Podcast
Questions and Answers
What inventory cost flow method assumes that the oldest inventory items are sold first?
What inventory cost flow method assumes that the oldest inventory items are sold first?
- Last in, First out (LIFO)
- Weighted Average
- Specific Identification
- First in, First out (FIFO) (correct)
Which method of inventory measurement is prohibited by the current standards?
Which method of inventory measurement is prohibited by the current standards?
- Weighted Average
- Moving Average
- First in, First out (FIFO)
- Last in, First out (LIFO) (correct)
In a period of inflation, what is the likely outcome of using the FIFO method on net income?
In a period of inflation, what is the likely outcome of using the FIFO method on net income?
- Reduced sales revenue
- No effect on net income
- Understated net income
- Higher net income (correct)
What is a significant drawback of using the FIFO method for inventory in financial reporting?
What is a significant drawback of using the FIFO method for inventory in financial reporting?
What does the weighted average method primarily focus on when calculating inventory costs?
What does the weighted average method primarily focus on when calculating inventory costs?
What is the primary distinction of the net method for recording accounts receivable?
What is the primary distinction of the net method for recording accounts receivable?
Which accounting method requires recognizing a bad debt loss only when accounts are deemed worthless?
Which accounting method requires recognizing a bad debt loss only when accounts are deemed worthless?
What must occur when a collection is made on an account previously written off as uncollectible?
What must occur when a collection is made on an account previously written off as uncollectible?
Why might small businesses prefer the direct writeoff method?
Why might small businesses prefer the direct writeoff method?
Which of the following statements is true regarding the allowance method?
Which of the following statements is true regarding the allowance method?
What is the common treatment for accounts that are only doubtful of collection?
What is the common treatment for accounts that are only doubtful of collection?
At what point does ownership transfer under the 'FOB shipping point' term?
At what point does ownership transfer under the 'FOB shipping point' term?
What is a significant drawback of the direct writeoff method?
What is a significant drawback of the direct writeoff method?
Who is responsible for freight charges when goods are shipped under 'freight collect'?
Who is responsible for freight charges when goods are shipped under 'freight collect'?
Under the 'FAS' shipping term, who bears the cost of loading the goods onto the vessel?
Under the 'FAS' shipping term, who bears the cost of loading the goods onto the vessel?
What must be done to the customer's account when a collection is made on a previously uncollectible account?
What must be done to the customer's account when a collection is made on a previously uncollectible account?
What are customers' credit balances in accounts receivable classified as?
What are customers' credit balances in accounts receivable classified as?
How are claims receivable initially measured according to PFRS 9?
How are claims receivable initially measured according to PFRS 9?
What does the 'CIF' shipping term require the buyer to pay?
What does the 'CIF' shipping term require the buyer to pay?
For short-term receivables, how is the fair value typically represented?
For short-term receivables, how is the fair value typically represented?
What happens to the title and risk of loss under 'ex-ship' shipping terms?
What happens to the title and risk of loss under 'ex-ship' shipping terms?
After initial recognition, how should accounts receivable be measured according to PFRS 9?
After initial recognition, how should accounts receivable be measured according to PFRS 9?
Under the 'freight prepaid' term, who has paid for the freight charges?
Under the 'freight prepaid' term, who has paid for the freight charges?
In the case of 'freight collect', who ultimately pays for the freight if goods are shipped?
In the case of 'freight collect', who ultimately pays for the freight if goods are shipped?
What term is preferably used in relation to accounts receivable instead of amortized cost?
What term is preferably used in relation to accounts receivable instead of amortized cost?
When estimating the net realizable value of trade accounts receivable, what is one of the deductions made?
When estimating the net realizable value of trade accounts receivable, what is one of the deductions made?
Which shipping term indicates that ownership and risk are transferred only when the goods are at the buyer’s premises?
Which shipping term indicates that ownership and risk are transferred only when the goods are at the buyer’s premises?
Which element is NOT typically considered when determining the initial amount of accounts receivable?
Which element is NOT typically considered when determining the initial amount of accounts receivable?
Why should assets not be carried at above their recoverable amount?
Why should assets not be carried at above their recoverable amount?
What does FOB destination imply regarding the ownership of goods?
What does FOB destination imply regarding the ownership of goods?
When freight is shipped freight collect, who is responsible for the freight charges?
When freight is shipped freight collect, who is responsible for the freight charges?
In the accounting for freight charge when the seller ships goods FOB destination but freight collect, how is the freight charge recorded?
In the accounting for freight charge when the seller ships goods FOB destination but freight collect, how is the freight charge recorded?
What is the purpose of offering a cash discount to credit customers?
What is the purpose of offering a cash discount to credit customers?
How is a cash discount expressed, such as 5/10, n/30?
How is a cash discount expressed, such as 5/10, n/30?
