Visit UMT online at www.umtweb.edu © South-Western 2004 Survey of Accounting, 2/e 1 of 51 Chapter 6, ACCT125 ACCOUNTING FUNDAMENTALS ACCOUNTING FUNDAMENTALS FOR MANAGERS FOR MANAGERS University of Management and Technology 1901 North Fort Myer Drive Arlington, VA 22209 Voice: (703) 516-0035 Fax: (703) 516-0985 Website: www.umtweb.edu
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No Slide Title© South-Western 2004
Arlington, VA 22209
Website: www.umtweb.edu
* of 51
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 www.umtweb.edu
© South-Western 2004
Chapter 6, ACCT125
After studying this chapter, you should be able to:
Continued
Chapter 6, ACCT125
Learning Objectives
Describe the three inventory cost flow assumptions and how they impact the financial statements.
Compare and contrast the use of inventory costing methods.
Describe how receivables and inventories are reported on the financial statements.
Compute and interpret the accounts receivable and inventory turnover ratios.
* of 51
Chapter 6, ACCT125
* of 51
Chapter 6, ACCT125
When merchandise or services are sold on credit, an account receivable is established.
* of 51
Chapter 6, ACCT125
Most accounts receivable are expected to be collected in 30 to 60 days; so, they are current assets.
* of 51
Chapter 6, ACCT125
Notes receivable are amounts that customers owe for which a formal, written instrument of credit has been issued.
Dec. 13, 2005
________________________
6 90
T. Wood
* of 51
Chapter 6, ACCT125
2
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.
* of 51
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.
* of 51
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.
* of 51
Chapter 6, ACCT125
3
Chapter 6, ACCT125
Net Effect
Chapter 6, ACCT125
Estimating Uncollectibles
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
* of 51
Chapter 6, ACCT125
Estimate Based on Aging of Receivables
The longer an account has been outstanding, the less like the receivable will be collected.
* of 51
Chapter 6, ACCT125
Not Days Past Due
Ashby & Co. $ 150 $ 150
Brock Co. 470 $ 470
Total $86,300 $75,000 $4,000 $3,100 $1,900 $1,200 $800 $300
Total accounts receivable shown by age.
* of 51
Chapter 6, ACCT125
2% 5% 10% 20% 30% 50% 80%
Uncollectibles
PERCENT
Not Days Past Due
Ashby & Co. $ 150 $ 150
Brock Co. 470 $ 470
Total $86,300 $75,000 $4,000 $3,100 $1,900 $1,200 $800 $300
* of 51
Chapter 6, ACCT125
2% 5% 10% 20% 30% 50% 80%
Uncollectibles
PERCENT
AMOUNT
Not Days Past Due
Ashby & Co. $ 150 $ 150
Brock Co. 470 $ 470
Total $86,300 $75,000 $4,000 $3,100 $1,900 $1,200 $800 $300
* of 51
Chapter 6, ACCT125
Sheet1
Net Effect
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.
* of 51
Chapter 6, ACCT125
Write-Offs to the Allowance Account
On January 21 John Parker, one of Richards Company’s receivables, files for bankruptcy. Thus, his account of $6,000 is deemed uncollectible.
Sheet1
Net Effect
Chapter 6, ACCT125
Collecting a Written-Off Account
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.
Sheet1
Jun. 10
Cash 6,000
Jun. 10
Chapter 6, ACCT125
* of 51
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
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
* of 51
Chapter 6, ACCT125
Learning Objectives
Describe the three inventory cost flow assumptions and how they impact the financial statements.
5
Chapter 6, ACCT125
Three identical units of Item X are purchased during May.
Item X Units Cost
18 Purchase 1 13
24 Purchase 1 14
Specific Identification
One unit is sold on May 30 for $20, the unit that was purchased on May 18.
* of 51
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.
