ACCOUNTING FOR
MANAGERS
University of Management and Technology
1901 North Fort Myer Drive
Arlington, VA 22209
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6-1
ACCT125
Carl S. Warren
Survey of Accounting (2nd ed.)
© 2004 South-Western
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ACCT125
Task Force Clip Art
included in this electronic
presentation is used with
the permission of New
Vision Technology of
Nepean Ontario, Canada.
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6-3
ACCT125
Chapter 6
Receivables and Inventories
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Learning Objectives
1.
2.
3.
4.
Describe the common
of receivables.
Afterclassifications
studying this
Describe the nature of uncollectible receivables.
chapter, you should
Describe methods of estimating uncollectible receivables.
be
able
to:
Describe the common classifications of inventories.
Continued
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6-5
ACCT125
Learning Objectives
5. Describe the three inventory cost flow assumptions and how
they impact the financial statements.
6. Compare and contrast the use of inventory costing
methods.
7. Describe how receivables and inventories are reported on
the financial statements.
8. Compute and interpret the accounts receivable and
inventory turnover ratios.
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ACCT125
Learning Objectives
1
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Describe the
common
classifications of
receivables.
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6-7
ACCT125
When merchandise or services are
sold on credit, an account
receivable is established.
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ACCT125
Most accounts receivable are
expected to be collected in 30 to 60
days; so, they are current assets.
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Notes receivable are amounts
that customers owe for which a
formal, written instrument of
credit has been issued.
Dec. 13, 2005
I promise to pay__________________________________
Douglas Cloud
One Thousand Dollars and no/100
____________________________________________
6
90 days.
at an interest rate of _____%
within ______
T. Wood
________________________
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6-10
ACCT125
Learning Objectives
2
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Describe the
nature of
uncollectible
receivables.
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6-11
ACCT125
Often when a company issues its
own credit card, it sells its
receivables to other companies.
This is called factoring and the
buyer is called the factor.
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ACCT125
Regardless of the
care used in
granting credit and
the collection
procedures used,
some part of the
credit sales will
not be collectible.
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ACCT125
The two methods of accounting for
receivables that appear to be
uncollectible are the allowance method
and the direct-write-off method.
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ACCT125
Learning Objectives
3
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Describe methods
of estimating
uncollectible
receivables.
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ACCT125
Estimating Uncollectibles
Estimate Based on Sales
Balance Sheet
Trans.
Date
Assets
Dec. 31
All. for Dbt. Accts. 3,000
Net Effect
Liabilities Stockholders' Equity
-3,000
-3,000
Retained Earnings
(Net Income)
Trans.
Date
Dec. 31
Net Effect
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Income Statement
Revenue
Expense
Uncoll. Accts. Expense
Net Income
3,000
-3,000
3,000
-3,000
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ACCT125
Estimating Uncollectibles
Estimate Based on Aging of Receivables
The process of determining how long a
receivable has been outstanding and attaching
a percentage to that time period is referred to
as aging the receivables.
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ACCT125
Estimating Uncollectibles
Estimate Based on Aging of Receivables
The longer an account has been
outstanding, the less likely the
receivable will be collected.
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ACCT125
Accounts Receivable Aging and
Uncollectibles
Customer
Ashby & Co.
B. T. Barr
Brock Co.
J. Zimmer Co.
Total
Balance
$ 150
610
470
Not
Past
Due
Days Past Due
1-30
31-60
61-90
91-180 181-365
$ 150
$ 350
$260
$ 470
160
$86,300
over
365
160
$75,000
$4,000 $3,100
$1,900
$1,200
$800
$300
Total accounts receivable
shown by age.
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ACCT125
Accounts Receivable Aging and
Uncollectibles
Customer
Ashby & Co.
B. T. Barr
Brock Co.
J. Zimmer Co.
Total
Balance
$ 150
610
470
Not
Past
Due
Days Past Due
1-30
31-60
61-90
91-180 181-365
$ 150
$ 350
$260
$ 470
160
$86,300
over
365
160
$75,000
$4,000 $3,100
$1,900
$1,200
$800
$300
20%
30%
50%
80%
Uncollectibles
PERCENT
2%
5%
10%
Uncollectible percentages based on
experience and industry averages.
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ACCT125
Accounts Receivable Aging and
Uncollectibles
Customer
Ashby & Co.