Under the gross method of recording credit sales, how are accounts receivable and sales recorded?
Under the gross method of recording credit sales, how are accounts receivable and sales recorded?
What does freight prepaid indicate about the freight charges?
What does freight prepaid indicate about the freight charges?
What is the implication of allowing for sales returns in accounting for accounts receivable?
What is the implication of allowing for sales returns in accounting for accounts receivable?
What is the main purpose of trade discounts?
What is the main purpose of trade discounts?
How often should a physical count of units on hand be made in a perpetual inventory system?
How often should a physical count of units on hand be made in a perpetual inventory system?
What is a key characteristic of cash discounts?
What is a key characteristic of cash discounts?
What is the main issue with the gross method of recording purchases?
What is the main issue with the gross method of recording purchases?
Which method records purchases at the gross amount of the invoice?
Which method records purchases at the gross amount of the invoice?
What does the net method of recording purchases involve?
What does the net method of recording purchases involve?
What should be included in the cost of inventories?
What should be included in the cost of inventories?
Why do most entities prefer using the gross method despite its theoretical issues?
Why do most entities prefer using the gross method despite its theoretical issues?
Flashcards
FOB Destination
FOB Destination
Ownership of goods transfers to the buyer when the goods arrive at the destination.
FOB Shipping Point
FOB Shipping Point
Ownership of goods transfers to the buyer when the goods are shipped.
Freight Collect
Freight Collect
Freight charge is not yet paid, the buyer pays later.
Freight Prepaid
Freight Prepaid
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Allowance for freight charge
Allowance for freight charge
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Allowance for doubtful accounts
Allowance for doubtful accounts
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Cash Discount
Cash Discount
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Sales Discount
Sales Discount
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Gross Method
Gross Method
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5/10, n/30
5/10, n/30
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Initial Measurement of Accounts Receivable
Initial Measurement of Accounts Receivable
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Subsequent Measurement of Accounts Receivable
Subsequent Measurement of Accounts Receivable
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Net Realizable Value (NRV)
Net Realizable Value (NRV)
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Adjustments to NRV
Adjustments to NRV
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Accounts Receivable, Current vs. Credit Balances
Accounts Receivable, Current vs. Credit Balances
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Claims Receivable
Claims Receivable
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Customers' Credit Balance
Customers' Credit Balance
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Allowance for freight charge
Allowance for freight charge
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Allowance for sales return
Allowance for sales return
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Allowance for sales discount
Allowance for sales discount
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FOB Shipping Point
FOB Shipping Point
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FOB Destination
FOB Destination
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Freight Collect
Freight Collect
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Freight Prepaid
Freight Prepaid
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FAS (Free Alongside)
FAS (Free Alongside)
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CIF (Cost, Insurance, Freight)
CIF (Cost, Insurance, Freight)
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Ex-ship
Ex-ship
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Maritime Shipping Terms
Maritime Shipping Terms
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Net Method
Net Method
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Gross Method
Gross Method
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Allowance for Sales Discount
Allowance for Sales Discount
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Allowance Method
Allowance Method
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Direct Write-off Method
Direct Write-off Method
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Recoveries of Accounts Written Off
Recoveries of Accounts Written Off
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Recharging Customer's Account
Recharging Customer's Account
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Doubtful Accounts (Income Statement)
Doubtful Accounts (Income Statement)
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Perpetual Inventory System
Perpetual Inventory System
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Physical Inventory Count
Physical Inventory Count
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Trade Discount
Trade Discount
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Cash Discount
Cash Discount
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Purchase Discount
Purchase Discount
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Sales Discount
Sales Discount
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Gross Method
Gross Method
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Net Method
Net Method
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Inventory Cost
Inventory Cost
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FIFO Inventory Costing
FIFO Inventory Costing
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Weighted Average Inventory Costing
Weighted Average Inventory Costing
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Inventory Cost Flow Methods
Inventory Cost Flow Methods
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Cost of Goods Sold (COGS)
Cost of Goods Sold (COGS)
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Inventory Valuation
Inventory Valuation
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LIFO Method
LIFO Method
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Study Notes
Trade Receivables
- Claims from sales of merchandise or services
- Examples: accounts receivable, notes receivable
- Accounts receivable are sales of goods and services not supported by notes (customer accounts, trade debts, trade accounts receivable).
- Notes receivable are supported by payment promises
- Non-trade receivables arise outside the ordinary course of business (like shareholder advances).
- Current assets are expected to be collected within a year; non-current assets for over a year.
- Trade receivables are influenced by the operating cycle and the one-year period; nontrade receivables only the one-year period.
- Both trade and nontrade receivables that are collectible are shown on the statement of financial position as one line item called trade and other receivables. Details are disclosed in the notes.
