Short-term Assets: Inventory & Accounts Receivable

Question 1

What is COGS and how is it calculated?

Answer 1

COGS is an expense and is calculated as:

Units sold x respective cost

Question 2

What is inventory and how is it calculated?

Answer 2

Inventory is an asset and is calculated as:

Remaining units x cost per unit

Question 3

Whats the FIFO method and how does it work?

Answer 3

The oldest units are sold first

—> The remaining inventory is composed of the newest units
—> The units sold are the oldest units

Question 4

Whats the LIFO method and how does it work?

Answer 4

The newest units are sold first

—> The remaining inventory is composed of the oldest units
—> The units sold are the newest units

Question 5

Whats the weighted average cost and how is it calculated?

Answer 5

The units are the ones from the starting balance + the purchase for the period

Cost per unit = cost of units purchased : number of units purchased

Question 6

What are the benefits & risks of accounts receivable?

Answer 6

Benefits:
—> More potential revenue sources
—> Larger customer base

Risks:
—> Customer night not be able to fulfill contract obligation

Question 7

Name the two methods for the treatment of accounts receivable

Answer 7

1. Direct Write-Off Method

2. Allowance Method

Question 8

Whats the direct write-off method?

Answer 8

The direct write-off method is used when we decide a customer will not pay

Therefore a bad debt is charged to expense as soon as it is apparent that an invoice will not be paid

Question 9

Whats the Allowance Method?

Answer 9

An estimate of the future amount of bad debt is charged to a reserve account
—> Aging method
—> Percent-of-receivables method
-recognizes expenses (uncollectible) in same period in which related revenues are earned