1. Chapter 10 Bad & doubtful debts

2. Slide 2 notes reference - page 107 Bad Debts If a debt is definitely irrecoverable, it should be written off to the I/S a/c as a bad debt Dr Bad debt expense (I/S) Cr Receivables (B/S)

3. Slide 3 notes reference - page 107 Lecture example 1 The bal c/d on the trade rec a/c is$50,000 The bad debt expense shown in the I/S is$15,000 Bad debt expense Trade Receivables 15,000 bal b/d65,000Bad debt expense15,000 (Ali 7,000 + Tyson 8,000) 50,000bal c/d Trade Receivables 65,000 I/S15,000

4. Slide 4 notes reference - page 108 Doubtful Debts If a debt is possibly irrecoverable, an allowance should be set up Dr Doubtful Debt expense (I/S) Cr Allowance for Doubtful Debts (B/S)

5. Slide 5 notes reference - page 108 Lecture example 2 The allowance for doubtful debts shown on the B/S is $3,500 The doubtful debt expense shown in the I/S is$3,500 Doubtful debt expense Allow for doubtful debts 3,500 Doubtful debt expense3,500bal c/d3,500 bal b/d Allowance for doubtful debts 3,500 I/S3,500

6. Slide 6 notes reference - page 109 Types of allowance Specific: an individual doubtful debt General: after taking into account…. Bad debts and Specific doubtful debts

7. Slide 7 notes reference - page 110 Lecture example 3 Allowance for doubtful debts Bad & D. Debt exp (specific) 400 Trade Receivables bal b/d47,440Bad Debt expense340 Bad & doubtful debt expense Allow for D. Debts (specific) 400 bal c/d 47,100 Trade Rec340 47,440

8. Slide 8 notes reference - page 110 Lecture example 3 47,100 (400) 46,700 Working: General allowance Trade Rec (net of bad debts) Less: specific allowance X 2% = 934

9. Slide 9 notes reference - page 110 Lecture example 3 Allowance for doubtful debts Bad & D. Debt exp ( specific allow ) 400 bal c/d1334 Trade Rec bal b/d47,440 Bad Debt expense340 Bad & doubtful debt expense I/S1,674 Allow for D. Debts (specific) 400 bal c/d 47,100 1,674 Trade Rec340 Allow for D. Debts (general )934 Bad & D. Debt exp (gen allow) 934 1,334 47,440

10. Slide 10 notes reference - page 110 Lecture example 3 (cont’d) The allowance for doubtful debts is: $1,334 Bad and doubtful debt expense is: $1,674

11. Slide 11 notes reference - page 111 Lecture example 4 A specific provision was made against Bugner’s debt in Lecture example 2 Suppose that in the next accounting period, the debt is considered to have gone bad. The double entry would be: Dr Allowance for doubtful debts Cr Receivables Remove allowance Remove debtor from B/S

12. Slide 12 notes reference - page 112 Lecture example 5 Allowance at 31.3.X0 = $20,000 x 5% = $1,000 Allowance at 31.3.X1 = $30,000 x 5% = $1,500 Increase in allowance = $500

13. Slide 13 notes reference - page 112 Bad debt recovered Dr Cash Cr Trade receivables Dr Cash Cr Trade receivables as normal Dr Trade receivables Cr Income statement Dr Trade receivables Cr Income statement to reverse the original bad debt

14. Slide 14 notes reference - page 113 I/S7,000 7,000 Lecture example 6 B/d50,000 Trade receivables Bad debt expense Cash7,000 50,000 Tr rec7,000 c/d50,000 BDE 7,000 Cash Tr rec7,000

15. Slide 15 notes reference - page 113 Debt specifically allowed for pays Dr Cash Cr Trade receivables Dr Cash Cr Trade receivables as normal Dr Allowance for doubtful debts Cr Doubtful debts Dr Allowance for doubtful debts Cr Doubtful debts to correct the original allowance

16. Slide 16 notes reference - page 114 I/S3,500 3,500 b/d3,500 BDDE3,500 Lecture example 7 B/d50,000 Trade receivables Allowance for doubtful debts Cash3,500 46,500 c/d46,500 Bad and doubtful debt expense Cash3,500 Cash ADD3,500

17. Chapter 11 Inventory Adjustments

18. Slide 18 notes reference - page 119 Closing stock adjustment Inventory held at the B/S date is determined by a physical stock count Inventory (B/S) Inventory (IS) DebitCredit 1,400 Being inventory held as at 31 December 20X1

19. Slide 19 notes reference - page 119 Opening inventory In the nominal ledger, at the start of 20X2, the $1,400 inventory total appears as opening inventory Inventory 1,400bal b/d1.1.X2

20. Slide 20 notes reference - page 119 Opening inventory and the trial balance DebitCredit Inventory Receivables Cash Sales Purchases 1,400 9,200 6,400 102,000 72,000 Trial balance as at 31 December 20X2 Preliminary trial balance includes opening inventory

21. Slide 21 notes reference - page 120 Effect of ignoring inventory Trading account for the year ended 31 December 20X2 Sales Purchases Gross Profit $ 102,000 (72,000) 30,000 Does not make sense! Frank has sold 340 ovens at a profit of £100 each Gross profit should be £34,000 340 units 360 units not matched

22. Slide 22 notes reference - page 120 Cost of sales Trading a/c should show COS instead of purchases: Opening inventory Purchases Less: closing inventory $ X X (X) X X Cost of sales =

23. Slide 23 notes reference - page 121 Lecture example 1 IS Opening inventory1,400 IS Closing inventory5,400 bal c/d bal b/d5,400 1,400 (5,400) (68,000) 34,000 Inventory (asset) 1.1.X21,400bal b/d 6,800 Trading a/c for the year ended 31 December 20X2 Sales Cost of sales Opening inventory Purchases Less: closing inventory $$ 102,000 72,000 Gross profit

