2.18 Class Notes

2.18.2009 Two methods for determination of actual money received. The aging method, which looks at the amount of time outstanding and the percentage that those are likely to be received. A debit to bad debt expense is made based on the probability that certain debts will go uncollected. Accounts Receivable (gross amount) us the total amount of money people owe you. Beginning Balance I Accounts written off +Credit Sales I Cash collections from credit customers EB I Allowance for uncollectable Accounts Accounts Written Off I BB +Estimates of accounts that will not be collected=EB On a balance sheet, we show the net accounts receivable. An account written off leaves the accounts receivable and the allowance for uncollectible debts Bad Debt Expense (Income Statement, closed out every year) BB=0 +Estimates of accounts that will not be collected, Ending Balance closed to retained earnings. Accounts Receivable Turnover-tells you hoq quickly you?re collecting Accounts receivable. A higher number means you?re collecting faster. Credit Sales/Average Accounts Receivable (or Ending A/R) A very high turnover implies that you have strict credit standards (which limits business). If that number is very low, it means that credit is given to everyone or that the company is inefficient in collection Days Outstanding for Accounts Receivable 365/Turnover. Yields number of days the average account is outstanding. Inventory The amount of cost of goods sold depends on the accounting method the company uses. Gross Margin=Revenue-Cost of Goods sold In the U.S., there are several different inventory accounting methods. FIFO-First In, First out. The first thing purchased is the first thing sold. LIFO- Last In, First out. Last thing purchased is the most recently sold. Matching up revenues and costs. Used during inflation to avoid showing massive inflation profits. Also used to pay less taxes. The only reality is tax dollars saved. The physical flow of goods is unchanged. LIFO does not exist outside of the US. Amount of inventory sold is the same, goods purchased cost exactly the same. The only thing that changes is cost of goods sold.