B. T. Barr
Brock Co.
J. Zimmer Co.
Total
Balance
$ 150
610
470
Not
Past
Due
Days Past Due
1-30
31-60
61-90
91-180 181-365
$ 150
$ 350
$260
$ 470
160
$86,300
over
365
160
$75,000
$4,000 $3,100
$1,900
$1,200
$800
$300
20%
30%
50%
80%
Uncollectibles
PERCENT
2%
AMOUNT $3,390 = $1,500
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5%
10%
$200
$310
$380
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$360
$400
$240
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ACCT125
Estimating Uncollectibles
Estimate Based on Aging of Receivables
Balance Sheet
Trans.
Date
Assets
Dec. 31
All. for Dbt. Accts. 2,880
Liabilities Stockholders' Equity
-2,880
-2,880
Net Effect
Retained Earnings
(Net Income)
Trans.
Date
Dec. 31
Net Effect
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Income Statement
Revenue
Net Income
Expense
Uncoll. Accts. Expense
2,880
-2,880
2,880
-2,880
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ACCT125
Estimating Uncollectibles
Estimate Based on Aging of Receivables
Notice that when the estimation is based
on accounts receivable, the calculated
amount is the desired ending balance in
the allowance account.
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6-23
ACCT125
Write-Offs to the Allowance
Account
On January 21 John Parker, one of Richards Company’s receivables, files for
bankruptcy. Thus, his account of $6,000 is deemed uncollectible.
Trans.
Date
Balance Sheet
Assets
Liabilities Stockholders' Equity
Jan. 21
Accounts Rec.
Jan. 21
All. for Dbt. Accts. - 6,000
Net Effect
- 6,000
0
Retained Earnings
( Net Income)
Trans.
Date
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Income Statement
Revenue
Expense
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Net Income
6-24
ACCT125
Collecting a Written-Off Account
John Parker won the state lottery, so he is paying all of his bankruptcy
debts. On June 10, Richards Co. receive a check for $6,000.
Trans.
Date
Balance Sheet
Assets
Jun. 10
Accounts Rec.
Jun. 10
All. For Dbt. Accts. 6,000
Jun. 10
Jun. 10
Cash
Accounts Rec.
Net Effect
Trans.
Date
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Liabilities Stockholders' Equity
6,000
6,000
- 6,000
0
Income Statement
Revenue
Expense
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Net Income
6-25
ACCT125
Learning Objectives
4
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Describe the
common
classifications of
inventories.
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6-26
ACCT125
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Materials inventory consists
of the cost of raw materials
used in manufacturing a
product.
Work-in-process inventory
consists of the costs for
partially completed products.
Direct materials
Direct labor costs
Factory
overhead
6-27
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Finished goods inventory
consists of the costs of direct
materials, direct labor, and
factory overhead for
completed products.
When the merchandise is
sold, the costs are
transferred to Cost of Goods
Sold
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ACCT125
Learning Objectives
5
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Describe the three
inventory cost flow
assumptions and how
they impact the
financial statements.
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6-29
ACCT125
One
Three
unit identical
is sold onunits
Mayof30Item
for $20,
X arethe
unit that
purchased
was purchased
during on
May.
May 18.
May 10
18
24
Total
Item X
Purchase
Purchase
Purchase
Units
1
1
1
3
Average cost per unit
Cost
$ 9
13
14
$36
$12
Specific Identification
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ACCT125
The gross profit from this sale
would be $7, which is the selling
price of $20 less the May 18th
cost of $13.
