Accounting for Trade Receivables

Receivables =
Accounts receivable (trade receivables) are amounts owed to a
resulting from credit sales in the ordinary course of business, t
trade terms.

Note All other receivables are non-trade receivables.

Non- Trade receivables might inclue the following
1- Lease receivable
2- Tax refunds, or insurance claim receivable or loan receiveab

Note Receivables should be separated into Current and Non Curren

Current Receivables are classified as current if they are expected to be

Receivables= the entity's normal operating cycle

Note Current accounts receivable are reported in B/S at Net Realiza

i.e. Net of allowance for credit losses (uncollectible accounts),
and billing adjustments

Receivable in B/S= at Net Realizable value (NRV)

Gross Accounts Receivable

Less Allowance for Uncollectible accounts
NRV of Accounts Receivable

Non Current are measured at Net Present Value of future cash flows expec
Receivables=
N-1 Allowance for Uncollectible Accounts and Bad Debt Expense
Collection in full of all accounts receivable in unlikely, Allowance for uncollecti
recognized.
Note This method attempts to match bad debts expense with related reven
it is allowed by GAAP
Note Allowance for uncollectible accounts is a contra account to accounts re
Issue The principle measurement issue for accounts receivable is the estima

Two Method Measure the Bad Debt Expense and

Allowance for Uncollectible Accounts

Income Statement Balance Sheet

Approach Approach

Percentage of Sales Percentage of

Method Receivables Method

Income Statement We will calculate the bad debt expense as a percentag

Approach income statement.

Example
A company's year end unadjusted trial balance reports the following amount
Gross Receivable 100000 Dr
Credit sale 250,000 Cr
 Opening Balance of Allowance 1000 Cr
According to past experience 1% of credit sale in uncollectible

Solution
Allowance (for the 1% x NetCredit sale
period) =
2500 = 1% x 250000

Entry with the full amount of allowance (But for the period)
Dr.Bad Debt Expense 2500
Cr. Allowance for uncollectible A/C

Closing Allowance = Opening allowance + allowance for the period

3500 = 1000 + 2500

Income statement Presentation

Bad Debt Expense = 2500

Balance Sheet Presentation

Gross receivable 100,000
Allowance (Closing Bal ) -3500
NRV 96,500

Balance Sheet We will calculate the bad debt expense as a percentag

Approach receivable.
Example
A company's year end unadjusted trial balance reports the following amount
Gross Receivable 100000 Dr
Credit sale 250,000 Cr
Opening Balance of Allowance 1000 Cr
According to past experience 5% of Accounts Receivable are determined to b

Solution
Allowance (Closing Balance) = 5% x Receivable
$5000 = 5% x $100000

Closing Allowance = Opening Allowance + Allowance for the period

Allowance for the period = closing allowance - opening allowance

4000 = 5000 - 1000

Entry for period

Dr. Bad Debt Expense 4000
Cr. Allowance for Uncollectible A/C 4000

Closing Allowance = Opening allowance + allowance for the period

5000 = 1000 + 4000

Income statement Presentation

Bad Debt Expense = 4000

Balance Sheet Presentation

 Gross receivable 100,000
Allowance (Closing Bal ) -5000
NRV 95,000

Balance Sheet Approach with Aging Schedule

An entity using the balance sheet approach generally prepares an aging sched

Additional Entries
1 -At the time of credit sale 2- At the time of sale return
Dr. Receivable A/C xxx Dr. Sales return A/C
Cr. Sale A/C xxx Cr. Receivable A/C

3- At the time of collection from Receivable.

Dr. Cash A/C xxx
Cr. Receivable xxx
4- At the time of creation of allowance for the period
Dr. Bad Debt expense A/C xxx
Cr. Allowance of Uncollectible A/C xxx

5-At the time of write off bad debts

Dr. Allowance of Uncollectible A/C xxx
Cr.Receibable A/C xxx
Note . Write off of a paricular bad debt has no effect on expenses.
Note . Wite off do not effect the carring amount of net receivable
because reduction of gross receivabl and the allowance are the same
Note. They also have no effect on working capital.

