Lecture 17 (Current assets: Inventory and receivables)

Question 1

What are the purposes of a stock count?

Answer 1

1. To ensure any inventory records maintained are accurate- this drives reordering so it is important to have good info.
2. To check inventory is in a saleable condition and is not obsolete/damaged.
3. To ensure inventory figures included in the year end accounts are a faithful representation of items held.

Question 2

How are businesses prudent in inventory valuation?

Answer 2

Inventories shall be measured at the lower cost and net realisable value.

Question 3

NET REALISABLE VALUE

Answer 3

The estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale.

Question 4

FIRST IN FIRST OUT (FIFO)

Answer 4

Assume that the goods which arrived first are issued first. (oldest items sold first)

Matches outdated costs against current revenues so inflates profits but gives more up to date inventory value.

Question 5

LAST IN FIRST OUT (LIFO)

Answer 5

Assume that the goods which arrived last are issued first (newest items sold first)

Matches most recent cost against revenues (so decreases profits), BUT inventory value becomes increasingly outdated.

Question 6

AVERAGE COST

Answer 6

Assume that all goods are issued at the average price of the inventory held.

Question 7

What can a business do if trade receivables are not received on time?

Answer 7

Send reminders. 
Phone and chase payment
Send legal letters
May take legal action
May receive cash
May not be worth taking legal action (too expensive)
Some debts may never be recovered.

Question 8

DOUBTFUL DEBTS

Answer 8

Where there is doubt about the value of an asset the directors should be invited to consider making a provision against the loss of the asset.

The asset still remains in the statement of financial position, the provisions shows there is some concern over the recoverability of the amount recorded.

Question 9

BAD DEBT

Answer 9

Where it is known that the debt is bad (because the customer has declared themselves bankrupt) the debtor should be removed from the record as a bad debt.

Asset is removed from the SoFP as it is no longer recoverable.

Question 10

What is the result of bad debt?

Answer 10

Receivables overstated and hence accounts not showing faithful representation.

Question 11

Debits and credits for removing the amount from the trade receivables account.

Answer 11

Dr Bad debt expense (IS)

Cr Trade Receivables (SoFP)

Question 12

Debit and credit for doubtful debts.

Answer 12

Dr Bad debt expense

Cr Bad debt provision

Question 13

SPECIFIC PROVISION

Answer 13

Relates to specific balances that are doubtful

Question 14

GENERAL PROVISION

Answer 14

Know that a specific percentage of debt (know from past experience) will be irrecoverable.
Dr Bad debt expense
Cr Bad debt provision

Question 15

What opening balances are carried forward from SoFP?

Answer 15

Trade receivables

Bad debt provision

Question 16

What happens if money is received (doubtful debt)?

Answer 16

Previous entry:
Dr Bad debt expense
Cr Trade receivables

Reverse previous entry. Need to reinstate receivables
Dr Trade receivables
Cr Bad debt expense

Record cash received
Dr Bank
Cr Trade Receivables