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ACCT125
Fifo Method
Purchased
goods
Sold
goods
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ACCT125
Fifo Method
May 10
18
24
Total
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Item X
Purchase
Purchase
Purchase
Units
1
1
1
3
Average cost per unit
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Cost
$ 9
13
14
$36
$12
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ACCT125
Fifo Method
Effect of Inventory
Costing Methods on
Financial Statements
Income Statement
Sales
Cost of merchandise
sold
Gross profit
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$14
13
Balance Sheet
Merchandise
inventory
$27
$20
9
$11
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ACCT125
Lifo Method
Purchased
Sold
goods
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ACCT125
Lifo Method
May 10
18
24
Total
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Item X
Purchase
Purchase
Purchase
Units
1
1
1
3
Average cost per unit
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Cost
$ 9
13
14
$36
$12
6-36
ACCT125
Lifo Method
Income Statement
Sales
Cost of merchandise
sold
Gross profit
Effect of Inventory
Costing Methods on
Financial Statements
$20
14
$ 6
$13
9
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Balance Sheet
Merchandise
inventory
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$22
6-37
ACCT125
Average Cost Method
Purchased
goods
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Sold
goods
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6-38
ACCT125
Average Cost Method
May 10
18
24
Total
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Item X
Purchase
Purchase
Purchase
Units
1
1
1
3
Average cost per unit
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Cost
$ 9
13
14
$36
$12
6-39
ACCT125
Average Cost Method
Effect of Inventory Costing Methods on
Financial Statements
$12
12
Balance Sheet
Merchandise
inventory
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$24
Income Statement
Sales
Cost of merchandise
sold
Gross profit
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$20
12
$ 8
6-40
ACCT125
Learning Objectives
6
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Compare and
contrast the use of
inventory costing
methods.
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ACCT125
First-In, First-Out
Net sales
$15,000
Cost of merchandise sold:
Beginning inventory
$ 1,800
Purchases
8,600
Merchandise available for sale $10,400
Less ending inventory
3,400
Cost of merchandise sold
7,000
Gross profit
$ 8,000
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ACCT125
Average Cost
Net sales
$15,000
Cost of merchandise sold:
Beginning inventory
$ 1,800
Purchases
8,600
Merchandise available for sale $10,400
Less ending inventory
3,120
Cost of merchandise sold
7,280
Gross profit
$ 7,720
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ACCT125
Last-In, First-Out
Net sales
$15,000
Cost of merchandise sold:
Beginning inventory
$ 1,800
Purchases
8,600
Merchandise available for sale $10,400
Less ending inventory
2,800
Cost of merchandise sold
7,600
Gross profit
$ 7,400
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ACCT125
Inventory Costing Methods
600
500
400
300
200
100
0
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FIFO
LIFO Average cost
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ACCT125
Learning Objectives
7
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Describe how
receivables and
inventories are reported.
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ACCT125
Starbucks’
ASSETS
Current assets:
Cash and cash equivalents
Marketable securities
Accounts receivable, net of
allowance of $4,590
Inventories
Prepaid expenses and other
current assets
Total current assets
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Sept. 30, 2001
(in thousands)
$113,237
107,312
90,425
221,253
61,698
$593,925
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ACCT125
In the lower-of-cost-or-market
method, market is the cost to
replace the merchandise on the
inventory date.
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ACCT125
Valuation of Inventory at Lower-of-Cost-or-Market
Inventory
Item Quantity
A
B
C
D
Total
400
120
600
280
Unit
Cost
Price
$10.25
22.50
8.00
14.00
Unit
Market
Price
$ 9.50
24.10
7.75
14.75
Total
Cost
Total
Market
Lower
C or M
$ 4,100
2,700
4,800
3,920
$ 3,800
2,892
4,650
4,130
$ 3,800
$15,520
$15,472
$15,070
2,700
4,650
3,920
The market decline is either:
1. Based on total inventory ($15,520 – $15,472) = $48
2. Based on individual items ($15,520 – $15,070) = $450
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ACCT125
Learning Objectives
8
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Compute and interpret
the accounts receivable
and inventory turnover
ratios.
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ACCT125
Accounts Receivable Turnover
Net sales on account
Accounts receivable (net):
Beginning of year
End of year
Total
Average
Use: To assess the efficiency
Net Sales
in collecting
receivables
Average
accounts
receivable
and in
the management
of credit
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2006
$1,498,000
2005
$1,200,000
$ 120,000
115,500
$ 235,000
$ 117,500
$ 140,000
120,000
$ 260,000
$ 130,000
12.7
9.2
$1,498,000 $1,200,000
$117,500
$130,000
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ACCT125
Inventory Turnover Ratios
Cost of merchandise sold
Inventories:
Beginning of year
End of year
Average
Inventory turnover
Safeway Inc.
Zale
$22,482,400,000
$920,003,000
$2,444,900,000
$2,508,000,000
$2,476,450,000
$571,669,000
$630,450,000
$601,059,500
9.1 times
1.5 times
Cost
of
merchandise
sold
Use: To assess the efficiency in the
Average inventory
management
of inventory
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6-52
ACCT125