LESSON THREE CURRENT ASSETS.docx
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LESSON THREE CURRENT ASSETS.docx
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LESSONTHREECURRENTASSETS
LESSONTHREECURRENTASSETS
LESSONTHREE
CURRENTASSETS
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Aims:
14>>.Toexplaintheimportanceofcashandtheaccountingtreatmentofcash>.
2>.Todiscussthebaddebtandtheaccountingtreatment
3>.Tomakeallowancefordoubtfulaccountreceivable>.
4>.Towriteoffanun-collectibleaccountreceivable>.
5>.Toexplaintwosystemsofinventoryaccounting>.
6>.Tointroducetheinventoryvaluationmethod:
FIFO&LIFO>.
7>.Todiscusstheaccountingtreatmentofcurrentassets>.
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3>.1IntroductiontoAssets
Assetsarefutureeconomicbenefitsobtainedorcontrolledbyanentityasaresultofpasttransactionsorevents>.Assetsmaybephysical,suchasland,buildings,inventoryofsupplies,material,orfinishedproducts>.Assetsmayalsobeintangible,suchaspatentsandtrademarks>.
Assetsarenormallydividedintotwomajorcategories:
currentassetsandlong-termassets>.
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3>.2CurrentAssets
Currentassetsareassets:
(1)intheformofcash,
(2)thatwillnormallyberealizedincash,or
(3)thatconservetheuseofcashduringtheoperatingcycleofafirmorforoneyear,whicheverislonger>.
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3>.3Cash
Cashismoneyintheformofbillsorcoins,whichcanpromptpaymentforgoodsorservicesincurrencyorbycheck>.Cashislistedfirstinthebalancesheet,becauseitisthemostliquidofallcurrentassets>.
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3>.4Inventory
Inventoryreferstovariousassetsthatarestockedforthepurposeofsale,productionorconsumptionduringtheprocessoftheproductionandoperationforabusiness>.Thedefinitionofinventoryisappliedtomanufacturingenterprisesaswellasmerchandisingenterprises>.
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3>.5FourCommonInventoryCostFlowMethods
1>.Specificidentification;
2>.First-in,first-out(FIFO);
3>.Last-in,fast-out(LIFO);
4>.Weighted-average>.
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3>.6ImpactontheIncomeStatementoftheCostFlowMethod
Thecostflowmethodacompanyusesinitsaccountinghasastraightinfluenceontheincomestatement,costofgoodssold,andthegrossmargin,sotheincomemustbeinfluenced>.
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3>.7ImpactontheBalanceSheetoftheCostFlowMethod
Sincethecostofinventoryisallocatedbetweenthecostofgoodssoldandtheendinginventory,thetypeofthecostflowmethodemployedbyacompanyhaseffectsonthebalancesheetaswellastheincomestatement>.
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FIFOtransfersthefirstcoststotheincomestatementwhileleavingthelastinthebalancesheet>.Contrary,
LIFOmovesthefirstcosttotheincomestatementandremainsthelastcostinthebalancesheet>.
Theweighted-averageusesthesameaveragecostsforbothincomestatementandbalancesheet>.
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3>.8AnExampleofthePerpetualInventorySystem>.
AssumethatacompanynamedYouthElectricMotorhadsuchendingbalancesinitsaccounts:
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Nowconsiderthefollowingtransactionsthathappenedinyear20X5:
(1)Twopurchasesofelectricmotorweremade;
(2)Onesaleofthegoodstookplace>.
Thetablebelowshowsthequantitiesandcostsofthelayers:
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3>.7><9FIFOMethod
Whenasaletakesplace,twoentriesshouldbemade-revenuerecognitionandexpenserecognition>.Thefirstonedoesnotdifferforanyofthecostflowmethodsinceonlyoneamountisinuse-thesellingpriceofthegoodssold,thatisthesameforFIFO,LIFO,orweighted-average>.Inourexampleitis$21,600for540electricmotorsold>.Therevenuerecognitionincreasesbothassets(Cash)andequity(SalesRevenue)>.
