Visit UMT online at South-Western 2004 Survey of Accounting, 2/e 1 of 51 Chapter 6, ACCT125 ACCOUNTING FUNDAMENTALS FOR MANAGERS University of Management and Technology 1901 North Fort Myer Drive Arlington, VA Voice: (703) Fax: (703) Website:

2 of 51Visit UMT online at Chapter 6, ACCT125 Task Force Clip Art included in this electronic presentation is used with the permission of New Vision Technology of Nepean Ontario, Canada.

Visit UMT online at South-Western 2004 Survey of Accounting, 2/e 3 of 51 Chapter 6, ACCT125 Chapter 6 Receivables and Inventories

4 of 51Visit UMT online at Chapter 6, ACCT125 After studying this chapter, you should be able to: ContinuedContinued Learning Objectives 1.Describe the common classifications of receivables. 2.Describe the nature of uncollectible receivables. 3.Describe methods of estimating uncollectible receivables. 4.Describe the common classifications of inventories.

5 of 51Visit UMT online at Chapter 6, 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.

6 of 51Visit UMT online at Chapter 6, ACCT125 1 Describe the common classifications of receivables. Learning Objectives

7 of 51Visit UMT online at Chapter 6, ACCT125 When merchandise or services are sold on credit, an account receivable is established.

8 of 51Visit UMT online at Chapter 6, ACCT125 Most accounts receivable are expected to be collected in 30 to 60 days; so, they are current assets.

9 of 51Visit UMT online at Chapter 6, ACCT125 Notes receivable are amounts that customers owe for which a formal, written instrument of credit has been issued.

10 of 51Visit UMT online at Chapter 6, ACCT125 Describe the nature of uncollectible receivables. 2 Learning Objectives

11 of 51Visit UMT online at Chapter 6, 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.

12 of 51Visit UMT online at Chapter 6, ACCT125 Regardless of the care used in granting credit and the collection procedure used, normally a part of the credit sales will not be collectible.

13 of 51Visit UMT online at Chapter 6, ACCT125 The two methods of accounting for receivables that appear to be uncollectible are the allowance method and the direct-write-off method.

14 of 51Visit UMT online at Chapter 6, ACCT125 Describe methods of estimating uncollectible receivables. 3 Learning Objectives

15 of 51Visit UMT online at Chapter 6, ACCT125 Estimate Based on Sales Estimating Uncollectibles

16 of 51Visit UMT online at Chapter 6, ACCT125 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. Estimate Based on Aging of Receivables Estimating Uncollectibles

17 of 51Visit UMT online at Chapter 6, ACCT125 Estimate Based on Aging of Receivables The longer an account has been outstanding, the less like the receivable will be collected. Estimating Uncollectibles

18 of 51Visit UMT online at Chapter 6, ACCT125 Not Days Past Due Past over CustomerBalanceDue Ashby & Co.$ 150$ 150 B. T. Barr610$ 350$260 Brock Co.470$ 470 J. Zimmer Co Total$86,300$75,000 $4,000$3,100 $1,900$1,200$800$300 Total accounts receivable shown by age. Accounts Receivable Aging and Uncollectibles

19 of 51Visit UMT online at Chapter 6, ACCT125 2%5%10%20%30%50% 80% Uncollectibles PERCENT Uncollectible percentages based on experience and industry averages. Not Days Past Due Past over CustomerBalanceDue Ashby & Co.$ 150$ 150 B. T. Barr610$ 350$260 Brock Co.470$ 470 J. Zimmer Co Total$86,300$75,000 $4,000$3,100$1,900$1,200$800$300 Accounts Receivable Aging and Uncollectibles

20 of 51Visit UMT online at Chapter 6, ACCT125 2%5%10%20%30%50% 80% Uncollectibles PERCENT AMOUNT $3,390 =$1,500$200$310$380$360$400 $240 Not Days Past Due Past over CustomerBalanceDue Ashby & Co.$ 150$ 150 B. T. Barr610$ 350$260 Brock Co.470$ 470 J. Zimmer Co Total$86,300$75,000 $4,000$3,100$1,900$1,200$800$300 Accounts Receivable Aging and Uncollectibles

21 of 51Visit UMT online at Chapter 6, ACCT125 Estimate Based on Aging of Receivables Estimating Uncollectibles

22 of 51Visit UMT online at Chapter 6, ACCT125 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. Estimating Uncollectibles

23 of 51Visit UMT online at Chapter 6, ACCT125 On January 21 John Parker, one of Richards Company’s receivables, files for bankruptcy. Thus, his account of $6,000 is deemed uncollectible. Write-Offs to the Allowance Account

24 of 51Visit UMT online at Chapter 6, ACCT125 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. Collecting a Written-Off Account

25 of 51Visit UMT online at Chapter 6, ACCT125 4 Describe the common classifications of inventories. Learning Objectives

26 of 51Visit UMT online at Chapter 6, ACCT125 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

27 of 51Visit UMT online at Chapter 6, ACCT125 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

28 of 51Visit UMT online at Chapter 6, ACCT125 Describe the three inventory cost flow assumptions and how they impact the financial statements. 5 Learning Objectives

29 of 51Visit UMT online at Chapter 6, ACCT125 Three identical units of Item X are purchased during May. Item X Units Cost May 10Purchase1$ 9 18Purchase113 24Purchase1 14 Total3$36 Average cost per unit$12 Specific Identification One unit is sold on May 30 for $20, the unit that was purchased on May 18.

