1. Accounting for Receivables and Inventory Cost Flow Chapter 05 McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

2. 5-2 Learning Objectives 1.Explain how the allowance method of accounting for uncollectible accounts affects financial statements. 2.Determine uncollectible accounts expense using the percent of revenue method. 3.Determine uncollectible accounts expense using the percent of receivables method. 4.Explain how accounting for notes receivable affects financial statements. 5.Explain how accounting for credit card sales affects financial statements. 6.Explain how different inventory cost flow methods (specific identification, FIFO, LIFO, and weighted average) affect financial statements.

3. 5-3 Financial Statements

4. 5-4 Inventory Cost Flow Methods Four Common Inventory Cost Flow Methods Specific Identification First-in, First- Out (FIFO) Last-in, First- Out (LIFO) Weighted Average

5. 5-5 Specific Identification When a company’s inventory consists of many high-priced, low-turnover goods the record keeping necessary to use specific identification is more practical.

6. 5-6 Specific Identification Assume TMBC Company purchased two identical inventory items: the first for $100 and the second for $110. Using specific identification, when the first item is sold, cost of goods sold would be $100. When the second item is sold, cost of goods sold would be $110. Alert! A disadvantage of the specific identification method is the opportunity for managers to manipulate the income statement.

7. 5-7 First-in, First-out The first-in, first-out cost flow method requires that the cost of the items purchased first be assigned to Cost of Goods Sold.

8. 5-8 First-in, First-out Assume TMBC Company purchased two identical inventory items: the first for $100 and the second for $110. Using first-in, first-out, the cost assigned to the first item sold would be $100 (the first cost in). The cost of goods sold assigned to the second item sold would be $110.

9. 5-9 Last-in, First-out The last-in, first-out cost flow method requires that the cost of the items purchased last be assigned to Cost of Goods Sold.

10. 5-10 Last-in, First-out Assume TMBC Company purchased two identical inventory items: the first for $100 and the second for $110. Using last-in, first-out, the cost assigned to the first item sold would be $110 (the last cost in). The cost of goods sold assigned to the second item sold would be $100.

11. 5-11 Weighted Average The weighted average cost flow method assigns the average cost of the items available to Cost of Goods Sold.

12. 5-12 Weighted Average Assume TMBC Company purchased two identical inventory items: the first for $100 and the second for $110. Using weighted average, the cost assigned to the first item sold would be $105 (the average cost). Total Cost Total Number = $210 2 = $105

13. 5-13 Effect of Cost Flow on Income Statement The cost flow method a company uses can significantly affect the gross margin reported in the income statement.

14. 5-14 Effect of Cost Flow on Balance Sheet Since total product costs are allocated between costs of goods sold and ending inventory, the cost flow method used affects its balance sheet as well as its income statement.

15. 5-15 End of Chapter Five