Accounting Concepts: Cash, Receivables, Inventory, and Cost of Goods Sold
Bank’s Cash Balance: Company’s Cash Balance: – Gross profit = net sales revenue – cost of goods sold
+ Deposits outstanding + Notes received by bank
– Checks outstanding + Interest received
– Unrecorded payments
– NSF checks from customers
– Bank service dee
+/- bank errors +/- company errors
Record items that increase cash by debiting cash and crediting notes/interest.
Record items that decrease cash by debiting expenses/services/receivables from NSF checks and crediting cash. (No adjusting entries for the bank!)
– Sales Returns: Seller issues a full refund; Customer returns the product
– Sales Allowance: Seller reduced the customer’s balance owed partially; Customer does not return product
–Sales Discounts: intended to provide an incentive to a customer for quick payment.
Purchase discounts are when a company is granted a discount
Sales discounts are when a company grants the buyer
– Net Sales (aka net revenues): A company’s total sales less any discounts, returns, & allowances
Net Sales = Sales – Sales Discounts – Sales Returns & Allowances
– Bad Debt Expense: recognized on the Income Statement as a cost (expense) of offering credit to customers
– Allowance for Uncollectible Accounts: A contra asset account representing the amount of accounts receivable that we do not expect to collect
– Percentage-of-receivables method: Based on the percentage of receivables expected to be uncollectible
Also called the balance sheet approach because the focus is on the Allowance for Uncollectible Accounts
– Percentage-of-credit-sales method: Based on a percentage of credit sales made
Also called the income statement approach because the focus is on Bad Debt Expenses
– Both Methods → debits Bad Debt Expenses & credits Allowance for Uncollectible Accounts
– However, for the Percentage-of-Credit-Sales Method, it adjusts allowance for uncollectible accounts but ignores any existing balance in the account
This method is known as an Income Statement approach since the focus is on Bad Debt Expense (not AFUA)
– Revenues are reported for the amount a company is entitled to receive. This amount equals total revenues minus trade discounts, sales returns, sales allowances, & sales discounts. Trade discounts reduce revenue directly, while sales returns, sales allowances, & sales discounts are recorded in separate contra-revenue accounts & subtracted when calculating net revenues.
– Re-establishing an account to be paid on you would credit Allowance for Uncollectable Accounts and debit Accounts Receivable
–Receivable Turnover Ratio: number of times the average accounts receivable balance is collected in a year (higher is better/more efficient)
– Average Collection Period: number of days the average accounts receivable balance is outstanding (lower is better/more efficient)
– Net Accounts Receivable Expected to Collect = Ending Accounts Receivable Balance – Allowance for Uncollectible Account
– Cost of goods sold: An expense account representing the cost of the inventory that is sold during the period (Expense; Income Statement)
Initial Inventory + Purchased Inventory – Ending Inventory = COGS
– Specific identification – each inventory item is identifiable as to its cost (think cars or jewelry)
– First-in, First-out: The 1st items we purchase are also the 1st items we sell.
– Last-in, First-out: The last items we purchase are the 1st 1s we sell.
– Weighted-average cost (WAC): Calculated as: Cost of goods available for sale / Number of units available 4 sale
– Ending Inventory with WAC→ take the total cost of goods & divide by # of units to find the average value of a unit, then, take the total # of units & subtract units sold to find the ending units, then multiply the ending units by the average value of units to find ending inventory value
– FIFO Method: – LIFO Method:
Matches the physical flow for most companies Costs of goods sold reflect today’s costs
Ending Inventory reflects today’s costs Income-Statement Approach
Balance-Sheet Approach
– When inventory costs are rising, FIFO results in: (& if inventory costs falling then LIFO is all the same)
1. Higher reported amount 4 inventory in the balance sheet
l Higher reported gross profits in the income statement
– Freight charges: Freight-in is added to the Inventory Balance whereas Freight-out may be recognized as COGS or a Selling Expense (disclosed in footnotes)
– If cost is lower than NRV, no adjusting entry is needed. If NRV is lower than cost, adjusting entry is required debiting COGS & crediting inventory.
– Ending Inventory you would multiply your quantity by the LOWEST # either NRV or Cost.
– Cash includes coins and currency, checks received, and balances in savings and checking accounts. The cash balance also includes credit card and debit card sales, as well as cash equivalents, defined as investments that mature within three months from the date of purchase (such as money market funds, Treasury bills, and certificates of deposit).
– When calculating the total AFUA and it already has a normal credit balance, you adjust accordingly through the percentage then debit bad debt expense to get the desired total and credit AFUA (if debit balance then add) (always looking for desired credit balance AFTER adjustment)
– Beginning AR balance + Credit Sales – Collections – Specific Write-Offs = Ending AR balance
– Operating activities:
Cash transactions involving revenues and expenses
Examples: Cash received from customers, cash paid for rent, utilities, supplies, and salaries
– Investing activities:
Cash investments in long-term assets and investment securities
Examples: Purchase or sale of land, equipment, and buildings for cash
– Financing activities:
Transactions designed to finance the business through borrowing and owner investment
Examples: Issue common stock or pay dividends; borrow or repay debt
Receivables and Sales
Inventory and COGS