Slide 1Ch. 6: ReceivablesSlide 3Ch. 6: Accounts Receivable - UncollectiblesCh. 6: Accounts Receivable – UncollectiblesSlide 6Ch. 6: Notes ReceivableSlide 8Slide 9Slide 10Slide 11InventoryCh. 6: Inventory Cost Flow methodsSlide 14Ch. 6: Inventory Cost Flow methodsCh. 6: Inventory Cost Flow methodsCh. 6: Inventory Cost Flow methodsCh. 6: Inventory Cost Flow methodsCh. 6: Compare three inventory costing methodsSlide 20Slide 21Ch. 6: Financial StatementsCh. 6: Financial StatementsCh. 6: Financial StatementsCh. 9: Accounts Receivable Turnover RatioCh. 9: Inventory Turnover RatioCurrent Assets:Receivables and InventoryChapter 6 A200 - Survey of AccountingUniversity of TennesseeFall 201512Ch. 6: ReceivablesReceivables: Amounts owed to the business by customers and othersReceivables: Recorded as assets on the Balance Sheet: Current asset if the business expects to receive the amount within one year Long-term asset if the business expects to receive the amount in longer than one yearTypes of Receivables we will study in A200:Accounts Receivable (current asset) Notes Receivable (either current or long-term asset)Interest Receivable (current asset)Ch. 6: Accounts ReceivableTransaction #1: During the year, Landers sold goods to customers on accountfor $335,200.STATEMENT OF CASH FLOWSBALANCE SHEETINCOME STATEMENT andSTATEMENT OF RETAINED EARNINGSAssets = Liabilities + EquityAccounts ReceivableRetained Earnings335,200 = 335,200335,200 Sales Revenue 34Ch. 6: Accounts Receivable - Uncollectibles When they sell goods on account, businesses take a risk that they will never receive the cash (i.e., risk that customers will never pay)Uncollectibility Risk can be reduced by:–Refusing to sell on account Cost of this approach: it turns off customers–Transferring collection risk to credit card company Cost of this approach: monthly fees, cost of purchasing or leasing a cardreader, and per-transaction fees can total 5-10% of the totalaccounts receivable.–Transferring collection risk to a factor (sell the right to future cash for cash now.) Cost of this approach: Factors charge 2-10% of the total A/Rec. Proper asset valuation and honest financial reporting require thatbusinesses estimate and report each period how much of their receivablesthey will not collect.5Ch. 6: Accounts Receivable – UncollectiblesAt the end of each accounting period, the business estimates its risk (how much of that period’s sales on account will not be collected.) Landers Corp. now has $335,200 of accounts receivable. The corporation analyzesthe receivables by age (how long they have gone uncollected). It estimates howmuch will not be collected, as follows: Past Due Amount Estimated UncollectibleNot at all $ 23,500 1% = $ 2351-30 days 115,000 6% = 6,90031-60 days 74,000 12%= 8,88061-90 days 91,000 18%= 16,38091-180 days 17,000 32%= 5,440181-365 days 8,000 65%= 5,200Over 365 days 6,700 90%= 6,030Total: $335,200 $49,065Ch. 6: Accounts Receivable - UncollectiblesTransaction #2: In an EOP adjustment, Landers records the estimate of uncollectible accounts. STATEMENT OF CASH FLOWSBALANCE SHEETINCOME STATEMENT and STATEMENT OF RETAINED EARNINGSAssets = Liabilities + EquityAllowance for Doubtful AccountsRetained Earnings(49,065) = (49,065) (49,065)Uncollectible Accounts Expense6Landers reports Accounts Receivable on the balance sheet at Net Realizable Value (accounts receivable minus allowance for doubtful accounts)7Ch. 6: Notes ReceivableA Note is an unconditional promise (a legal contract) containing:1. principal (face) amount2. stated due (maturity) date3. interest rate on face amount for term of note4. term: from issuance to maturityNotes Receivable (Chapter 6) are generated when a business: 1. converts an open account receivable to a formal note, or 2. lends money to another businessNotes Payable (Chapter 8) are generated when a business:1. is required to convert an open account payable to a formal note, or2. borrows moneyCh. 6: Notes ReceivableTransaction #3: Ansel Corporation owed $12,000 to Landers Corporation on an open account receivable. On 9-01-15, Landers demanded that Ansel convert the debt to a formal note. Landers received from Ansel a $12,000, 60-day note at 4% interest. The due date of Landers’s note receivable is 11-01-15.Landers records the conversion:STATEMENT OF CASH FLOWSBALANCE SHEETINCOME STATEMENT and STATEMENT OF RETAINED EARNINGSAssets = Liabilities + EquityAccounts ReceivableNotes Receivable(12,000) 12,000 =8Ch. 6: Notes Receivable - InterestTransaction #4: On 9-30-15, in an end-of-period adjustment, Landers recognized that it had earned 29 days of interest on the note, but had not yet received it. Landers records the interest earned:STATEMENT OF CASH FLOWS BALANCE SHEETINCOME STATEMENT and STATEMENT OF RETAINED EARNINGSAssets = Liabilities + EquityInterest ReceivableRetained Earnings39 = 39 39Interest Revenue9Ch. 6: Notes Receivable - InterestTransaction #5: On 10-31-15, in an end-of-period adjustment, Landers recognized that it had earned another 31 days of interest on the note, but had not yet received it. Landers records the interest earned:STATEMENT OF CASH FLOWS BALANCE SHEETINCOME STATEMENT and STATEMENT OF RETAINED EARNINGSAssets = Liabilities + EquityInterest ReceivableRetained Earnings41 = 41 41Interest Revenue10Ch. 6: Notes Receivable - InterestTransaction #6: On 11-01-15, Landers received payment from Ansel.Landers records the receipt: STATEMENT OF CASH FLOWSBALANCE SHEETINCOME STATEMENT and STATEMENT OF RETAINED EARNINGSAssets = Liabilities + EquityCash Notes ReceivableInterest Receivable12,080Cash in Operating12,080 (12,000) (80)1112Inventory Physical Inventory: Goods or merchandise held for sale to customers - Merchandisers purchase finished goods from manufacturers - Manufacturers purchase the elements to make goodsCost of inventory: Current asset on the balance sheet until goods are sold - Merchandisers report Merchandise Inventory - Manufacturers report Raw Materials Inventory, Work-in-Process Inventory, and Finished Goods Inventory Cost of Goods Sold Expense on the income statement (matched with the revenue generated by the sale) when goods are sold13Ch. 6: Inventory Cost Flow methodsWhen manufacturers and merchandisers sell goods, they either:1. 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