Receivables and Inventory Test

Question 1

Debit Card

Answer 1

Debit cards have flat fees: The same charge is applied to a debit sale, regardless of the cost of the good.
For example, $1 flat fee per transaction

Question 2

Credit card

Answer 2

Credit cards have service fees: These charges are based on a % of the sale
For example, a service fee of 3% is applied to every sale.

Question 3

Assume on Apr. 1, Lee Company has 5 customers use debit cards to purchase merchandise costing $500.

The bank charges Lee Company $1 per debit card transaction.

Answer 3

Debit Card Expense [5 x $1]
Cash [$500 – 5]
Sales
To record debit card sales

5
495
500

Question 4

Assume on Apr. 1, Lee Company sold $500 of merchandise to customers who paid with credit card.

The bank charges Lee Company a 2% service fee for credit card sales.

Answer 4

Credit Card Expense [$500 x 2%]
Cash [$500 – 10]
Sales
To record credit card sales

10
490
500

Question 5

Sold 10 basketballs to various customers at a cost of $25 each on August 1

All the transactions had a $0.50 fee charged by the bank

How did these customers pay

What is the appropriate journal entry

Answer 5

Debit card

Debit Card Expense [10 x $0.50]
Cash [$250 – 5]
(Indent) Sales [10 x $25]
To record debit card sales

5
245
(Indent) 250

Question 6

Made sales of $4,000 on August 1 for basketball equipment

A service charge of 2.5% was applied to these sales by the bank.

How did these customers pay

What is the appropriate journal entry

Answer 6

Credit Card Expense [$4,000 x 2.5%]
Cash [$4,000 – 100]
(Indent) Sales
To record credit card sale

100
3,900
(Indent) 4,000

Question 7

Sold $2,000 worth of sports equipment to a customer who agrees to pay at later date.

What type of sale is this

What is the appropriate journal entry

Answer 7

Sale on account

Accounts Receivable
(Indent) Sales
To record sale on account

2,000
(Indent) 2,000

Question 8

If a customer does not pay in full within a certain amount of time, interest may be

Answer 8

Added to the balance due.

This would be recognized as interest revenue

Accounts Receivable
(Indent) Interest Receivable
To record interest on amount due

XX
(Indent) XX

Question 9

Net Realizable Value

Answer 9

Current market value of asset

Question 10

The Allowance Method

Answer 10

When you know a client can’t pay back fully (you guys talk) so you give “discount” in a sense like what papa does

Question 11

Net Realizable Value Calculation

Answer 11

Gross Accounts Receivable - Allowance for Doubtful Accounts = Net Realizable Value

Bad Debts Expense
(Indent) Allowance for Doubtful Accounts
To record estimate of uncollectible accounts

14,500
(Indent) 14,500

Question 12

Recording Write-Off of Uncollectible Accounts

Answer 12

When a company knows for sure that a receivable is no longer collectible, the write-off has to be recorded

Bad debt expense is not increased – the expense was already recognized when the allowance was initially record

Allowance for Doubtful Accounts
(Indent) Accounts Receivable
Write off of uncollectible account

XX
(Indent) XX

Question 13

Collection of a Written-Off Uncollectible Account

Answer 13

Sometimes, a customer may pay us an amount that we thought would not be paid

Two journal entries required:
A reversal of the write-off
Collection of the receivable

Accounts Receivable -CN
(Indent) Allowance for Doubtful Accounts
To reverse the write-off

XX
(Indent) XX

Cash
(Indent) Accounts Receivable - CN
To record collection of receivable

XX
(Indent) XX

Question 14

Notes Receivable

Answer 14

There may be cases where:
Companies borrow or lend money
Customers will take a long time to pay back money

As such a note receivable may be created, which is a promissory note

A promissory note is written promise to pay back a specific amount of money when requested or at a specific date.