6- At the time of recovery of bad debts previously written off

1- Reverse the pervious write off entry

Dr. Receivable A/C xxx
Cr. Allowance of Uncollectible A/C xxx
2- Record the cash collection
Dr. Cash A/C xxx
Cr. Receivable A/C xxx

Summary Allowance of Uncollectible Accounts

Opening balnce for Uncollectible A/C

Plus Bad Debt exp for the period
Less A/C Receivalbe wrtten off
Plus Collection of A/C Previously Receivalbe wrtten off
 Closing balance of allowance

Note Under the income statement approach, bad debt expense is percentag
and the ending balance of the allowance is calculated using the equati
Note Under the balance sheet approach, the ending balance of allowance is
balance of accounts receibable, and bad debt epxense is calculate usin

Summary Gross receivable

Opening balance of gross receivable Dr

Plus Credit sale Dr
Less Sales return Cr
Less Collection from Customers Cr
Less Account Receivable written off Cr
Closing balance of Gross Receivable

Note = Allowance methods are allowed by GAAP/ IFRS (As per Matching conc
Direct Write of method is not allowed by GAAP/IFRS
Direct Write of method can be used for tax purpose only

Bad Debt Expense and Direct Write off Method

The direct write off method expenses bad dabts when thay are determined to
Note. It is not Acceptable under GAAP because it does not match revnue an
and the write off are recorded in different periods.
Note. This method is used for tax purpose only.

Note. A small company can use if

 The difference between it and the allowance method is immaterial.
in other words, Materiality principle is used as an excuse to voilate the

Entry To Record Bad Debt Expense at the time of write off

Dr. Bad Debts Expense A/c xxx
Cr. Account Receivable A/C xxx

1- This method does not involve a reduction in the amount of recroded s

the bad debt expense.
2- The direct write off approach violates the matching priciple, under wh
revnue are charged to expense in the same period in which we reogni
3- This method also delays the reognition of expenses related to a revnu

Additional Entries
1 -At the time of credit sale 2- At the time of sale return
Dr. Receivable A/C xxx Dr. Sales return A/C
Cr. Sale A/C xxx Cr. Receivable A/C

3- At the time of collection from Receivable.

Dr. Cash A/C xxx
Cr. Receivable A/C xxx

4- At the time Bad Debts Write off

Dr. Bad Debt expense A/C xxx
Cr. Receivable A/C xxx
Note . Write off of a paricular bad debt has effect on expenses.
6- At the time of recovery of bad debts previously written off

1- Reverse the pervious write off entry

Dr. Receivable A/C xxx
Cr. Bad Debt Exp xxx
2- Record the cash collection
Dr. Cash A/C xxx
Cr. Receivable A/C xxx
Note. It has no effect of CV of Receivable.
But it will increase the income.

Summary

Opening balance of receivable Dr

Plus Credit sale Dr
Less Sales return Cr
Less Collection from Customers Cr
Less Account Receivable written off Cr
Closing balance of Gross Receivable

Accounts Receivable Factoring

Definition of Factoring
 Factoring is a financial transaction in which a company sells its accoun
to a finance company that specializes in buying receivables at a discou

Note It is also known as invoice factoring or accounts receivable financing.

Accounts Receivable

Factor

Pays Cash

How Accounts Receivable Factoring Works

Company sells its receivable to factor. The factor collects payment on
from the company customers.
1- Companies choose factoring if they want to receive cash quickly rathe
the duration of credit terms.
2- Companies can build up their cash immediately.
3- Factoring helps companies free up capital that is tied up in accounts re
4- Companies can also transfer the default risk associated with receivable

Recourse Factoring and Non- Recourse Factoring

Transfer Without In transfer without recourse, the factor takes on all the
Recourse The company that transferred receivables has no liabili

Note: This transaction is the sale of receivable.

