In Class Live Session #6

Prepared by Dr. Sudhakar Balachandran

Agenda

1. Wrap up Any Unfished Parts of Inventroy

2. Discuss Accounts Recievable
3. In Class Exercise Problem 7-1, 7-2, 7-6

2
Discussion Problems 5-10 to 5-11

3
Discussion Problems 5-10 to 5-11

4
Solution: 5-10 Requirements 3 and 4

5
Solution to 5-11 (Perpetual System)

6
Solution to 5-11 (Perpetual System)

7
Agenda

1. Wrap-up 5-11, Inventory Perpetual system

under LIFO
2. Gross Margin, Inventory Turnover and Days in
Inventory
3. Accounts Receivable Concepts
4. Solve Accounts Receivable Discussion
Problem 7-1, 7-2, 7-6

8
 Analysis of Profitability

Of
particular
interest Gross
to current and Margin %
potential
investors

© 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different
from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part. LO4
 Daisy’s Profitability
Net sales $100,000
Cost of goods sold 60,000
Gross profit $ 40,000

Gross Margin ratio = 40%

Gross Profit Ratio = Gross Profit

Net Sales
(How many cents on every $ of sales are left
over after covering the cost of the product)
© 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different
from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
 Inventory Turnover Ratio
Cost of Goods Sold
Average Inventory

Represents the number of times per period

inventory is turned over (i.e., sold).
 Number of Days’ Sales
in Inventory
Number of Days in the Period
Inventory Turnover

Represents the average number of days

inventory is on hand before it’s sold
Agenda

1. Wrap-up 5-11, Inventory Perpetual system

under LIFO
2. Gross Margin, Inventory Turnover and Days in
Inventory
3. Accounts Receivable Concepts
4. Solve Accounts Receivable Discussion
Problem 7-1, 7-2, 7-6

13
Apple’s Consolidated Balance Sheets
(Partial)
ASSETS (in millions) September 25, September 26,
2010 2009
Current assets:
Cash and cash equivalents $11,261 $5,263
Short-term investments 14,359 18,201
Accounts receivable, less
allowances of $55 and $52, respectively 5,510 3,361
Inventories 1,051 455
Deferred tax assets 1,636 1,135
Vendor non-trade receivables 4,414 1,696
Other current assets 3,447 1,444
Total current assets $41,678 $31,555
 Apple’s Consolidated Balance
Sheets (Partial)
ASSETS (in millions)
Current assets:
Cash and cash equivalents
Short-term investments
Accounts receivable
Inventories
Deferred tax assets Less
Vendor non-trade receivables liquid
Other current assets
Total current assets
© 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different
from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
 Apple Corporation Sample
Accounts Receivable
Subsidiary Ledger
Total Due
Acme $ 10,000
Baxter 50,000
Jones 15,000
Martin 20,000
Smith 5,000
Gross Accounts
$100,000
Receivable
© 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different
from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part. LO1
 Apple’s Consolidated Balance
Sheets (Partial)
September 25, September 26,
(amounts in millions) 2010 2009
Accounts receivables,
less allowances of $55
and $52, respectively $5,510 $3,361

Net
Realizable
Value
© 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different
from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
 Credit Sales
 Slows inflow of cash
 Risk of uncollectible accounts

Trade Credit Sales Invoice

Terms: 2/10,
Retail Customer net 30
Receivables
© 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different
from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
 Accounting for Bad Debts:
Direct Write-off Method
Period of sale Future period charged
with expense of bad debt
write-off
Journal entry to record write-off in period determined
to be uncollectible:
Bad Debts Expense XXX
Accounts Receivable—Dexter XXX
© 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different
from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
 Accounts Receivable Connection-
Direct Method

Direct Method Is Simple But Is Not

Allowed Under GAAP
 Accounting for Bad Debts:
Allowance Method
Period ofEstimated
sale bad debt
expense (and
allowance account)
recorded in the same
period

© 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different
from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
Accounts Receivable Connection-
Allowance Methods
 Percentage of Net Credit
Sales Method
Example:
Assume prior years’ net credit sales and bad debt
expense is as follows:
Year Net Credit Sales Bad Debts
2007 $1,250,000 $ 26,400
2008 1,340,000 29,350
2009 1,200,000 23,100
2010 1,650,000 32,150
2011 2,120,000 42,700
$7,560,000 $153,700
© 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different
from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
Method 1 The Income Statement
Approach

Step 1, Calculate Bad Debt Expense as Percent of Credit Sale

Step 2: Calculate Beginning and end Balance of ADA
 Percentage of Accounts
Receivable Method
Example:
Assume prior years’ ending Accounts Receivable and
bad debts is as follows:
December 31
Year Accounts Receivable Bad Debts
2007 $ 650,000 $ 5,250
2008 785,000 6,230
2009 854,000 6,950
2010 824,000 6,450
2011 925,000 7,450
$4,038,000 $32,330
© 2013 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different
from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
 Method 2 The Balance Sheet
Approach

Step 1: Calculate the beginning and end balances of ADA as

percentage of Balances in Accounts Rec
Step 2: Calculate the bad debt expensse
Agenda

1. Wrap-up 5-11, Inventory Perpetual system

under LIFO
2. Gross Margin, Inventory Turnover and Days in
Inventory
3. Accounts Receivable Concepts
4. Solve Accounts Receivable Discussion
Problem 7-1, 7-2, 7-6

27
Problem 7-1

28
Solution Problem 7-1

29