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ACCT1101 > WEEK 9 - Receivables and Inventories > Flashcards

WEEK 9 - Receivables and Inventories Flashcards

1
Q

Trade Debtors

A

customers that owe you money

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1
Q

Recognition of Accounts Receivable

A
  • for entities providing services, ACR recognised when services are provided and invoices are issued
  • for wholesaling and retail entities, recognised at time of sale, evidenced by issue of invoices
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2
Q

Valuation of Accounts Receivable

A
  • uncollected portion of ACR = bad/doubtful debts
  • estimation of this value leads to major accounting problem
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3
Q

Bad and Doubtful debts

A
  • recognised in same accounting period which credit sale was recognised (usually, no rule)
  • creditor (entity) can turn receivable to collection agency
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4
Q

Allowance Method for Doubtful Debts

A
  • at end of Acct period, estimate is made of the amount of accounts receivable expected to be uncollectable ie.doubtful debts
  • adjusting entry prepared

eg. Bad Debt Expense
Allowance for Doubtful Debt

  • any Dr or Cr to ACR Control requires a like Dr or Cr to one or more of the subsidiary ledger accounts
  • direct credit to ACR Control acct produces imbalance between it and the subsidiary ledger, therefore destroying an important element of internal control
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5
Q

Estimating Doubtful Debts

A
  • use past experience and economic forecasting to produce reasonable estimate or AcR value to be collected eventually in cash
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6
Q

Estimating Doubtful Debts Methods

A
  • % Net Credit Sales Method
  • ageing of AcR method
    -> if the estimate for doubtful debts is based on analaysis of AcR, estimate is derived from a schedule that analyses and classifies accts receivable by age
    -> past Acct records are therefore analysed to determine appro % of each age group that will become bad debts
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7
Q

Writing off bad debts

A
  • Debit: Allowance for Doubtful Debt
  • Write back GST previously collected on the sale/service by Debit: GST payable
  • Credit: AcR Control

Allowance For Doubtful Debt
GST Payable
Accounts Receivable Control

  • MUST include GST NOTE to obtain adjustment of GST previously collected
  • related account in AcR Subsidiary Ledger is Also Credited
  • for tax purposes, an entity can only claim bad debts actually written off during the year as an allowable deduction
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8
Q

Recover of written off bad debt

A
  • if written off account is collected in part or in full at later date, AcR should be re-established in Accounts ot maintain a complete history of customer’s activity
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9
Q

Direct Write-Off Method

A
  • usually used by small businesses
  • no allowance is made for expected bad debts, and only actual bad debts are charged to expense at time an account is determined to be uncollectable

Dr: Bad Debts Expense
Cr: AcR Control
and the appropriate account in the subsidiary ledger

Bad Debts Expense
Accounts Receivable Control

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10
Q

Credit Policies: Management and Control of Accounts Receivable

A
  • credit department is responsible for investigating the credit history and determining the debt paying ability of customers who apply for credit
  • if customer is a business entity, the credit department normally requests a set of its audited financial statements for use in judging its ability to pay
  • if customer is individual, the credit department asks for information about Cu Earnings, Cu Exps, outsanding debts, general financial position and past experiences in handling obligations
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11
Q

Monitoring Credit Policies

A
  • measure of success of credit policy best done through receipt of cash collections within normal credit items
  • essential that overdue accounts are detected early, and steps are taken to encourage payment (reminder notices, letters, phone calls, handing debt over to debt collectors)
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12
Q

Monitoring Credit Policies: Ageing Analysis of Receivables

A
  • used to gauge age of individual customer’s balances, identify accounts requiring attention
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13
Q

Monitoring Credit Policies: Ratios; Receivable Turnover

A
  • management can also make use of ratios to assess credit control performance
  • use of Receivable turnover policy

Receivable Turnover = (net credit sales / income) / Average Receivables

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14
Q

Monitoring Credit Policies: Average Collection Period

A

Avg Collection Period = ( AVG Receivables x 365 ) / (net credit sales revenue / income)

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15
Q

Internal Control of Accounts Receivable

A
  • record keepers should not have access to cash receipts
  • recording sales returns and allowances, discounts allows, and. bad-debt write-offs should be authorised by a responsible officer and separated from CR and CP functions
  • slow-paying accounts should be periodically reviewed by senior official
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16
Q

Disposal of Accounts Receivable: Use of Credit Cards

A
  • credit limit arrangement amounts to retail business transferring the detailed accounting for and collection of receivables to the issuer of the cards
16
Q

Disposal of Accounts Receivable: Sale of AcR

A
  • businesses sell their accounts receivable in order to
    • realise cash to finance trading operations
    • provide a source of cash for other reasons
    • minimise costs of credit control, collection expenses and bad debt losses
  • disposal of AcR is referred to as FACTORING of accounts receivable
17
Q