30 of 51Visit UMT online at Chapter 6, ACCT125 The gross profit from this sale would be $7, which is the selling price of $20 less the May 18th cost of $13.

31 of 51Visit UMT online at Chapter 6, ACCT125 Purchased goods Sold goods Fifo Method

32 of 51Visit UMT online at Chapter 6, ACCT125 Item X Units Cost May 10Purchase1$ 9 18Purchase113 24Purchase1 14 Total3$36 Average cost per unit$12 Fifo Method

33 of 51Visit UMT online at Chapter 6, ACCT125 Income Statement Sales$20 Cost of merchandise sold 9 Gross profit$11 Balance Sheet Merchandise inventory$27 $14 13 Effect of Inventory Costing Methods on Financial Statements Fifo Method

34 of 51Visit UMT online at Chapter 6, ACCT125 Purchased goods Sold goods Lifo Method

35 of 51Visit UMT online at Chapter 6, ACCT125 Item X Units Cost May 10Purchase1$ 9 18Purchase113 24Purchase1 14 Total3$36 Average cost per unit$12 Lifo Method

36 of 51Visit UMT online at Chapter 6, ACCT125 Income Statement Sales$20 Cost of merchandise sold 14 Gross profit$ 6 $13 9 Balance Sheet Merchandise inventory$22 Effect of Inventory Costing Methods on Financial Statements Lifo Method

37 of 51Visit UMT online at Chapter 6, ACCT125 Purchased goods Sold goods Average Cost Method

38 of 51Visit UMT online at Chapter 6, ACCT125 Item X Units Cost May 10Purchase1$ 9 18Purchase113 24Purchase1 14 Total3$36 Average cost per unit$12 Average Cost Method

39 of 51Visit UMT online at Chapter 6, ACCT125 $12 12 Income Statement Sales$20 Cost of merchandise sold 12 Gross profit$ 8 Balance Sheet Merchandise inventory$24 Effect of Inventory Costing Methods on Financial Statements Average Cost Method

40 of 51Visit UMT online at Chapter 6, ACCT125 Compare and contrast the use of inventory costing methods. 6 Learning Objectives

41 of 51Visit UMT online at Chapter 6, ACCT125 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 First-In, First-Out

42 of 51Visit UMT online at Chapter 6, ACCT125 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 Average Cost

43 of 51Visit UMT online at Chapter 6, ACCT125 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 Last-In, First-Out

44 of 51Visit UMT online at Chapter 6, ACCT FIFOLIFO Average cost Number of firms (> $1Billion Sales) Inventory Costing Methods

45 of 51Visit UMT online at Chapter 6, ACCT125 Describe how receivables and inventories are reported. 7 Learning Objectives

46 of 51Visit UMT online at Chapter 6, ACCT125 Starbucks’ ASSETS Sept. 30, 2001 (in thousands) Current assets: Cash and cash equivalents$113,237 Marketable securities107,312 Accounts receivable, net of allowance of $4,59090,425 Inventories221,253 Prepaid expenses and other current assets 61,698 Total current assets$593,925

47 of 51Visit UMT online at Chapter 6, ACCT125 In the lower-of-cost-or-market method, market is the cost to replace the merchandise on the inventory date.

48 of 51Visit UMT online at Chapter 6, ACCT125 $ 3,800 2,700 4,650 3,920 Total $15,520$15,472$15,070 Valuation of Inventory at Lower-of-Cost-or-Market A400$10.25$ 9.50$ 4,100$ 3,800 B ,7002,892 C ,8004,650 D ,9204,130 Unit InventoryCostMarketTotalTotal Lower ItemQuantityPricePriceCostMarketC or M 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

49 of 51Visit UMT online at Chapter 6, ACCT125 Compute and interpret the accounts receivable and inventory turnover ratios. 8 Learning Objectives

50 of 51Visit UMT online at Chapter 6, ACCT125 Accounts Receivable Turnover Net sales on account$1,498,000$1,200,000 Accounts receivable (net): Beginning of year$ 120,000$ 140,000 End of year 115,500120,000 Total$ 235,000$ 260,000 Average$ 117,500$ 130,000 $1,498,000 $117,500 $1,200,000 $130,000 Net Sales Average accounts receivable Use:To assess the efficiency in collecting receivables and in the management of credit

51 of 51Visit UMT online at Chapter 6, ACCT125 Inventory Turnover Ratios Safeway Inc. Zale Cost of merchandise sold$22,482,400,000$920,003,000 Inventories: Beginning of year$2,444,900,000$571,669,000 End of year $2,508,000,000$630,450,000 Average$2,476,450,000$601,059,500 Inventory turnover9.1 times1.5 times Cost of merchandise sold Average inventory Use:To assess the efficiency in the management of inventory