Chapter 6 Receivables and Inventory

Classifying Receivables Accounts Receivable ─ Credit terms extended to customers Notes Receivable ─ More formal agreement ─ Includes a maker and payee Other Receivables ─ Can include interest receivable, taxes receivable, and receivables from employees or officers

Accounting for Notes Receivable

Bad Debt Expense Two Methods DirectWrite-OffMethodAllowanceMethod

Direct Write-Off Method Bad Debt Expense is recorded and the receivable written off when the account is determined to be worthless.

If payment is collected after the write-off, the write-off entry is reversed and the cash collection is recorded

Allowance Method Required by GAAP for companies with large accounts receivable Estimates the accounts receivable that will not be collected and records bad debt expense for this estimate at the end of each period using an allowance account

Estimate of Uncollectible Accounts Receivable: $30,000 If the total accounts receivable balance is $200,000, the new net realizable value is $170,000

Write-Offs to the Allowance Account When a customer’s account is identified as uncollectible, it is written off against the allowance account

If payment is collected after the write-off, the write-off entry is reversed and the cash collection is recorded. Assume a $5,000 account had been previously written off.

Estimating Uncollectible Accounts Based on past experiences and forecasts of the future Two common methods: Percent of Sales Analysis of the Receivables

Sample Aging Schedule

Estimate Based on Percent of Sales Assume that on December 31, 2009, the Allowance for Doubtful Accounts for ExTone Company has a negative balance of $3,250. In addition, ExTone estimates that 3/4% of 2009 credit sales will be uncollectible. Credit sales for the year are $3,000,000.

Estimate Based on Analysis of Receivables Comparing the $26,490 estimate with the unadjusted balance in the allowance account determines the needed adjustment for bad debt expense. Assume the unadjusted balance in the allowance account is a negative $3,250. $23,240 more is needed in the allowance account.

Manufacturing Inventories Materials Inventory Raw material used to make the product Work In Process Inventory Cost of partially completed products Finished Goods Inventory Total cost of completed goods: material, labor, manufacturing overhead

Manufacturing Inventories

Inventory Cost Flow 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 Units Purchased Units Sold

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)

Three Inventory Methods

First-In, First-Out (FIFO) One unit is sold on May 30 for $20

Last-In, First-Out (LIFO) One unit is sold on May 30 for $20

Average Cost One unit is sold on May 30 for $20

Balance Sheet Presentation

Lower of Cost or Market