Accounts Receivable and inventory

• How do you account for when businesses sell goods or services on credit?

  Dr trade receivables

  Cr Sales revenue
• What may be some of the reasons a company may not expect to collect all its receivables?

  - customer may be a bad risk (creditworthiness)

  - customer might be disputing the amount of the invoice you sent

  - a customer may have refused to accept some of the goods because they were faulty or may be planning to send some faulty goods back but has not yet been picked up by accounting system
• What are the two methods to account for uncollectible accounts?

  - direct write-off method

  - allowance method
• What is the direct write-off method?

  -Recording bad debt expense at the time we know the account to be uncollectible

  - actual losses from uncollectible accounts
• What is a problem with the direct write-off method?

  fails to match expenses with the associated revenues in the same period
• What is the allowance method?

  - estimate uncollectible accounts at the end of each period

  - accounts receivable stated at net realizable value on balance sheet, the net amount the company expect to receive in cash
• What is the allowance method better at doing?

  - better matching of expenses with revenues on the income statement
• How do you account using the direct write-off method?

  Dr bad debt expense

  Cr Accounts receivable
• What does allowance for doubtful accounts show?

  -the estimated amount of claims on customers that the company expects will become uncollectible in the future

  - a contra account to accounts receivables
• How do you account/ write off an uncollectible account using allowance method?

  Dr bad debt expense

  Cr Allowance for doubtful accounts
• How do you use the allowance method for recovery of an uncollectible account?

  1. reverse write off account:

  - Dr Accounts receivable

  - Cr allowance for doubtful accounts

  2. Record collection of account:

  - Dr cash

  - Cr Accounts receivable
• How do you estimate the allowance?

  - as a percentage of outstanding receivables

  -set of percentages of outstanding receivables classified by the length of time they have been unpaid.
• What are/ examples of inventories?

  assets held for sale (finished goods), work in progress assets and raw materials
• How do you calculate cost of goods sold?

  opening inventory + cost of goods purchased - closing inventory
• What are two types of systems to monitor inventory?

  - perpetual inventory system

  - periodic inventory system
• what is the perpetual inventory system?

  - constant monitoring of inventory levels and frequent reorders

  - computerized control system usually with point of sale tech which records inventory receipts and issues from stores

  - physical counts take place continuously, are organized and focus on rotated areas
• What is the periodic inventory system?

  - the no. of items in inventory are physically checked periodically and orders for more items are made in light of expected demand relative to the number of items in stores

  - review period is usually fixed, hence higher levels of inventory r typically held

  - many instances, businesses close for counts or its performed overnight
• When is inventory recorder in a perpetual inventory system and what does this mean?

  - recorded as its bought and as its sold.

  -at year end, there is a record of all inventory sold during the year and what it originally cost, so cost of sales is calculated by accounting system automatically
• Where will the trial balance show in terms of costs for a perpetual inventory system?

  cost of sales and closing inventory - NOT purchases and opening inventory
• What are some cost flow assumptions?

  - first-in, first-out

  - average cost

  - last-in, first out
• Which cost flow assumption is prohibited by the IFRS?

  last-in, first-out
• What is first-in, first-out?


  - assumes the items of inventory that were purchased/produced first are sold first - items that remain in inventory at end of period are those most recently purchased/produces

  - inventory and cost of goods sold would be same at end of month when using a perpetual system vs. a periodic system.
• What is the average cost / weighted average method?

  - on the basis of average cost of all similar goods available during the period

  -weighted average method for periodic system vs. moving- average method for perpetual system
• what is last in, first out

  - matches the cost of the last goods purchased against revenue

  - the inventory and cost of goods sold would be different at the end of the month when using a perpetual system vs. a periodic system
• when inventory costs are rising what happens when using the FIFO method?

  results in the highest gross profit, income tax, and net income
• when inventory costs are rising what happens when using the LIFO method?

  results in the lowest gross profit, income tax, and net income
• when inventory costs are rising what happens when using the average cost method?

  results in gross profit, income tax, net income, and inventory amounts that are between FIFO and LIFO
• how do you calculate the weighted average cost per unit?

  total costs of goods purchased/ no. of units avaiaible for sale
• what is the basic principle?

  inventories are measured at the lower of cost and net realizable value
• what is net realizable value (NRV)

  estimated selling price - estimated costs of completion and estimated costs necessary to make the sale
• what are the reasons for discrepancy between NRV and cost?

  - permanent fall in market price of inventory

  - deliberate decision to dispose of high inventory levels

  - physical deterioration

  - product obsolescence

  - deliberate decision to sell "below cost" as marketing strategy
• using the cost of goods sold method how do u write-down inventory to NRV?

  Dr cost of goods sold

  Cr inventory

  - No separate loss is reported in income statement
• using the loss method how do u write-down inventory to NRV?

  Dr inventory loss

  Cr inventory