Disposal Of accounts Receivable: use of Debit Cards

A
  • used for EFTPOS
18
Q

Performing Stocktake: Periodic

A
  • COGS purchased during period is recorded in purchases account (physical stock take of units on hand to determine the cost of ending inventory
19
Q

Performing Stocktake: Perpetual

A
  • inventory on hand is computerised and balances available instantaneously, a physical stocktake is still done at least once a year to verify the balances recorded in the accounting records
20
Q

Transfer of Ownership

A
  • if terms are DDP (delivery duty paid), the seller is responsible for paying the freight and title usually does not transfer until delivery is made to the buyer
  • sales normally recorded when shipment is made and purchases are recorded when the inventory is received irrespective of shipping terms
21
Q

Goods on Assignment

A
  • a consignment is a selling arrangement whereby a business (the consignor) ships goods to a dealer or agent (the consignee) who agrees to sell the goods on behalf of the consignor for a commission
  • goods out on consignment are therefore part of the consigner’s inventory even though physical possession of the goods is with the consignee
  • the goods are excluded from the inventory of the consignee since they remain under the control and ownership of the consigner
22
Q

Assignment of cost to ending inventory and cost of sales - periodic system

A
  • in order to measure cost expense, the allocation of total inventory cost between inventory and cost of sales must be based on a cost flow assumption
  • several methods based on different cost flow assumptions have been suggested
    -specific identification, FIFO, LIFO, Average Cost
23
Q

Specific Identification Method - Periodic

A
  • indentify each unit on hand to be identifies with a specific purchase invoice
  • the entity must use some form of identification, such as a serial number, stock tag, or barcode containing th cost recorded in some appropriate coding system, which is attached to the item
24
Q

FIFO - Periodic

A
  • fifo method determining the cost of sales is based on the assumption that the cost of the first units acquired is the cost of the first units sold
25
Q

LIFO - periodic

A
  • cost of last units purchased is assumed to be the cost of first units sold
26
Q

weighted average method - periodic

A
  • AVG cost per unit = COG available for sale (incl. cost of beginning inventory and all net purchases) / total number of units available for sale
  • weighted average is then multiplied by the no. units available for sale to determine the cost of ending inventory
27
Q

FIFO: Perpetual

A
  • cost of units removed from inventory is assumed to be fromthe first units available for sale at the time of each sale
  • cost of units on hand, therefore is composed of the most recent purchases
  • identification of units from separate purchases results in what are frequently called ‘inventory cost layers’
28
Q

LIFO

A
  • LIFO + Perpetual inventory system -> cost of sales is determined a the point of each sale based on the assumption that the last costs acquired are transferred out first
29
Q

Moving Average Inventory: Perpetual

A
  • ## because a new weighted average cost is calculated after each purchase rather than simply calculating a weighted average at the end of the period
30
Q

Comparison of Inventory Systems

A
  • values obtained with SIM are = because units idenditfied as sold are the same under both systems
  • When LIFO is used, both the ending inventory and COGS ($) may vary between the pertual and periodic systems
31
Q

Net Realisable Value

A

(estimated selling price in normal course of business) - (estimate costs of completion + estimated costs necessary to make sale)

-> current replacement cost (used for NFP) would incur to acquire asset at end of reporting period

32
Q

Returns FIFO

A
  • goods returned are brought in the latest price attached to relevant sale to ensure cos still reflects the first costs out of inventory
  • cause INV Acct after return to relfect the later costs inwards, and will ensure consistency with FIFO calculations under the periodic inventory system
33
Q

Returns Moving Average

A
  • return is recorded on the inventory record as actual price negotiated with supplier, and not at moving average price
34
Q

Inventory Errors

A
  • inventory balance of unsold goods is usuall largers CuA in SOFP
  • perpetual -> physical stock take made at end of period to verify balances
  • periodic -> errors can occur in pricing/counting and in failure to use proper cut-off dates for recording purchases and sales
35
Q

Estimating Inventories: Retail Inventory Method

A

(1st way) - no physical stocktake is performed and cost of ending inventory is estimated
(2nd way) - physical stock take valued at retail prices, then converted to cost for financial statement purposes

36
Q

Estimating Inventories: Gross Profit Method

A
  • assumption the gross profit % remains same from period to period to period
  • if estimated value for ending inv is required, GP% of previous period is used
37
Q

Financial Statements: Inventory Categories

A
  • finished goods
  • work in progress
  • raw materials
38
Q

Inflation/Deflation and Costing Methods

A

In times of rising prices (inflation)
- FIFO -> highest GP ratio and profit margin, and lowest inventory turnover
- LIFO -> lowest GP ratio and profit margin, and highest inventory turnover
- moving average -> lies between 2 extremes
- specific identification method, 3 ratios can be manipulated merely by selection of item to be sold

ACCT1101 (4 decks)

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