* of 51
Chapter 6, ACCT125
Chapter 6, ACCT125
18 Purchase 1 13
24 Purchase 1 14
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Chapter 6, ACCT125
* of 51
Chapter 6, ACCT125
Chapter 6, ACCT125
18 Purchase 1 13
24 Purchase 1 14
* of 51
Chapter 6, ACCT125
* of 51
Chapter 6, ACCT125
Average Cost Method
Chapter 6, ACCT125
Average Cost Method
18 Purchase 1 13
24 Purchase 1 14
* of 51
Chapter 6, ACCT125
Average Cost Method
* of 51
Chapter 6, ACCT125
6
Chapter 6, ACCT125
Less ending inventory 3,400
Gross profit $ 8,000
Chapter 6, ACCT125
Less ending inventory 3,120
Gross profit $ 7,720
Chapter 6, ACCT125
Less ending inventory 2,800
Gross profit $ 7,400
Chapter 6, ACCT125
Inventory Costing Methods
* of 51
Chapter 6, ACCT125
7
Chapter 6, ACCT125
Marketable securities 107,312
Chapter 6, ACCT125
In the lower-of-cost-or-market method, market is the cost to replace the merchandise on the inventory date.
* of 51
Chapter 6, ACCT125
A 400 $10.25 $ 9.50 $ 4,100 $ 3,800
B 120 22.50 24.10 2,700 2,892
C 600 8.00 7.75 4,800 4,650
D 280 14.00 14.75 3,920 4,130
Unit Unit
Item Quantity Price Price Cost Market C 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
* of 51
Chapter 6, ACCT125
Compute and interpret the accounts receivable and inventory turnover ratios.
8
Chapter 6, ACCT125
Accounts Receivable Turnover
Accounts receivable (net):
Total $ 235,000 $ 260,000
Average $ 117,500 $ 130,000
Use: To assess the efficiency in collecting receivables and in the management of credit
12.7
9.2
$1,498,000
$117,500
$1,200,000
$130,000
Chapter 6, ACCT125
Inventory Turnover Ratios
Safeway Inc. Zale
Inventories:
Average $2,476,450,000 $601,059,500
Use: To assess the efficiency in the management of inventory
Cost of merchandise sold
Cash 6,000
Balance Sheet
AssetsStockholders' Equity
0
Liabilities
-2,880-2,880
Arlington, VA 22209
Website: www.umtweb.edu
* of 51
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 www.umtweb.edu
© South-Western 2004
Chapter 6, ACCT125
After studying this chapter, you should be able to:
Continued
Chapter 6, ACCT125
Learning Objectives
Describe the three inventory cost flow assumptions and how they impact the financial statements.
Compare and contrast the use of inventory costing methods.
Describe how receivables and inventories are reported on the financial statements.
Compute and interpret the accounts receivable and inventory turnover ratios.
* of 51
Chapter 6, ACCT125
* of 51
Chapter 6, ACCT125
When merchandise or services are sold on credit, an account receivable is established.
* of 51
Chapter 6, ACCT125
Most accounts receivable are expected to be collected in 30 to 60 days; so, they are current assets.
* of 51
Chapter 6, ACCT125
Notes receivable are amounts that customers owe for which a formal, written instrument of credit has been issued.
Dec. 13, 2005
________________________
6 90
T. Wood
* of 51
Chapter 6, ACCT125
2
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.
* of 51
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.
* of 51
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.
* of 51
Chapter 6, ACCT125
3
Chapter 6, ACCT125
Net Effect
Chapter 6, ACCT125
Estimating Uncollectibles
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
* of 51
Chapter 6, ACCT125
Estimate Based on Aging of Receivables
The longer an account has been outstanding, the less like the receivable will be collected.
* of 51
Chapter 6, ACCT125
Not Days Past Due
Ashby & Co. $ 150 $ 150
Brock Co. 470 $ 470
Total $86,300 $75,000 $4,000 $3,100 $1,900 $1,200 $800 $300
Total accounts receivable shown by age.
