1 Current Assets Receivables and Inventory Chapter 6 A200 Survey of Accounting University of Tennessee 2 Ch 6 Receivables Receivables Amounts owed to the business by customers and others Receivables 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 year Types of Receivables we will study in A200 Accounts Receivable current asset Notes Receivable either current or long term asset Interest Receivable current asset 3 Ch 6 Accounts Receivable Transaction 1 During 2012 Corker Corporation sold goods to customers on account for 335 200 STATEMENT OF CASH FLOWS INCOME STATEMENT and STATEMENT OF RETAINED EARNINGS BALANCE SHEET Assets Accounts Receivable 335 200 Liabilities Equity Retained Earnings 335 200 335 200 Sales Revenue 4 Ch 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 card reader and per transaction fees can total 5 10 of the total accounts 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 that businesses estimate and report each period how much of their receivables Ch 6 Accounts Receivable Uncollectibles 1 At the end of each period the business estimates how much of that period s sales on account will not be collected using the aging of accounts method based on analysis of receivables Recording the estimate Increase Uncollectible Accounts Expense Increase Allowance for Doubtful Accounts 2 Report Accounts Receivable on the Balance Sheet at Net Realizable Value A R minus ADA Note This is similar to the concept of reporting the Net Book Value of our Assets PPE minus Accumulated Depreciation 5 Ch 6 Accounts Receivable Uncollectibles At the end of each accounting period the business estimates its risk how much of that period s sales on account will not be collected Corker Corp now has 335 200 of accounts receivable The corporation analyzes the receivables by age how long they have gone uncollected It estimates how much will not be collected as follows Past Due Amount Estimated Uncollectible Not at all 23 500 1 235 1 30 days 115 000 6 6 900 31 60 days 74 000 12 8 880 61 90 days 91 000 18 16 380 91 180 days 17 000 32 5 440 181 365 days 8 000 65 5 200 Over 365 days 6 700 90 6 030 Total 335 200 49 065 6 7 Ch 6 Accounts Receivable Uncollectibles Transaction 2 In an EOP adjustment Corker Corporation records the estimate of uncollectible accounts STATEMENT OF CASH FLOWS INCOME STATEMENT and STATEMENT OF RETAINED EARNINGS BALANCE SHEET Assets Allowance for Doubtful Accounts 49 065 Liabilities Equity Retained Earnings 49 065 49 065 Uncollectible Accounts Expense Corker reports Accounts Receivable on the balance sheet at Net Realizable Value accounts receivable minus allowance for doubtful accounts 8 Ch 6 Notes Receivable A Note is an unconditional promise a legal contract containing 1 2 3 4 principal face amount stated due maturity date interest rate on face amount for term of note term from issuance to maturity Notes Receivable Chapter 6 are generated when a business 1 converts an open account receivable to a formal note or 2 lends money to another business Notes Payable Chapter 8 are generated when a business 1 is required to convert an open account payable to a formal note or 2 borrows money 9 Ch 6 Notes Receivable Transaction 3 Ansel Corporation owed 12 000 to Corker Corporation on an open account receivable On 9 01 12 Corker demanded that Ansel convert the debt to a formal note Corker received from Ansel a 12 000 60 day note at 4 interest The due date of Corker s note receivable is 11 01 12 Corker records the conversion STATEMENT OF CASH FLOWS INCOME STATEMENT and STATEMENT OF RETAINED EARNINGS BALANCE SHEET Assets Accounts Receivable Notes Receivable 12 000 12 000 Liabilities Equity 10 Ch 6 Notes Receivable Interest Transaction 4 On 9 30 12 in an end of period adjustment Corker recognized that it had earned 29 days of interest on the note but had not yet received it Corker records the interest earned STATEMENT OF CASH FLOWS INCOME STATEMENT and STATEMENT OF RETAINED EARNINGS BALANCE SHEET Assets Interest Receivable 39 Liabilities Equity Retained Earnings 39 39 Interest Revenue 11 Ch 6 Notes Receivable Interest Transaction 5 On 10 31 12 in an end of period adjustment Corker recognized that it had earned another 31 days of interest on the note but had not yet received it Corker records the interest earned STATEMENT OF CASH FLOWS INCOME STATEMENT and STATEMENT OF RETAINED EARNINGS BALANCE SHEET Assets Interest Receivable 41 Liabilities Equity Retained Earnings 41 41 Interest Revenue 12 Ch 6 Notes Receivable Interest Transaction 6 On 11 01 12 Corker received payment from Ansel Corker records the receipt STATEMENT OF CASH FLOWS BALANCE SHEET Assets 12 080 Cash in Operating INCOME STATEMENT and STATEMENT OF RETAINED EARNINGS Cash Notes Receivable Interest Receivable 12 080 12 000 80 Liabilities Equity Inventory 13 Physical Inventory Goods or merchandise held for sale to customers Merchandisers purchase finished goods from manufacturers Manufacturers purchase the elements to make goods Cost 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 revenue generated by the sale when goods are sold the 14 Ch 6 Inventory Cost Flow Assumptions When manufacturers and merchandisers sell goods they either 1 Can specifically identify which specific units were sold inventory cost is expense on the income statement and which are unsold inventory cost is an asset on the balance sheet or 2 Cannot specifically identify which specific units were sold and which were unsold If this is the case the business must choose a Cost Flow Assumption 1 Average Cost 2 FIFO first in first out 3 LIFO last in first out 15 Ch 6 Inventory Cost Flow