Inventory and Receivables Accounting: Perpetual vs. Periodic Systems | Schemi e mappe concettuali di Cost Accounting

Perpetual system: companies keep detailed records of the cost of each inventory purchase and sale;

these records continuously show the inventory that should be on hand for every item a company

determines the cost of goods sold each time a sale occurs.

Periodic inventory system: companies determine the cost of goods sold only at the end of the

accounting period that is periodically.

(BEGINNING INVENTORY + PURCHASES) – ENDING INVENTORY= COST OF GOODS SOLD

Purchases under a perpetual system: cash purchase is supported by a canceled check or cash

Freight costs can be FOB shipping point and FOB destination.

When the buyer incurs the transportation costs these costs are considered part of the cost of

purchasing inventory.

Freight costs incurred by the seller on outgoing merchandise are an operating expense to the seller.

- PURCHASE RETURNS: Return goods for credit if the sale was made on credit, or for a cash

refund if the purchase was for cash.

- PURCHASE ALLOWANCE: May choose to keep the merchandise if the seller will grant an

allowance (deduction) from the purchase price.

 in both cases if the sale was made on credit, you reduce (debit) account payable and reduce

(credit) inventory; while if the sale was made on cash, you increase (debit) cash and reduce (credit)

inventory.

- PURCHASE DISCOUNTS: Credit terms may permit buyer to claim a cash discount for prompt

payment. Advantages: Purchaser saves money; Seller shortens the operating cycle.

The credit terms specify the amount of the cash discount and time period in which it is offered. They

also indicate the time period in which the purchaser is expected to pay the full invoice price.

Sales under a perpetual system: cash register documents provide evidence for cash sales and sales

invoice provide evidence for credit sales.

Adjusting entries: same type of adjusting entries as a service company + adjusting inventories and

cost of goods sold ( at the end of each period for control purposes a physical count of inventory will

take place to count goods on hand).

Income stmt

Other income and expenses —> consists of various

revenues, gains, expenses and losses that are unrelated

to the company’s main line of operations.

Other income:

Interest revenue from notes receivable and marketable

securities

Dividend revenue from investments in ordinary shares

Rent revenue from subleasing a portion of the shore

Gain from the sale of property, plant and equipment

Other expenses:

Casualty losses from such causes as vandalism and

accidents

Loss from the sale or abandonment of property, plant

and equipment

Loss from strikes by employees and suppliers

Interest expense —> financing activities, which result in

interest expense, represent distinctly different types of

cost to a business. In evaluating the performance of a

business, it is important to monitor its interest expense.

Gross profit rate: GROSS PROFIT/ NET SALE

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Perpetual system: companies keep detailed records of the cost of each inventory purchase and sale; these records continuously show the inventory that should be on hand for every item a company determines the cost of goods sold each time a sale occurs. Periodic inventory system: companies determine the cost of goods sold only at the end of the accounting period that is periodically. (BEGINNING INVENTORY + PURCHASES) – ENDING INVENTORY= COST OF GOODS SOLD Purchases under a perpetual system: cash purchase is supported by a canceled check or cash register receipt and credit purchases are supported by purchase invoice. Freight costs can be FOB shipping point and FOB destination. When the buyer incurs the transportation costs these costs are considered part of the cost of purchasing inventory. Freight costs incurred by the seller on outgoing merchandise are an operating expense to the seller.

- PURCHASE RETURNS : Return goods for credit if the sale was made on credit, or for a cash refund if the purchase was for cash. - PURCHASE ALLOWANCE : May choose to keep the merchandise if the seller will grant an allowance (deduction) from the purchase price.  in both cases if the sale was made on credit, you reduce (debit) account payable and reduce (credit) inventory; while if the sale was made on cash, you increase (debit) cash and reduce (credit) inventory. - PURCHASE DISCOUNTS: Credit terms may permit buyer to claim a cash discount for prompt payment. Advantages: Purchaser saves money; Seller shortens the operating cycle. The credit terms specify the amount of the cash discount and time period in which it is offered. They also indicate the time period in which the purchaser is expected to pay the full invoice price. Sales under a perpetual system: cash register documents provide evidence for cash sales and sales invoice provide evidence for credit sales. Adjusting entries: same type of adjusting entries as a service company + adjusting inventories and cost of goods sold ( at the end of each period for control purposes a physical count of inventory will take place to count goods on hand). Income stmt Other income and expenses —> consists of various revenues, gains, expenses and losses that are unrelated to the company’s main line of operations. Other income : Interest revenue from notes receivable and marketable securities Dividend revenue from investments in ordinary shares Rent revenue from subleasing a portion of the shore Gain from the sale of property, plant and equipment Other expenses : Casualty losses from such causes as vandalism and accidents Loss from the sale or abandonment of property, plant and equipment Loss from strikes by employees and suppliers Interest expense —> financing activities, which result in interest expense, represent distinctly different types of cost to a business. In evaluating the performance of a business, it is important to monitor its interest expense. Gross profit rate: GROSS PROFIT/ NET SALE

Purchases and Sales under Periodic System Retained Earnings: beginning balance + net income - dividends

IAS 2 requires that those assets that are considered inventories should be recorded at the lower of cost or net realizable value:

Inventories are initially recognized at cost
After that, if the net realizable value is lower than the historical cost companies must write- down inventory. The net realizable value is the estimated selling price in the normal course of business minus the costs of completion minus the estimated costs necessary to make the sale. Inventory write-down /// Inventory ///  LIFO: allowed only under US GAAP: last in first out; seldom the flow of costs coincides with the actual physical flow of inventory.

