Financial Accounting: Cash, Receivables, and Inventory

Posted on Apr 23, 2026 in Accounting and Finance

Chapter 7: Cash and Cash Equivalents

Definitions

  • Cash: Currency, coins, checking account balances, and checks/money orders received from customers.
  • Cash Equivalents: Short-term, highly liquid investments with a maturity date no longer than 3 months from the date of purchase (e.g., Treasury Bills, commercial paper).

IFRS vs. U.S. GAAP

  • GAAP: Bank overdrafts are classified as liabilities.
  • IFRS: Bank overdrafts are treated as a reduction of the cash asset account.

Internal Controls and Compliance

  • SOX Section 404: Requires companies to document and assess internal controls; auditors must express an opinion on the effectiveness of these controls.
  • Restricted Cash: Must be reported separately from regular cash, classified as current or non-current based on the restriction timeline.
  • Segregation of Duties (Cash Receipts): Employee A opens mail/prepares listing; Employee B deposits checks; Employee C records receipts.
  • COSO Framework: Focuses on operational effectiveness, financial reporting reliability, and regulatory compliance.

Sales Returns and Accounting Methods

  • Sales Returns: Recorded in three steps involving revenue adjustments and inventory restoration.
  • Gross Method: Records sales at full amount; discounts are recorded only if taken.
  • Net Method: Records sales at net amount; late payments result in “Discounts Forfeited” revenue.
  • Bad Debt Accounting: The Allowance Method is required by GAAP to match expenses with revenue. The Direct Write-off Method is generally not permitted for GAAP.

Notes Receivable

  • Non-interest-bearing: Recorded at the present value (PV) of the note.
  • Interest-bearing: Recorded at face value with interest accrued over time.

Chapter 8: Inventory Systems

Perpetual vs. Periodic Systems

  • Perpetual: Updates inventory and COGS in real-time.
  • Periodic: Updates inventory and COGS only at the end of the period via physical count.

Inventory Valuation and Shipping

  • F.O.B. Shipping Point: Title transfers when goods leave the seller; buyer owns goods in transit.
  • F.O.B. Destination: Title transfers upon arrival; seller owns goods in transit.
  • Consignment: Consignor retains legal title until the consignee sells the goods.

Cost Flow Assumptions

  • FIFO: Oldest costs assigned to COGS first.
  • LIFO: Most recent costs assigned to COGS first.
  • Average Cost: Uses a weighted average of costs.
  • LIFO Reserve: The difference between FIFO and LIFO inventory values.

Chapter 9: Inventory Measurement

Lower of Cost or Market (LCNRV/LCM)

  • LCNRV: Used for FIFO/Average Cost. Inventory is written down if NRV falls below cost.
  • LCM: Used for LIFO/Retail methods. Market value is constrained by a ceiling (NRV) and a floor (NRV minus normal profit margin).

Estimating Inventory

  • Gross Profit Method: Estimates ending inventory based on historical margins.
  • Retail Inventory Method: Uses cost-to-retail ratios to estimate ending inventory values.

Accounting Changes and Errors

  • Retrospective Treatment: Restating prior financial statements for method changes.
  • Prospective Treatment: Applying changes only to future periods (e.g., switching to LIFO).
  • Inventory Errors: Errors in ending inventory are self-correcting over two periods, as COGS and ending inventory move in opposite directions.