The person making the promise to pay is the maker

The person receivable the money is the payee

The accounting for note receivables is very similar to accounts receivable

Basic issues are accounting for:
Recognizing notes receivable
Disposing of notes receivable

Notes are always valued at net realizable value – similar process to determine bad debt expense and allowance for doubtful accounts

Question 15

Recognizing Notes Receivable

If a note receivable is created to have an account receivable settled:

Answer 15

Notes Receivable
(Indent) Accounts Receivable
To record acceptance of note for account receivable

XX
(Indent) XX

Question 16

Recognizing Notes Receivable

If a note receivable is exchanged for cash (example: a loan), then the entry would be:

Answer 16

Notes Receivable
(Indent) Cash
To record loan of cash in exchange for a note receivable

XX
(Indent) XX

Question 17

Interest Calculation

Answer 17

Principal Amount of Note x Annual Interest Rate x Time in Terms of One Year = Interest

Question 18

Interest Entry

Answer 18

Interest Receivable
(Indent) Interest Revenue
To record accrued interest from a note receivable

XX
(Indent) XX

Question 19

Disposing Notes Receivable

Answer 19

Notes are normally held to their maturity date - the date where the principal and any accrued interest are collected

There are two outcomes that may occur:
Honouring of Notes Receivable – it is paid back to payee
Dishonour of Notes Receivable – it is not paid back

Question 20

Honouring of Notes Receivable

The journal entry to account for this situation is:

Answer 20

Cash
Notes Receivable*
Interest Revenue**
Interest Receivable***
To record collection of note

XXX
(Indent) X
(Indent) X
(Indent) X

• • The principal amount of the note receivable
    ** - The interest accrued
    *** - The interest that has already been accrued
    (may not be necessary to include depending on adjustment date)

Question 21

Dishonouring of Notes Receivable – Payment still expected

Answer 21

A note is dishonoured if it is not paid in full at maturity.
A note is no longer negotiable
Payee still has a claim against the person who owes them money
Balance of note receivable is transferred to accounts

Still need to adjust for interest revenue and credit any interest receivable already recorded as an accrual

Accounts Receivable
Notes Receivable
Interest Revenue
Interest Receivable
To record dishonouring of note when collection is expected

XXX
(Indent) X
(Indent) X
(Indent) X

Question 22

Dishonouring of Notes Receivable – Payment no longer expected

If we believe the note receivable will not be collected, we would write off the note receivable

The journal entry for this situation is:

Answer 22

Allowance for Doubtful Accounts
Notes Receivable
Interest Receivable
To record dishonouring of note when collection is no longer expected

XX
(Indent) X
(Indent) X

Need to write off any interest we already accrued and recorded.

Question 23

Analysis of Receivables

Answer 23

Sales are the most important source of cash for a business

Since most sales are made on account, management of accounts receivable is important for the business to analyse.

As such, there are some measures (ratios) that are used to help evaluate a company’s management of its accounts receivable

Question 24

Analysis of Receivables- Receivables Turnover

Answer 24

measures the average number of times that receivables are collected during a period.

The higher this number is, the more liquid the company’s receivables are

Net Sales/Average Gross Accounts Receivable = Receivables Turnover

Average Gross Accounts Receivable:
The balance in A/R (beginning of a year) + A/R (end of the year)

Question 25

Analysis of Receivables- Collection Period

Answer 25

How long it takes to receive money owed to you 365 days/Receivable turnover = collection period The collection period should not be longer than the credit term period – the time it allows a customer to pay them back A low number usually means they collect money quickly

Question 26

Average Cost Formula

Answer 26

An inventory cost formula that assumes all merchandise is very similar and not sold in any particular order. Often used for goods that don’t expire or break down. To calculate Cost of Goods Sold and Merchandise Inventory: [Cost of Goods Available for Sale (Total Balance of Inventory)] / [Units Available for Sale (Total Balance of Units)]

Question 27

Days Sales in Inventory

Answer 27

A liquidity measure of the average number of days that inventory is held before being sold. It is calculated as: 365 Days/Inventory Turnover Ratio - Lower the better - Not too low cuz then difficulty keeping up with demand

Question 28

First-In, First Out (FIFO) Cost Formula

Answer 28

An inventory cost formula that assumes that the goods purchased the earliest are the first sold when calculating Cost of Good Sold. Often used for goods that expire quickly. COGS are the earliest inventory, the Merchandise Inventory are the latest goods purchased.

Question 29

Inventory Turnover

Answer 29

How quickly company is selling its inventory Formula: (Costs of Goods Sold) / (Average Inventory) OR (Beginning + Ending Inventory)/2

Question 30

Lower of Cost and Net Realizable Value

Answer 30

A method for listing inventory at the lower of its original cost and the net realizable value at the end of a fiscal period

Question 31

Specific Identification

Answer 31

An inventory cost method where goods can be easily identified for the purposes of calculating Cost of Goods Sold and Merchandise Inventory

Question 32

Weighted Average Unit Cost

Answer 32

(Costs of Goods Available for Sale) / (Number of Units Available for Sale)