Receivables are amounts due from individuals and other companies that are expected to be collected in cash. The quality of a receivable is the likelihood that the cash flows owned to a company in the forms of receivable are going to be collected. We can define three categories of receivables:

- Accounts receivable —> amounts owed by customers that result from the sale of goods and services (amounts costumers owe on account) - Notes receivable —> Written promise (as evidenced by a formal instrument) for amounts to be received (advantages: companies generally expect to collect interest; note receivables may be transferred to third parties, called trade receivables) - Other receivables —> “Non-trade” receivables (interest receivable, loans to company officers, advances to employees, and income taxes refundable) —> do not result from the operations of the business. A service organization records receivables when it perform a service on account. A merchandiser records account receivables at the point of sale of merchandise on account. Some retailers issue their own credit cards. When you use a retailer’s credit card, the retailer charges interest on the balance due if not paid within a specified period. Determine the amount of account receivable and to report it in the financial statement is sometimes difficult because some receivables will become uncollectible. Companies record credit losses as Bad Debt Expense. Two methods are used in accounting for uncollectible accounts:

1) Direct Write-Off Method: when a company determines a particular account to be

uncollectible, it charges the loss to Bad Debt Expense. Under this method, Bad Debt Expense will show only actual losses from uncollectible. Under direct write-off method companies often record bed debt expense in a period different from the period in which they recorded the revenue. This method does not attempt to match bad debt expense to sales revenue in the income statement; moreover it does not show accounts receivable in the stmt of financial position at the amount the company actually expects to receive not acceptable for financial reporting purposes.

2) Allowance Method for Uncollectible Accounts: involves estimating uncollectible accounts

receivable at the end of each period. This provides better matching expenses with revenues on the income stmt and ensures that receivables are stated at their cash net realizable value on the stmt of financial position. Cash (net) realisable value is the net amount the company expects to receive in cash. —> Companies estimate uncollectible accounts receivable. They match this estimate against revenues in the same accounting period in which they record the revenue. —> Companies debit estimated uncollectible to bad debt expense and credit them to allowance for doubtful accounts (contra account to A/R) through an adjusting entry at the end of each period. —> When companies write off a specific account as uncollectible , they debit actual uncollectible to allowance for doubtful accounts and credit that amount to accounts receivable Recording Estimated Uncollectibles Bad Debt Expense /// Allowance for Doubtful Accounts ///

Sale to a Factor: a factor is a finance company or bank that buys receivables from businesses and then collects the payments directly form the customers the risk that customers won’t pay is completely transferred to the factor. Cash (A/R – Service Charge Expense) /// Service Charge Expense (A/R x i%) /// A/R /// National Credit Sales Advantages:

- Issuer does credit investigation of customer - Issuer mantains costumer accounts - Issuer undertake collection and absorbs losses - Retailer receives cash more quickly Cash (Sales Revenue – Service Charge Expense) /// Service Charge Expense (A/R x i%) /// Sales revenue /// Notes Receivable A promissory note is a written promise to pay a specified amount of money on demand or at a definite time. Promissory notes may be used: when individuals and companies lend or borrow money, when amount of transaction and credit period exceed normal limits, or in settlement of accounts receivable. In a promissory note, the party making the promise to pay is called the maker. The party to whom payment is to be made is called the payee. For the maker, the promissory note is the note payable, while for the payee it is the note receivable. Note receivable give the holder a stronger legal claim to assets than do account receivable. There are three ways of stating the maturity date of a promissory note: on demand, on a stated date and at the end of a stated period. Interest = Face Value of the Note x Annual Interest Rate x Time in Terms of One Year Companies report short-term notes receivable at their cash (net) realizable value. A note is honored when the maker pays in full at its maturity date. For each interest-bearing note, the amount due at maturity is the face value plus the interest for the length of time specified on the note. Cash (N/R + Interest Rev) /// Interest Receivable /// N/R /// Interest Revenue /// Interest Revenue /// Interest Receivable /// A dishonored (defaulted) note is a note not paid in full at maturity, it is no longer negotiable. However the payee still has a claim on the maker of the note for both the note and the interest, therefore he transfers the note to accounts receivable. If there is no hope of collection the note holder will write off the face value debiting Allowance for Doubtful Accounts and crediting the Note Receivable. A/R /// Allowance for Doubtful Accounts /// N/R /// N/R /// Interest Revenue ///

Historical cost principle require that companies record plant asset at their cost. Cost consists of all expenditures necessary to acquire the asset and make it ready for its intended use. Land: cash purchase price, closing costs (title and attorneys’ fee), real estate brokers’ commissions, accrued property taxes and other liens assumed by the purchaser, expenditures for clearing, draining, filling and grading, demolition and removal cost less any proceeds from saving materials. Land Improvements: expenditures necessary to make the improvements ready for their intended use land improvements are depreciated Buildings: expenditures related to the purchase or construction of a building; when it is purchased: purchase price, closing costs, real estate brokers’ commissions, cost to make the building ready for use (remodeling, replacing); when the building is constructed: contract price plus architects’ fees, building permits, excavation costs, interest costs incurred to finance the project are include in cost the cost of building when a significant period of time is required to get the building ready for use Equipment: The cost of equipment includes all costs incurred in acquiring the equipment and preparing it for use. Costs typically include: cash purchase price, sales taxes, freight charges, insurance during transit paid by the purchaser, expenditures required in assembling, installing, and testing the unit. License and insurance are operating costs and so expense. Ordinary repairs are expenditures to maintain the operating efficiency and productive life of the unit revenue expenditures Additions and improvements are costs incurred to increase the operating efficiency, productive capacity, or useful life of a plant asset capital expenditures

Inventory and Receivables Accounting: Perpetual vs. Periodic Systems, Schemi e mappe concettuali di Cost Accounting

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1) Direct Write-Off Method: when a company determines a particular account to be

2) Allowance Method for Uncollectible Accounts: involves estimating uncollectible accounts