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3>.10LIFOMethod
Asitnamesimplies(last-in,first-out),thecostofgoodssoldiscalculatedusingthecostsoftheelectricmotorthatthecompanypurchasedlast>.Thecomputationsarebelow:
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The60unitsfromthebeginninginventoryremaininInventory>.
Theincomeisdeterminedbysubtractingalltheexpenses(inourcase,theyonlyincludethecostofgoodssold)fromthesalesrevenue:
$11,<980(i>.e>.,$21,600-$<9,620)>.Theincometaxtobepaidis$3,5<94(i>.e>.,$11,<980×30%)>.
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3>.11Weighted-AverageMethod
Underthismethoditisimportantfirsttocalculateweighted-averagecostperunit>.Thisisdonebydividingthetotalcostofgoodsavailableforsalebythetotalnumberofgoodsavailableforsale:
Thecostofgoodsavailableforsale:
200×$15+240×$18+160×$20=$10,520
Thenumberofgoodsavailableforsale:
200+240+160=600units
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3>.12TheDifferencesintheFinancialStatementsundertheThreeMethods
Therearedifferencesintheamountsofincomebeforetaxes,inventory,etc>.underthethreemethods:
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3>.13TheDifferenceintheIncomeBeforeTaxesundertheThreeMethods
YouhavepossiblynoticedthattheamountofincomebeforetaxesisthebiggestforFIFO($12,280),andthelowestforLIFO($11,<980)>.Whyso?
Considerthattheendinginventoriesarejustviseversaforthetwomethods(respectively,$1200and$<900)>.So,thecostofgoodssoldforFIFOislower($<9,320)thanthatforLIFO($<9,620)>.Asaresult,wecanseethedifferenceintheincomebeforetaxes>.
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SincetheincomeforFIFOisgreater,thecompaniesthatemployFIFOpayhigherincometaxes>.Incontrast,companiesusingLIFOpaylowerincometaxes>.Asitwassaidbefore,thisisawaytomanipulatewithfiguresofthefinancialstatements>.Usually,companiesuseFIFO,andthengobusinessesthatuseLIFO>.
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3>.14WhatIfWeHaveSalesandPurchasesMixed?
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Totalnumberofgoodsavailableforsaleis420units(i>.e>.,100+200+120)>.
Totalnumberofgoodssoldis380units(i>.e>.,240+140)>.
Endinginventoryis40units(i>.e>.,420-380)>.
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3>.15PeriodicSystem
Underperiodicsysteminventoryrecordsarenotchangedwhenpurchasesandsalesoccur>.
Theamountofendinginventoryisdeterminedbyaphysicalcountofthegoodsremainingonhandattheendofanaccountingperiod>.
Thecostofgoodssoldiscomputedthenbysubtractingtheamountofendinginventoryfromthegoodsavailableforsale>.
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3>.16TheUseoftheLowerofCostorMarketRule
Thelowerofcostormarketrulecanbeappliedto:
(1)eachindividualinventoryitem;
(2)majorclassesorcategoriesofinventory;
(3)entirecostofinventoryinaggregate>.
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3>.17InventoryLoss
Ifthemarketvalueofanitem(oritemsinaggregate)islowerthanitscost,thecompanyhastoreduceitsendinginventorybytheamountofdifference>.
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3>.18AccountReceivable(or:
Debtors)
Accountsreceivableareveryliquidassets,usuallybeingconvertedintocashwithinaperiodof30to60days>.
Accountsreceivablefromcustomers(andnotesreceivableaswell)classifiedascurrentassetsappearinthebalancesheetimmediatelyaftercashandcashequivalents>.
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3>.20TheAllowanceMethodofAccountingforBaddebts:
anExample
Acompanythatspecializesintrainingservicesincurredthefollowingtransactionsthatpertainto20X5:
(1)Recognized$6,000ofservicerevenueearnedonaccount;
(2)Co
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