Treasury bills, commercial paper and money market funds. (2). Restricted Cash Ex. Petty cash, payroll and dividend funds. Amount is not material, not segregate from cash; amount is material, segregate. (3). Bank Overdrafts: when a company writes a check for more than the amount in its cash account. 2 A/R: (1). Trade receivable: A/R, Notes Receivable. (2). Nontrade receivable: Advances to officers and employees and subsidiaries; Deposits paid to cover potential damages or losses; dividends and interest receivable… (3).
Recognition of A/R: (a) Trade discount. (b) Cash (sales) discounts. Companies value and report short-term receivable at net realizable value—the net amount they expect to receive in cash. (Determining NRV need both uncollectible receivables and any returns or allowances) Two methods are used in uncollectible accounts: (1) the direct write-off method (Bad debt expense-debit, Accounts Receivable-credit). (2) Allowance method: NRV, three essential features: (a). estimate uncollectible receivable. (b).
Debit estimated uncollectible to Bad Debt Expense and credit them to Allowance for Doubtful Accounts. (c). When companies write off a specific account, they debit actual uncollectible to AFDA and credit that amount to A/R. Companies do not close AFDA at the end of fiscal year. Recovery of an Uncollectible Account: It reverses the entry made in writing off the account. It journalizes the collection in the usual manner. Percentage of sales: sales—Bad Debt Expense; Percentage of Receivable: A/R—AFDA, Ch8 Inventories . Perpetual system: continuously track changes in the inventory account, a company records all purchase and sales of goods directly in the inventory account as they occur. ( Purchase of merchandise for resale or RM for production are debited to inventory rather than to purchase; Freight-in is debited to inventory, Purchase returns and allowances and purchase discounts are credited to inventory; COGS is recorded at the time of each sale by debiting COGS and crediting Inventory 2.
Periodic system: a company determines the Q of inventory on hand only periodically. It records all acquisitions of inventory by debiting the purchase account. The periodic system matches the total withdrawals for the month with the total purchases for the month in applying the LIFO method. In contrast, the perpetual system matches each withdrawal with the immediately preceding purchases. FIFO periodic and FIFO perpetual provide the same gross profit and inventory value. LIFO usually produces a lower GP than FIFO. 3. Basic issues in inventory valuation: (1). he physical goods to include in inventory (who owns the goods: FOB shipping point—Buyer’s at time of deliver; Consignment goods—seller’s; Sales with buyback—seller’s; Sales with high rate of returns—buyer’s, if you can estimate returns; Sales on installments—buyer’s, if you can estimate collectability. (2) The cost to include in inventory (product vs. period costs). (3) The cost flow assumption to adopt (specific identification, average cost, FIFO, LIFO, retail) 4. FIFO: in all cases, the inventory and COGS would be the same at the end of the month whether a perpetual or periodic system is used.
LIFO: results in different ending inventory and COGS amounts that the amounts calculated under the periodic method. Not allowed under IFRS; LIFO liquidation can suddenly Inc tax liability; ADV: matching—reflect current prices; tax benefits; fewer write downs of Inventory; DIS: lower NI; understate EI Ch9 Inventories: Additional valuation issues 1. A company abandons the historical cost principle when the future utility (revenue-producing ability) of the asset drops below its original cost.
Companies therefore report inventories at the lower-of-cost-or-market (a conservative approach to inventory valuation) at each reporting period. Net realizable value is the estimated selling price less reasonably predictable costs of completion and disposal (net selling price). A normal profit margin is subtracted from that amount to arrive at net realizable value less a normal profit margin. The general LCM rule is: a company values inventory at the LCM, replacement cost with market limited to an amount that is not more than NRV (upper, ceiling) or less than NRV less a normal profit margin (lower, floor).
The designated market value is the amount that a company compares to cost. It is always the middle value of three amounts (replacement cost, NRV and NRV less a normal PM). Assumption A: Computes a cost ratio after markups (and markup cancellations) but before markdowns. One approach use only assumption A. It approximates the lower-of-average-cost-or-market. We will refer to this approach as the conventional retail inventory method or the LCM approach. It also provides the most conservative estimate of EI.