WEEK 9 - Receivables and Inventories Flashcards
Trade Debtors
customers that owe you money
Recognition of Accounts Receivable
- 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
Valuation of Accounts Receivable
- uncollected portion of ACR = bad/doubtful debts
- estimation of this value leads to major accounting problem
Bad and Doubtful debts
- recognised in same accounting period which credit sale was recognised (usually, no rule)
- creditor (entity) can turn receivable to collection agency
Allowance Method for Doubtful Debts
- 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
Estimating Doubtful Debts
- use past experience and economic forecasting to produce reasonable estimate or AcR value to be collected eventually in cash
Estimating Doubtful Debts Methods
- % 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
Writing off bad debts
- 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
Recover of written off bad debt
- 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
Direct Write-Off Method
- 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
Credit Policies: Management and Control of Accounts Receivable
- 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
Monitoring Credit Policies
- 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)
Monitoring Credit Policies: Ageing Analysis of Receivables
- used to gauge age of individual customer’s balances, identify accounts requiring attention
Monitoring Credit Policies: Ratios; Receivable Turnover
- 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
Monitoring Credit Policies: Average Collection Period
Avg Collection Period = ( AVG Receivables x 365 ) / (net credit sales revenue / income)
Internal Control of Accounts Receivable
- 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
Disposal of Accounts Receivable: Use of Credit Cards
- credit limit arrangement amounts to retail business transferring the detailed accounting for and collection of receivables to the issuer of the cards
Disposal of Accounts Receivable: Sale of AcR
- 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
Disposal Of accounts Receivable: use of Debit Cards
- used for EFTPOS
Performing Stocktake: Periodic
- COGS purchased during period is recorded in purchases account (physical stock take of units on hand to determine the cost of ending inventory
Performing Stocktake: Perpetual
- 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
Transfer of Ownership
- 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
Goods on Assignment
- 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
Assignment of cost to ending inventory and cost of sales - periodic system
- 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
Specific Identification Method - Periodic
- 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
FIFO - Periodic
- 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
LIFO - periodic
- cost of last units purchased is assumed to be the cost of first units sold
weighted average method - periodic
- 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
FIFO: Perpetual
- 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’
LIFO
- 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
Moving Average Inventory: Perpetual
- ## because a new weighted average cost is calculated after each purchase rather than simply calculating a weighted average at the end of the period
Comparison of Inventory Systems
- 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
Net Realisable Value
(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
Returns FIFO
- 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
Returns Moving Average
- return is recorded on the inventory record as actual price negotiated with supplier, and not at moving average price
Inventory Errors
- 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
Estimating Inventories: Retail Inventory Method
(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
Estimating Inventories: Gross Profit Method
- 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
Financial Statements: Inventory Categories
- finished goods
- work in progress
- raw materials
Inflation/Deflation and Costing Methods
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