Note: Factor will charge High Factoring fee (Percentage
 Example
ABC Company transfer of $500 of receivables, without

Dr. Cash A/C 400

Dr. Interest Expense A/C 100
Cr. Accounts Receivable A/C

Transfer With In transfer with recourse, the factor can demand mone
Recourse
Transfer With
Recourse transferred receivables if it cannot collect from custom

Note: This transaction is the Loan (short term loan) aga

Note: Factor will charge low Factoring fee (Percentage
Example
ABC Company transfers $500 of receivalbes with recou

Later on, the factor is able to collect receivables of $49

Dr. Cash A/C
Dr. Due from factor(Holdback) A/C
Cr. Short term debt A/C

"Due from Factor" is the potential payment for possible

After the factor collected $490 of receivables ($10 unco

Dr. Cash A/C

Dr. Allowance for doubtful A/C
Cr. Due from factor(Holdback) A/C

Dr. Short term debt A/C

Dr. Interest expnese A/C
Cr. Accounts Receivable A/C
Practice Questions "Accounting For Receivables".

Question #1

Opening balnce Allowance for uncollectibles

Plus Bad Debt exp for the period
Less A/C Receivalbe wrtten off
Plus Collection of A/C Rec Previously wrtten off
Closing balance of allowance

Note Under the income statement approach, bad debt expense is percentag
and the ending balance of the allowance is calculated using the equati
Note Under the balance sheet approach, the ending balance of allowance is
balance of accounts receibable, and bad debt epxense is calculate usin
 Closing balance of allowance
Less Collection of A/C Rec Previously wrtten off
less Bad Debt Exp for the Period
Less Opening balnce for Uncollectible A/C
A/C Receivalbe wrtten off

Question # 2

Question # 3
Question # 4
Inventory - Fundamentals

Inventory Definition

Retailers/Wholesaler=

For Manufacturer
Cost Basis of Inventory - Initial Measurement

Cost of Inventory

Cost of Purchased Inventory

Purchase Price xxx

Less Trade Discount (xxx)
Less Return & Allowances (xxx)
Add Transportation- in xxx
Add Non-refundable taxes xxx
Add Insurance cost xxx
Add Handling Cost xxx
Add Other Cost xxx
Cost of Net Purchases xxx

Note- Storage cost, selling cost and administration cost will not be the part of

Exam Note - How to Calculate Cost of Goods Sold

Inventory Accounting System

Perpetual Inventory System

1- Updates Inventory accounts after each purchase or sale
2- More suitable for entities that sell expensive and hetrogeneous items
which requires continuos monitoring of inventory and cost of goods so
3- Purchases and other items related to inventory costing are charged dir
4- Inventroy and cost of goods sold are adjusted as sales occur
Note

Periodic Inventory System

1- Inventory and cost of goods sold are updated at sepcific interval (quar
based on the results of a physical count
2- Suitable to those entities deals in relarively inexpensive and homogen
that have no need to continuous monitor their inventory and cost of g
3- Inventory costs are tracked duing the period in a separate temporary a
4- Beginning inventroy balance remains unchaged until the end of the pe
when the purchases account is closed
5- Changes in inventory and cost of goods sold are recorded only at the e
bases on the physical count

Question # 1
Inventory Period-End Physical Count
Amount of inventory reported in annual Financial statement should be based

Under the perpetual system, a physical count helps to detect

a)- Misstatements in the records
b)- Thefts of inventory

Note

Under Periodic System, the amount of inventory and cost of goods sold can b
only on the results of physical count

Note
Goods in Transit
Q-1 Who will consider inventory in transit in their books at the end of pe
Items to be counted as inventory in physical count includes the following

1- FOB Shipping Point Seller is responsible until shipping point

Note = if goods are shipped before year end

it’s a buyers/customer inventory
buyer will add in his/her inventory
2- FOB Destination= here seller is responsible until destination