* of 51
Chapter 6, ACCT125
2% 5% 10% 20% 30% 50% 80%
Uncollectibles
PERCENT
Not Days Past Due
Ashby & Co. $ 150 $ 150
Brock Co. 470 $ 470
Total $86,300 $75,000 $4,000 $3,100 $1,900 $1,200 $800 $300
* of 51
Chapter 6, ACCT125
2% 5% 10% 20% 30% 50% 80%
Uncollectibles
PERCENT
AMOUNT
Not Days Past Due
Ashby & Co. $ 150 $ 150
Brock Co. 470 $ 470
Total $86,300 $75,000 $4,000 $3,100 $1,900 $1,200 $800 $300
* of 51
Chapter 6, ACCT125
Sheet1
Net Effect
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.
* of 51
Chapter 6, ACCT125
Write-Offs to the Allowance Account
On January 21 John Parker, one of Richards Company’s receivables, files for bankruptcy. Thus, his account of $6,000 is deemed uncollectible.
Sheet1
Net Effect
Chapter 6, ACCT125
Collecting a Written-Off Account
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.
Sheet1
Jun. 10
Cash 6,000
Jun. 10
Chapter 6, ACCT125
* of 51
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
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
* of 51
Chapter 6, ACCT125
Learning Objectives
Describe the three inventory cost flow assumptions and how they impact the financial statements.
5
Chapter 6, ACCT125
Three identical units of Item X are purchased during May.
Item X Units Cost
18 Purchase 1 13
24 Purchase 1 14
Specific Identification
One unit is sold on May 30 for $20, the unit that was purchased on May 18.
* of 51
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.
* of 51
Chapter 6, ACCT125
Chapter 6, ACCT125
18 Purchase 1 13
24 Purchase 1 14
* of 51
Chapter 6, ACCT125
* of 51
Chapter 6, ACCT125
Chapter 6, ACCT125
18 Purchase 1 13
24 Purchase 1 14
* of 51
Chapter 6, ACCT125
* of 51
Chapter 6, ACCT125
Average Cost Method
Chapter 6, ACCT125
Average Cost Method
18 Purchase 1 13
24 Purchase 1 14
* of 51
Chapter 6, ACCT125
Average Cost Method
* of 51
Chapter 6, ACCT125
6
Chapter 6, ACCT125
Less ending inventory 3,400
Gross profit $ 8,000
Chapter 6, ACCT125
Less ending inventory 3,120
Gross profit $ 7,720
Chapter 6, ACCT125
Less ending inventory 2,800
Gross profit $ 7,400
Chapter 6, ACCT125
Inventory Costing Methods
* of 51
Chapter 6, ACCT125
7
Chapter 6, ACCT125
Marketable securities 107,312
Chapter 6, ACCT125
In the lower-of-cost-or-market method, market is the cost to replace the merchandise on the inventory date.
* of 51
Chapter 6, ACCT125
A 400 $10.25 $ 9.50 $ 4,100 $ 3,800
B 120 22.50 24.10 2,700 2,892
C 600 8.00 7.75 4,800 4,650
D 280 14.00 14.75 3,920 4,130
Unit Unit
Item Quantity Price Price Cost Market C 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
* of 51
Chapter 6, ACCT125
Compute and interpret the accounts receivable and inventory turnover ratios.
8
Chapter 6, ACCT125
Accounts Receivable Turnover
Accounts receivable (net):
Total $ 235,000 $ 260,000
Average $ 117,500 $ 130,000
Use: To assess the efficiency in collecting receivables and in the management of credit
12.7
9.2
$1,498,000
$117,500
$1,200,000
$130,000
Chapter 6, ACCT125
Inventory Turnover Ratios
Safeway Inc. Zale
Inventories:
Average $2,476,450,000 $601,059,500
Use: To assess the efficiency in the management of inventory
Cost of merchandise sold
Cash 6,000
Balance Sheet
AssetsStockholders' Equity
0
Liabilities
-2,880-2,880
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