 3:
Goods Available
for Sale at Cost
÷
Goods Available
=
for Sale at Retail
O
Ending
x
Inventory at Retail
Cost-toRetail Ratio
O
Cost-toRetail Ratio
Estimated Cost of
=
Ending Inventory
• For Goods Available for Sale at Retail, we must consider markups and
markdowns and their cancellation (if any). This approach is called “Cost
Method (Assumption B in the textbook).”
• There is another method called “Conventional Retail (LCNRV) Method
(Assumption A in the textbook)”, where a ratio includes net markups (and
their cancellation, if any), but excludes net markdowns. In this course,
however, we only focus on the cost method.
77 / 86
Retail Inventory Method
Retail Inventory Method:
• Key terminologies
1.
Markup: an additional markup of the original retail (sales) price.
2.
Markup cancellations: decreases in prices of merchandise that the
retailer had marked up above the original retail price.
3.
Markdown: decreases in the original sales price.
4.
Markdown cancellations: occurs when the markdowns are later offset
by increases in the prices of goods that the retailer had marked down.
(Neither a markup cancellation nor a markdown cancellation can exceed the original
markup or markdown.)
78 / 86
Retail Inventory Method
☆ 시험
응
Illustration:
In-Fusion SA can calculate its ending inventory at cost under the (1)
conventional retail method and (2) cost method. The related data is as follows.
What is Goods Available for Sale at Retail (under the Cost Method)?
79 / 86
Retail Inventory Method
☆ 시험
나응
How to compute Estimated Cost of Ending Inventory:
Ending Inventory
=
at Retail
Step 1:
Goods Available
for Sale at Retail
-
Step 2:
Goods Available
for Sale at Cost
Goods Available
÷
=
for Sale at Retail
Step 3:
Ending
x
Inventory at Retail
Net Sales
Cost-toRetail Ratio
Cost-toRetail Ratio
Estimated Cost of
=
Ending Inventory
80 / 86
Evaluation of Retail Inventory Method
Use of the Retail Inventory Method for the following reasons:
• To permit the computation of net income without a physical count of
inventory.
• Control measure in determining inventory shortages.
• Regulating quantities of merchandise on hand.
• Insurance information.
Some companies refine the retail method by computing inventory separately
by departments or class of merchandise with similar gross profits.
81 / 86
Review Question 6: Retail Inventory Method
The following data concerning the retail inventory method are taken from the
financial records of Welch Company:
Cost (in $)
Retail (in $)
Beginning inventory
49,000
70,000
Purchases
224,000
320,000
Freight-in
6,000
NA
Net markups
NA
20,000
Net markdowns
NA
14,000
Sales
NA
336,000
rat
retail
(a) What is the goods available for sale (assuming the cost method is used)?
82 / 86
Review Question 6: Retail Inventory Method
The following data concerning the retail inventory method are taken from the
financial records of Welch Company:
Cost (in $)
Retail (in $)
Beginning inventory
49,000
70,000
Purchases
224,000
320,000
Freight-in
6,000
NA
Net markups
NA
20,000
Net markdowns
NA
14,000
Sales
NA
336,000
(b) The ending inventory at cost should be?
83 / 86
Learning Objectives
1.
Describe inventory classifications and different inventory systems.
2.
Identify the goods and costs included in inventory.
3.
Compare the cost flow assumptions used to account for inventories.
4.
Determine the effects of inventory errors on the financial statements.
5.
Describe and apply the lower-of-cost-or-net realizable value rule.
6.
Determine ending inventory by applying the gross profit method.
7.
Determine ending inventory by applying the retail inventory method.
8.
Explain how to report and analyze inventory.
84 / 86
Presentation of Inventories
Accounting standards require disclosure of:
Skim it over
→
un
에 ilcely
to
be
tested
• Accounting policies adopted in measuring inventories, including the cost
formula used (weighted-average, FIFO)
• Total carrying amount of inventories and the carrying amount in
classifications (merchandise, production supplies, raw materials, work in
progress, and finished goods.
• Carrying amount of inventories carried at fair value less costs to sell.
• Amount of inventories recognized as an expense during the period.
• Amount of any write-down of inventories recognized as an expense in
the period and the amount of any reversal of write-downs recognized as
a reduction of expense in the period.
• Circumstances or events that led to the reversal of a write-down of
inventories.
• Carrying amount of inventories pledged as security for liabilities, if any.
85 / 86
Analysis of Inventories
Inventory Turnover:
• Measures the number of times on average a company sells the inventory
during the period.
Average Days to Sell Inventory:
• Measure represents the average number of days’ sales for which a
company has inventory on hand.
Illustration:
In its 2019 annual report Tate & Lyle plc reported a beginning inventory of
£419 million, an ending inventory of £434 million, and cost of goods sold of
£1,621 million for the year.
86 / 86