Note= if goods have reached to destination before year end

buyer will add in his/her inventory
Note= if goods have not reached to destination before year end
Seller will add in his/her inventory
3- Consignment= Inventory held by third party

Note= if inventory is unsold

consignor will add back in his inventory at cost
Note= If inventory is sold
Do Nothing (no need to adjust inventory for consignor)

Question # 1
Inventory Estimation

Opening Inventory Value xxx

Plus Cost of production/Purchases xxx
CG Available for Sale xxx
Less Closing Inventory (xxx)
 Cost of Goods Sold xxx

Sales xxx
Less Gross Profit (Sales x GP%) (xxx)
Cost of Goods sold xxx

Question # 1

Question # 2
Inventory Errors

Opening Inventory Value xxx

Plus Cost of production/Purchases xxx
CG available for sale xxx
Less Closing Inventory (xxx)
Cost of Goods Sold xxx

Inventory Cost of good sold

Overstated Overstated
Op. Inventory
Understated Understated

Overstated Understated
Closing Inventory
Understated Overstated

Note. Opening inventory has direct relation with CGS

Note. Closing inventory has direct relation with Profit
 Note. CGS and Profit have inverse relation
Note. Profit and Retained earning has direct relation

Note

3)
Question
Question

Inventory - Cost Flow Methods

To determine the cost of inventory we use cost flow methods

Cost Flow
Methods

Specific Average First in First

Identification Method Out (FIFO)
 Specific Average First in First
Identification Method Out (FIFO)

Moving Weighted Same for

Average Average Periodic &
Perpetual

Perpetual Periodic
System System

1- Specific Indentification Method

Note
2- Average Method

Moving Average Method.

Weighted Average Method.

First in First Out (FIFO)

Example

Units Purchase Cost

Opening Units 100 20
Plus Purchases
1-Mar 20 32
1-Jun 30 14
50
Available for sale 150
Less Units Sold (70 + 40) -110
Units in Ending Inventory 40
Last in First Out (LIFO)

Example

Units Purchase Cost

Opening Units 100 20
Plus Purchases
1-Mar 20 32
 1-Jun 30 14
50
Available for sale 150
Less Units Sold (70 + 40) -110
Units in ending Inventory 40

LIFO Perpetual

Example
 Summary

Value of Closing Inventory

Effect of Inflation &
Deflation FIFO LIFO

1- Inflation Higher Value

Incrase in price (Replacement Lower Value
cost)
2- Defaltion
Lower Value Higher Value
Decrease in Price

Note Under IFRS, LIFO is not permitted

Note

Retail Inventory Method

Steps to Calculate the Value of Ending Inventory

Cost of Product
Step 1 Calculate the Cost to Retail Ratio =
Retail Price

Step 2 Calculate the Cost of Goods Available For Sale =

Opening Inventory xxx
Plus Purchases xxx
CG Available for Sale xxx
 3 Calculate the Cost of Goods Sold = (Sales x Cost to Retail Ratio

4 Calculate the Value of Ending Inventory=

Opening Inventory xxx
Plus Purchases xxx
CG Available for Sale xxx
Less Cost of Goods Sold (xxx)
Ending Inventory xxx

Example
Cost of Product A = $50, Sale Price of Product A = $80
Cost of Opening Inventory = $10000
Cost of Purchases During the period = $20000
Sale Revenue during the period = $45000

1- Cost to Retail Ratio = Cost / Retail Price =

2- Cost of Goods Available for Sale =

Opening Inventory at Cost =
Plus Purchases at cost =
Cost of Goods AF. Sale =

3- Calculate the Cost of Goods Sold = (Sales x Cost to Retail Ratio

28125 = 45000 x 62.5%

4- Calculate the Value of Ending Inventory=

Opening Inventory 10000
 Plus Purchases 20000
CG Available for Sale 30000
Less Cost of Goods Sold -28125
Ending Inventory 1875

Note This is just an estimate and does not account for items that are broke
Note It works best when the markup is consistent across products. If differe
markups, the end result wont be completely accurate.

