Inventory, bad debts cards Flashcards
What does inventory include?
Items a business intends for sale to customers
Typically reported as a current asset and represents the cost of inventory not yet sold.
What is net realizable value (NRV)?
The estimated selling price
Used to determine the value of inventory.
What are the methods for determining inventory cost?
Specific identification (unit cost)
FIFO: first in first out AVCO: average cost
LIFO: last in first out
What is FIFO in inventory valuation?
First in first out; assumes first units purchased are first ones sold
What does AVCO stand for?
Average cost; assumes each unit of inventory has a cost equal to the weighted-average unit cost of all inventory items
What is LIFO in inventory valuation?
Last in first out; assumes last unit purchased are first ones sold
What is the perpetual inventory system?
Maintains a continual record of inventory on hand, purchased and sold
Helps managers make good decisions and is most often used in practice.
What is the periodic inventory system?
Does not continually record inventory amounts; calculates balance of inventory at the end of period
How should inventories be valued?
At the LOWER of cost and net realizable value
What costs should be included in the cost of inventories?
- Purchases costs
- Carriage inward costs (shipping materials etc.)
- Production costs
What does ‘brought down’ mean in accounting?
Shows beginning balances/opening balances
What does ‘carried down’ mean in accounting?
Shows ending balances/closing balances at the end of the accounting period
What is net revenue?
Total revenues - (any amounts for returns, allowances and discounts)
What are the types of discounts and allowances that can reduce cash received?
- Trade discounts
- Sales returns (returns inwards)
- Sales allowances
- Sales discounts
What is a trade discount?
Reduction in list price of a product or service - used to provide incentives to larger customers
What is a sales discount?
Reduction in the amount to be received from a credit customer if collection occurs within a specified period
How are sales returns, sales allowances, and sales discounts treated on the income statement?
As expenses
How are revenues reported?
For the amount the company is entitled to receive
(total revenues - (trade discounts, sales returns, sales allowances, and sales discounts))
What is a doubtful debt?
Money predicted to be uncollectible and may turn into bad debt
What is bad debt?
Debt officially written off as uncollectible
What does uncollectible mean?
Any money that is owed which is unlikely to be or unable to be paid back
What causes bad debt?
When a trade receivable is unable to pay the amount owed for goods sold on credit
What are two reasons why a debt may be irrecoverable?
- The credit customer cannot be traced
- The customer has been declared bankrupt
*not worth taking to court
What is the prudence concept in accounting?
A business should anticipate potential losses and ensure financial statements do not overstate assets or profits
