Receivables and Inventory Chapter ©2013 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part Learning Objectives After studying this chapter, you should be able to: • Describe the common classifications of receivables • Describe the nature of and the accounting for uncollectible receivables • Describe the direct write-off method of accounting for uncollectible receivables • Describe the allowance method of accounting for uncollectible receivables ©2013 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part Learning Objectives (continued) After studying this chapter, you should be able to: • Describe the common classifications of inventories • Describe three inventory cost flow assumptions and how they impact the financial statements • Compare and contrast the use of the three inventory costing methods • Describe how receivables and inventory are reported on the financial statements ©2013 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part Learning Objective Describe the common classifications of receivables ©2013 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part Classifying Receivables • Accounts Receivable • • Notes Receivable • • • Other Receivables • ©2013 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part Accounting for Notes Receivable Exhibit 1: Promissory Note ©2013 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part Learning Objective Describe the nature of and the accounting for uncollectible receivables ©2013 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part Uncollectible Receivables Q What if a customer does not pay the balance owed to the company? R Companies must recognize an _ for accounts that are not collectible It is called ©2013 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part Bad Debt Expense Two Methods _ _ ©2013 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part Learning Objective Describe the direct write-off method of accounting for uncollectible receivables ©2013 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part Footnote Disclosure of Manufacturing Inventories ©2013 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part Learning Objective Describe three inventory cost flow assumptions and how they impact the financial statements ©2013 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part Inventory Cost Flow Units _ Units • Identical units purchased at different unit costs during a period • When units are sold, it is necessary to determine the cost of units sold • Cost of units sold can be determined using a cost flow assumption ©2013 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part Specific Identification • If the merchandise can be identified with a specific purchase, the specific identification method can be used • Each unit of merchandise can be identified with a specific purchase price • Only practical if each unit has a unique identification number (e.g., VIN for an automobile) ©2013 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part Three Inventory Methods _, _ ( ) _, _ ( ) ©2013 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part First-In, First-Out (FIFO) • One unit is sold on May 30 for $20 ©2013 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part Last-In, First-Out (LIFO) • One unit is sold on May 30 for $20 Purchases May 10 May 18 Balance Sheet May 24 May 31 ©2013 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part Average Cost • One unit is sold on May 30 for $20 Purchases May 10 May 18 May 24 Balance Sheet May 31 ©2013 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part Learning Objective Compare and contrast the use of the three inventory costing methods ©2013 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part Comparing Methods - Rising Prices METHOD I/S EFFECT B/S EFFECT RESULT FIFO Lower COGS Higher gross profit Inventory shows replacement cost Benefit lost in higher future costs LIFO Higher COGS Lower gross profit Lower inventory values Matches current cost with current revenue AVERAGE Average (middle) gross profit Average inventory value Compromise between LIFO & FIFO ©2013 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part Learning Objective Describe three inventory cost flow assumptions and how they impact the financial statements ©2013 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part Balance Sheet Presentation Exhibit 8: Receivables and Inventory in Balance Sheet ©2013 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part Lower of Cost or Market Exhibit 9: Determining Inventory at Lower of Cost or Market ©2013 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part Reporting Receivables and Inventory • Accounts Receivable • Classified as a _ asset if collection is expected within • Reported at _ realizable value: _ – _ _ • Inventory • Damaged inventory is reported at the _ realizable value • Net realizable value = _ – _ • Reported at _ ( _) ©2013 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part End of Chapter ©2013 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part ... this chapter, you should be able to: • Describe the common classifications of receivables • Describe the nature of and the accounting for uncollectible receivables • Describe the direct write-off... uncollectible receivables • Describe the direct write-off method of accounting for uncollectible receivables • Describe the allowance method of accounting for uncollectible receivables ©2013 Cengage Learning... Merchandisers • In Chapter 4, we learned that merchandise on hand is called merchandise inventory Inventory sold becomes the cost of merchandise sold • Cost of inventory includes all costs of ownership