Measurement of Inventory Subsequent To Initial Recognition

Initial Measurement of Inventory = At Cost

Subsequent Measurement

Case 1- if company is using LIFO/Retail

inventory method
Lower of
a- Cost of inventory xxx
b- Market N-1 xxx

This method is allowed under

GAAP Only
Terminologies

1- Replacement cost = It is the cost of brand new asset to replace old

2- Net Realizable Value(NRV) Ceiling= is the estimated selling in the ordi

net of cost necessary to sell.
NRV Ceiling = (Sale Price - Incidental costs (Costs necessary to sell)

(Cost of completion/processing)
(Cost of rework)
(Any selling cost)
100 = 120 - 20

3- Net Realisable Value(NRV) Floor= if we will sell the item what should

NRV Floor = (NRV Ceiling - Profit Margin)

90 = 100 - 10

4- Historic cost/Cost of inventoy = Actual cost which we have p

Can be calculated by cost fl

Case 1- if company is using LIFO/Retail

inventory method
Lower of
a- Cost of inventory xxx
b- Market N-1 xxx
N-1 How To Determine MARKET

Case 1 Replacement cost = MARKET , if

Replacement cost is in between NRV
Ceiling and NRV Floor
eg. Replace cost = 100 = Market
NRV Ceiling = 120
NRV Floor = 90

Case 3 NRV Floor = MARKET If,

Replacement cost < NRV Floor
Replace cost = 80
NRV Ceiling = 95
NRV Floor = 90 = Market

Example
if co is using LIFO/Retail inventroy method
 Lower of
a- Cost of inventory 50
b- Market N-1 53

Example = NRV Ceiling 54

NRV Floor 51
Replacement cost 53 = Market
Historic Cost 50

Case 2- if co is using other methods(FIFO, Average)

Lower of
a- Cost of inventory 50
N-1 54
b- Net Realiseable Value (Ceiling)
Example = NRV Ceiling 54
NRV Floor 51
Replacement cost 53
Historic cost 50

Question # 1
Question # 2

Inventoy Losses

Initial Measurement of Inventory = At Cost

Subsequent Measurement

Case 1- if company is using LIFO/Retail

inventory method
Case 1- if company is using LIFO/Retail
inventory method
Lower of
a- Cost of inventory xxx
b- Market xxx

This method is allowed under

GAAP Only

What is Inventory Loss

if Cost of Inventoy > Market (or) NRV Ceiling = Inventory loss
100 > 80 = (20) Loss
If Market (or) NRV ceiling < Cost of inventory = Inventory Loss

Note

Entry to Record The Loss

Dr. Loss(I/S) 20
Cr. Inventory A/C 20

Note If Loss is at Reporting Date in Annual F/S, This loss will never reverse in

Note Under IFRS

Question

Subsequent Measurement

Case 1- if company is using LIFO/Retail

inventory method
Lower of
a- Cost of inventory 100000 Loss =
b- Market 85000 15000

Entry to Record The Loss

Dr. Loss(I/S) 15000
Cr. Inventory A/C 15000

Case 3 NRV Floor = MARKET If,

Replacement cost < NRV Floor Less
Replace cost = 82000
NRV Ceiling = 90000
NRV Floor = NRV Ceiling - Profit
85000 = 90000 - 5000
Note = Floor will be our Market = 85000

if Loss is in Quarterly F/S 31-Mar

if Cost of Inventoy > Market (or) NRV Ceiling = Inventory loss

100 > 80 = (20) Loss
If Market (or) NRV ceiling < Cost of inventory = Inventory Loss

Note -Temprary losses- If we expect that this loss will be reveresed in subseq
we will not record the loss,(we will record the inventory at cost)

Note - if we expect this is permanent loss and it will not be reversed,

We will record this loss immediately by passing the below entry
entry to Record the loss
Dr. Loss (I/S) 20
Cr. Inventory A/C 20

Note- This loss can be reversed upto the original amount of loss

Example
Qtr 2 Data Qtr 3 Data
Lower of Lower off
a- Cost 100 a- Cost
b- NRV/Market 80 In B/S b- NRV/Market
Gain
Record the loss
Dr. Loss 20 Note- This gain can be book
Cr. Inventory 20 but only upto the original a

Record the Gain

Dr. Inventory
Cr. Loss Reversal or Gain(I/S

Note- Inventory in B/S will

Plus

Note

Question
es) are amounts owed to an entity by its customers
nary course of business, that are due in customary

eceivables.
he following

ceivable or loan receiveable etc.