- Examples of non-trade receivables: advances to shareholders, directors, officers, or employees; advances to affiliates, suppliers; subscription receivables (sometimes shown as deduction from subscribed capital); creditors accounts with debit balances (from overpayment or returns/allowances); special deposits on contract bids (normally non-current); dividend, rent, royalty, and accrued interest receivables (usually current); claims receivable (claims against common carriers for losses, claims for rebates, tax refunds—usually current); customers' credit balances from overpayments, returns, and allowances.
Initial Measurement of Accounts Receivable
- Accounts receivable are initially recognized at fair value plus transaction costs.
- Fair value is usually the transaction price.
- For short-term receivables, fair value is equal to the face amount or original invoice amount.
- Cash flows relating to short-term receivables are not normally discounted.
- Transaction costs are not usually incurred for accounts receivable.
Subsequent Measurement
- Accounts receivable are measured at amortized cost, which is usually the net realizable value.
- Net realizable value represents the estimated recoverable amount or cash expected to be collected.
- Adjustments that reduce the amount recoverable from the customer are made. Amount recoverable in the ordinary course of business will reduce the amount recoverable.
Allowance for Sales Returns
- Some customers return goods requiring a reduction in the amount due from sales.
- An estimate of the likely returned goods at year-end is made.
Sales Discount
- Businesses often offer cash discounts for prompt payment.
- A cash discount is a reduction from the invoice price.
- Two main methods:
- Gross Method: Records receivables at gross amount of the invoice
- Net Method: Records receivables at net amount (invoice price minus discount).
Allowance for Sales Discount
- If cash discounts are given, estimates are conceptually made of discounts expected to be taken at the end of the period. Example: If receivables are 1,000,000,discountsmaybeestimatedat1,000,000, discounts may be estimated at 1,000,000,discountsmaybeestimatedat50,000.
Accounting for Bad Debts
- Two main methods exist for accounting for bad debts
- Allowance Method
- Direct Write-off Method
Recoveries of Accounts Written Off
- If collections are made on previously written-off accounts, the procedure is to re-charge the customer's account and possibly the amount previously charged.
- Collections are normally handled by debiting cash and crediting accounts receivable.
Doubtful Accounts
- Accounts potentially uncollectible at year-end
- Accounts that have been previously written-off may be recovered unexpectedly, in which case accounts receivable and the allowance are reversed.
Doubtful Accounts in the Income Statement
- If the granting of credit and collection of accounts is handled by the sales manager, doubtful accounts are considered a distribution cost.
- If another officer handles it, they are considered an administrative expense.
Methods of Estimating Doubtful Accounts
- Aging of Accounts Receivable: Classifies accounts based on due dates (e.g. not due, 1-30 days past due).
- Percent of Accounts Receivable: Uses a certain rate multiplied by the open accounts at the end of the period.
- Percent of Sales: The amount of sales is multiplied by a certain rate (prior year's bad debt losses divided by prior year's credit sales) .
Inventory
- Assets held for sale in the ordinary course of business, in the process of production, or as materials/supplies to be consumed in production.
- Types of Inventory in Manufacturing Concerns:
- Finished Goods: Completed products ready for sale.
- Goods in Process: Partially completed products needing further work.
- Raw Materials: Materials used in production, also called Direct Materials.
- Factory Supplies (Indirect Materials): Materials that are not directly used in the production process.
- Trading Concerns Inventory: Are goods bought and sold in the same form
Legal Test
- To determine if an entity owns goods, applying this test will be used to determine whether or not the inventory should be included or excluded.
Maritime Shipping Terms
- FAS (Free Alongside Ship): Seller pays all costs and risks to deliver goods alongside the ship.
- CIF (Cost, Insurance, and Freight): Buyer pays a lump sum covering cost, insurance, and freight; seller pays loading costs.
- Ex-ship: Seller bears all costs and risks until goods are unloaded; buyer takes responsibility once off the ship.
Accounting for Inventories
- Periodic System: Physical count at end of period; unit cost multiplied by quantity to get total inventory value.
- Perpetual System: Maintaining records (stock cards) to track inventory inflow and outflow; used for large-value items (like jewelery, cars).
Cost of Inventories
- Cost of Purchase: Includes purchase price, import duties, taxes, freight, handling costs.
- Cost of Conversion: Includes costs directly related to units produced, like direct labor and a systematic allocation of fixed and variable production overheads.
Cost Formulas
- FIFO (First-In, First-Out): Assumes first-purchased goods are first sold; goods remaining are most recently purchased.
- Weighted Average: Average cost of all goods available for sale is used to determine the cost of goods sold and ending inventory.
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Description
This quiz focuses on the various aspects of trade receivables, including examples like accounts receivable and notes receivable. It also covers the differences between current and non-current assets and the effects of the operating cycle. Test your knowledge on how these elements are reflected in financial statements.
