WEEK 9 - Receivables and Inventories Flashcards
(40 cards)
1
Q
Trade Debtors
A
customers that owe you money
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
2
Q
Valuation of Accounts Receivable
A
- uncollected portion of ACR = bad/doubtful debts
- estimation of this value leads to major accounting problem
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
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
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
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
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
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
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
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
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)
12
Q
Monitoring Credit Policies: Ageing Analysis of Receivables
A
- used to gauge age of individual customer’s balances, identify accounts requiring attention
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
14
Q
Monitoring Credit Policies: Average Collection Period
A
Avg Collection Period = ( AVG Receivables x 365 ) / (net credit sales revenue / income)
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
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
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
24
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
25
LIFO - periodic
- cost of last units purchased is assumed to be the cost of first units sold
26
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
27
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'
28
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
29
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
-
30
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
31
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
32
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
33
Returns Moving Average
- return is recorded on the inventory record as actual price negotiated with supplier, and not at moving average price
34
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
35
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
36
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
37
Financial Statements: Inventory Categories
- finished goods
- work in progress
- raw materials
38
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