Question 33

Determining Inventory Quantities

Answer 33

The amount of inventory a company has is determined in two steps: Taking a physical inventory of goods on hand. By determining the ownership of goods in transit Companies will do this at least once a year, and is used to determine the balance of Merchandise Inventory in the Balance Sheet

Question 34

A Nike store employee counts 100 pairs of running shoes in the store’s stock room. Each pair of shoe cost $40 from the store’s supplier. What’s the value of the Merchandise Inventory

Answer 34

[100 shoes x $40/shoe] = $4,000 When each pair is sold, $40 becomes the Cost of Goods Sold

Question 35

Inventory Cost Determination Methods (Specific Identification)

Answer 35

Tracks the actual flow of goods for a business Each inventory item is marked with its cost Used where goods can be specifically and easily identified when sold

Question 36

Inventory Cost Determination Methods (Cost Formulas)

Answer 36

Used when identifying specific inventory is not possible We use a “Cost Formula” instead: First-in, First-out (FIFO) Average Cost The flow of costs may not match physical flow, but it’s the best guess as per the cost principle.

Question 37

First-In, First-Out (FIFO)

Answer 37

Assumes that the goods purchased earlier are sold first Usually matches the flow of goods sold by a company as its best to sell the oldest goods first. (Think of produce sold in a grocery story) Costing: Cost of oldest goods purchased are first to be recognized as Cost of Goods Sold Cost of goods purchased most recently are recognized as the Merchandise Inventory As such, companies need to create perpetual inventory schedules to show the flow of goods

Question 38

Inventory Cost Determination Methods (Cost of Goods Sold)

Answer 38

1. Identify the Cost of Beginning Inventory: This is the value of the inventory you had at the start of the accounting period. It's the cost of goods that were left over from the previous period. 2. Calculate the Cost of Purchases: This is the total cost of all new inventory acquired during the accounting period. Include all costs associated with the purchase, such as the invoice cost, freight-in, and any other costs to get the inventory to your facility. 3. Calculate the Cost of Goods Available for Sale: Add the cost of beginning inventory to the cost of purchases. This represents the total cost of all goods that could potentially be sold during the period. 4. Determine the Cost of Ending Inventory: This is the value of the inventory that remains unsold at the end of the accounting period. You'll need to determine the cost of this inventory using the inventory costing method your business uses (e.g., FIFO, LIFO, or weighted average cost). 5. Calculate the Cost of Goods Sold (COGS): Subtract the cost of ending inventory from the cost of goods available for sale. The result is the total cost of the goods that were sold during the accounting period. Example: Beginning Inventory: $10,000 Purchases: $50,000 Cost of Goods Available for Sale: $10,000 + $50,000 = $60,000 Ending Inventory: $15,000 Cost of Goods Sold (COGS): $60,000 - $15,000 = $45,000

Question 39

Inventory Cost Determination Methods (Merchandise Inventory)?

Question 40

Consistency Principle

Answer 40

Being able to compare financial statements from year to year, so if you use FIFO one year, and average cost in the other, than statements are not comparable (Best to use same method every year)

Question 41

Full Disclosure Principle

Answer 41

Companies must disclose the inventory method used

Question 42

What are the differences in COGS and Merchandise Inventory

Answer 42

Under FIFO, COGS was lower and the balance in Merchandise Inventory was higher Under Average Cost. COGS was high and balance in Merchandise Inventory was lower. The prices on the goods increased throughout the year [$10/unit 🡪 $11 -🡪 $12] Therefore, cheaper goods from earlier would be used in COGS

Question 43

LCNRV

Answer 43

Lower of cost and net realizable value (LCNRV) rule When the value of inventory is lower than its cost, the inventory is written down to its net realizable value at the end of the period This rule follows the GAAP principle of conservatism – requires that accountant uses a method that results in a lower amount of net income or balance for the asset Net Realizable Value: [Selling Price – Costs to make the goods ready for sale] Rule is applied in three steps: Determine the ending balance in Merchandise Inventory with an appropriate cost method Determine the net realizable value of the Merchandise Inventory Compare these two numbers. Use the lower value.

Question 44

Reporting Inventory: Financial Statements In the financial statements, the following information should be disclosed:

Answer 44

The total amount of inventory The cost determination method (Specific, FIFO, or Average) used (in notes of financial statements) The Cost of Goods Sold The amount of any write down to net realizable value

Question 45

Average Gross Accounts Receivable

Answer 45

The balance in A/R (beginning of a year) + A/R (end of the year)