lect 6 (I/S)

• What are the key differences between perpetual and periodic inventory systems?

  • Perpetual: Track COGS throughout the year
  • Periodic: Perform inventory checks at year-end
  • Perpetual provides real-time inventory data
  • Periodic updates inventory and COGS periodically
• What is the formula for calculating COGS in a perpetual inventory system?

  Beginning Inventory + Purchases - COGS = Ending Inventory
• How does a periodic inventory system calculate COGS?

  By performing an inventory check at year-end
• What is the main disadvantage of a periodic inventory system?

  Time-consuming and costly to calculate COGS
• What happens to ending inventory under a perpetual inventory system?

  • It may not match actual inventory
  • Can decrease due to spoilage, theft, or damage
  • Requires periodic checks to reconcile differences
• How should inventory be reported on the balance sheet?

  At the lower value of cost or NRV
• What is Net Realisable Value (NRV)?

  Estimated selling price less selling costs
• What should inventory be recorded at if the acquisition cost is £10 and NRV is £15 with selling costs of £2?

  £10
• What should inventory be recorded at if the acquisition cost is £10 and NRV is £11 with selling costs of £3?

  £8
• What must accountants do when NRV is lower than acquisition cost?

  Adjust inventory value downwards
• Why do we not increase inventory value when NRV is greater than acquisition cost?

  Due to the conservatism principle
• What is the accounting treatment for bad debts?

  • Decrease trade receivables by bad debt amount
  • Increase bad debts expense by the same amount
  • Reflects loss in financial statements
• What is classified as a bad debt?

  Debt certain to never be paid
• What is classified as a doubtful debt?

  Debt suspected to be unpaid
• What happens if a customer goes bankrupt?

  Debt is classified as a bad debt
• How does the accounting treatment change for bad debts when a customer goes bankrupt?

  Decrease trade receivables and increase bad debts expense
• How is the balance sheet affected by a bad debt write-off?

  Trade receivables decrease by bad debt amount
• How is the income statement affected by a bad debt write-off?

  Bad debts expense increases
• What are the key components of trade receivables accounting?

  • Record credit sales as trade receivables
  • Adjust for bad debts when necessary
  • Reflect changes in financial statements
• What is classified as a bad debt?

  Debt owed that will never be paid
• What is classified as a doubtful debt?

  Debt suspected may not be paid
• What is the accounting treatment for bad debts?

  • Decrease trade receivables by bad debt amount
  • Increase bad debts expense by bad debt amount
• What happens to trade receivables when a customer goes bankrupt?

  They are decreased by the bad debt amount
• Why are bad debt expenses considered operating expenses?

  They relate to revenue generation processes
• How does accounting for doubtful debts work?

  • Estimate uncollectible receivables
  • Recognize expected loss as an expense
  • Use provision for doubtful debts as a contra-asset
• What is the formula for net trade receivable?

  Net Trade Receivable = Gross Trade Receivable - Provision for doubtful debt
• How do you estimate future doubtful debts?

  Analyze age and balance of trade receivables
• What are the steps to recognize provision for doubtful debt?

  1. Record trade receivables
  2. Estimate uncollectible amount
  3. Create provision for doubtful debt
  4. Adjust net trade receivables
• What happens when a doubtful debt goes bad?

  Write down the bad debts using provision
• How does the treatment differ when the actual bad debt exceeds the provision?

  Recognize additional bad debt expense for excess
• What happens if no trade receivables go bad in a year?

  Provision for doubtful debt remains unchanged
• What is the process for updating the provision for doubtful debts at year-end?

  • Analyze trade receivables
  • Adjust provision based on new estimates
  • Report updated provision on balance sheet
• What are some accounting choices that firms can make?

  Depreciation methods, inventory valuation, doubtful debts estimation
• Why is it important for information users to be aware of management biases?

  Management assumptions can influence financial perceptions