Survey of accounting 6e chapter 6

Receivables and Inventory

Chapter
6

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Learning Objectives
After studying this chapter, you should be able to:
•

Describe the common classifications of receivables.

•

Describe the nature of and the accounting for
uncollectible receivables.

•

Describe the direct write-off method of accounting for
uncollectible receivables.

•

Describe the allowance method of accounting for
uncollectible receivables.

©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part.

Learning Objectives (continued)
After studying this chapter, you should be able to:
•

Describe the common classifications of inventories.

•

Describe three inventory cost flow assumptions and
how they impact the financial statements.

•

Compare and contrast the use of the three inventory
costing methods.

•

Describe how receivables and inventory are reported
on the financial statements.

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Learning
Objective 1
Describe the common classifications of
receivables

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Classifying Receivables
• Accounts Receivable
• ______________________________
• Notes Receivable
• ______________________________
• ______________________________
• Other Receivables
• ______________________________
______________________________

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Accounting for Notes Receivable
Exhibit 1: Promissory Note

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Learning
Objective 2
Describe the nature of and the accounting
for uncollectible receivables

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Uncollectible Receivables
Q. What if a customer does not pay the balance
owed to the company?
R. Companies must recognize an _________ for
accounts that are not collectible. It is called
____________.

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Bad Debt Expense
Two Methods

_______
______ _____
__________

__________
__________

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Learning
Objective 3
Describe the direct write-off method of
accounting for uncollectible receivables

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Direct Write-Off Method
• Bad Debt Expense is recorded and the receivable written
off when the account is determined to be worthless.

Bad debt expense
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If payment is collected after the write-off
• The write-off entry is reversed and the cash
collection is recorded

Reinstate accounts receivable

Collection of accounts receivable
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Learning
Objective 4
Describe the allowance method of
accounting for uncollectible receivables

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Allowance Method
• Required by GAAP for companies with large amount of
accounts receivable

• Estimates the accounts receivable that will not be
collected and records bad debt expense for this estimate
at the end of each period using an allowance account

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Estimate of Uncollectible
Accounts Receivable: $30,000
• If the total accounts receivable balance is $200,000, the
new net realizable value is $170,000

Uncollectible accounts receivable
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Write-Offs to the Allowance
Account
• When a customer’s account is identified as uncollectible,
it is written off against the allowance account

Net realizable value

No affect on net realizable value

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If payment is collected after the write-off
• The write-off entry is reversed and the cash collection

is recorded.
• Assume a $5,000 account had been previously written
off.

Reinstating account balance

Cash collected
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Estimating Uncollectible
Accounts
• Based on past experiences, industry averages and
forecasts of the future
• Two common methods:

_______ __
________

_________
___
_________

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•

Estimate Based on Percent of
Sales

Assume that on December 31, 2012, the Allowance for
Doubtful Accounts for DPS Company has a negative
balance of $3,250. In addition, DPS estimates that 3/4%
of 2012 credit sales will be uncollectible. Credit sales for
the year is $3,000,000.

Bad debt expense

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Sample Aging Schedule
Exhibit 2: Aging of Receivables schedule, December 31, 2012

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Estimate Based on Analysis of
Receivables
• Comparing the $26,490 estimate of uncollectible account
with the unadjusted balance in the allowance account, we
determine the adjustment needed for bad debt expense.
Assuming that the unadjusted balance in the allowance
account is a negative $3,250, the amount to be added to
this balance is –$23,240.

Bad debt expense
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Learning
Objective 5
Describe the common classifications of
inventory

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Inventory Classification for
Merchandisers
• In Chapter 4, we learned that merchandise on hand is
called merchandise inventory. Inventory sold becomes
the cost of merchandise sold
• Cost of inventory includes all costs of ownership (e.g.,
purchase price, transportation costs, insurance costs,
etc.)

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Merchandising Inventories
Exhibit 4: Size of Merchandise Inventory for Merchandising Businesses

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Manufacturing Inventories
• ____________ Inventory
• Raw material used to make the product
• ____________ Inventory

• Cost of partially completed products
• ____________ Inventory
• Total cost of completed goods: material, labor,
manufacturing overhead

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