24. Chapter 12 Inventory valuation

25. Slide 25 notes reference - page 129 Inventory valuation Governed by IAS 2  Significant figure on balance sheet (Current assets)  Direct effect on cost of sales and therefore on profit

26. Slide 26 notes reference - page 129 Inventories figure How much ? - Quantity Normally ascertained by inventory count at end of accounting period Value ? Guidance is provided in IAS 2

27. Slide 27 notes reference - page 129 Valuation Basic rule: “the lower of cost and net realisable value” What is Cost? …costs incurred in bringing the inventories to their present location and condition Includes:(i)Costs of purchase (ii)Costs of conversion (iii)Other costs

28. Slide 28 notes reference - page 130 Net realisable value (NRV) Selling Price 1,000 Less: Costs to completion (200) Less: Selling costs (100) Net realisable value 700

29. Slide 29 notes reference - page 130 No offset Example: Inventory itemCost $ NRV $ Lower $ 1273227 21488 3435543 4 29 40 29 113135107 The inventories figure is $107 not $113

30. Slide 30 notes reference - page 131 Lecture example 1 The value of inventory held is$4,000 Cost Item ABC 10126 Selling price15 1611 Modification costs - (3)(4) Marketing costs (3.50)(2.50)(1) 11.5010.506 Value at: Cost 10 NRV 10.50 Either 6 No. of units held: 100200150 Value: $1,000$2,100$900 ++=$4,000 NRV

31. Slide 31 notes reference - page 131 Lecture example 2 Vino Ltd will show a closing inventory figure of $20,300 in the accounts for 20X6. Working Goods sold on sale or return(50 x $6) Closing inventory value 300 20,300 Closing inventory per question 20,000 $

32. Slide 32 notes reference - page 132 Methods of estimating cost FIFOFirst goods purchased are first to be sold Remaining inventory is latest purchases LIFOLast goods purchased are first to be sold Remaining inventory is earlier purchases AverageAim to produce a reasonable approximation to actual cost cost

33. Slide 33 notes reference - page 133 14.11.X2 500 units 21.11.X2 500 units 28.11.X2 100 units 300 400 (300) (200) (300) (100) nil 400 Closing inventory = 400 x $15 = $6,000 $12 $12.50$14$15 1.11.X210.11.X220.11.X225.11.X2 Open inventory/ purchases Sales Lecture example 3 - FIFO

34. Slide 34 notes reference - page 133 Lecture example 3 - FIFO Applying the FIFO technique of inventory valuation, the closing inventory value isand the cost of sales is $6,000$14,200. Cost of sales Open inventory Purchases Less: closing inventory (300 x $12) (400 x $12.50)+(400 x $14)+(400 x $15)16,600 3,600 (6,000) 20,200 14,200 $

35. Slide 35 notes reference - page 133 14.11.X2 500 units 21.11.X2 500 units 28.11.X2 100 units 300 400 (100) (400) (100) nil 100300 $12 $12.50$14$15 1.11.X210.11.X220.11.X225.11.X2 Opening inventory/ purchases Sales Lecture example 3 - LIFO (100) Closing stock = (100 x $12) + (300 x $15) = $5,700

36. Slide 36 notes reference - page 133 Lecture example 3 - LIFO and the cost of sales is Applying the LIFO technique of inventory valuation, the closing Inv. value is$5,700 $14,500. Cost of sales Opening inventory Purchases Less: closing inventory (300 x $12) (400 x $12.50)+(400 x $14)+(400 x $15)16,600 3,600 (5,700) 20,200 14,500 $

37. Slide 37 notes reference - page 134 Lecture example 3 – simple average Total cost No. of units = $20,200 1,500 =$13.47 each Simple average cost per unit: Closing inventory = 400 x $13.47 = $5,388

38. Slide 38 notes reference - page 134 Lecture example 3 – simple average Cost of sales Open inventory Purchases Less: closing inventory (300 x $12) (400 x $12.50)+(400 x $14)+(400 x $15)16,600 3,600 (5,388) 20,200 14,812 $ Using a simple average, the inventory value would be and the cost of sales would be$5,388$14,812.

39. Slide 39 notes reference - page 134 Lecture example 3 – weighted average 5,60014400Purchases20/11 2,457200 6,143(6,143)12.29(500)Sales14/11 8,60012.29 (W1) 700 5,00012.50400Purchases10/11 3,60012300 Opening inventory 1/11 COS Total cost Av cost Per unit CostUnits (W1) $8,600 / 700 = $12.29 per unit

40. Slide 40 notes reference - page 134 Lecture example 3 – weighted average (cont) 1,469(1,469)14.69(100)Sales28/11 7,34314.69 (W3) 500 6,00015400Purchases 25/11 1,343100 6714(6,714)13.43(500) Sales 21/11 8,05713.43 (W2) 600 COS Total cost Av cost Per unit CostUnits (W2) $8,057 / 600 = $13.43 per unit 14,3265,874400 (W3) $7,343 / 500 = $14.69 per unit O. Inv 1/11

41. Slide 41 notes reference - page 134 Lecture example 3 – weighted average (cont) Using a weighted average, the closing inventory value would be and the cost of sales would be$5,874$14,326

42. Slide 42 notes reference - page 135 Advantages and disadvantages FIFO More realistic LIFO Not permitted under IAS 2 (revised 2003) AVCO Compromise. Can be complex – weighted average required by IAS 2

43. Slide 43 notes reference - page 135 In times of rising prices FIFOHigher inventory value Higher profits

44. Slide 44 End of day 3 - what to do now… 1.Course notes review Course Companion 2. Question practice 3. Study text review Reinforce today’s learning Develop question skills