Current and Non Current portion.

f they are expected to be collected within 1 year or

rted in B/S at Net Realizable Value

(uncollectible accounts), Allowance for sales return,

100 xxxx
N-1 -20 (xxx)
80 xxx

f future cash flows expected to be collected

ad Debt Expense
y, Allowance for uncollectible accounts must be

pense with related revenue (Matching principle) and

tra account to accounts receivable.

ts receivable is the estimation of NRV.

Debt Expense and

e Accounts

Balance Sheet
Approach

Percentage of
Receivables Method

bt expense as a percentage of credit sale reported on

rts the following amounts

00000 Dr
50,000 Cr
collectible

e period)
Will be recorded as expense in I/S
2500 Will be transferred to Allowance for
uncollectible A/C

e for the period

2500

00,000

bt expense as a percentage of ending balance of gross

 rts the following amounts
00000 Dr
50,000 Cr

able are determined to be uncollectible.

ce for the period

ning allowance

Will be recorded as expense in I/S

Will be transferred to Allowance for
uncollectible A/C

e for the period

00,000

y prepares an aging schedule for accounts receivable.

me of sale return
. Sales return A/C xxx
. Receivable A/C xxx
t on expenses.
net receivable
allowance are the same

written off

Direct entry
Dr.Cash A/C xxx
Cr. Allowance of Uncollectible A/C

Note. It has no effect on expenses or income

Cr xxx
Cr xxx
Dr (xxx)
Cr xxx
 xxx

debt expense is percentage of sales on credit

alculated using the equation above.
ng balance of allowance is a percentage of the endind
t epxense is calculate using the equation above.

xxx
xxx
(xxx)
(xxx)
(xxx)
xxx

RS (As per Matching concepts)

AP/IFRS
purpose only

ethod
en thay are determined to be uncollectible.
oes not match revnue and expense when the Receivable
 method is immaterial.
as an excuse to voilate the matching principle.

write off

the amount of recroded sales, only the increase of

atching priciple, under which all costs related to

eriod in which we reognise the revnue.
penses related to a revnue

me of sale return
. Sales return A/C xxx
. Receivable A/C xxx

n expenses.
written off

Cash
Bad Debt recovered

xxx
xxx
(xxx)
(xxx)
(xxx)
xxx
 company sells its accounts receivable
ng receivables at a discount (Called a factor)

nts receivable financing.

Company

ctor collects payment on the receivable

eceive cash quickly rather than waiting for

at is tied up in accounts receivable.

associated with receivable to the factor.

the factor takes on all the risk of uncollectible receivables.

receivables has no liability for uncollectible receivables.

ale of receivable.
Factoring fee (Percentage of receivables)
0 of receivables, without recourse for proceed of $400

500

factor can demand money back from the company that

nnot collect from customers.

oan (short term loan) against receivable.

actoring fee (Percentage of receivables)

of receivalbes with recourse for $450 less a $50 holdback.

collect receivables of $490 and $10 receivables uncollectible

400
50
450

ntial payment for possible non-collectibles.

0 of receivables ($10 uncollectible)

40
10
50

450
50
500
vables".

Closing balance of allowance

Less Collection of A/C Rec Previously wrtten of
Less Bad Debt Exp for the Period
Less Opening balnce for Uncollectible A/C

A/C Receivalbe wrtten off

debt expense is percentage of sales on credit

alculated using the equation above.
ng balance of allowance is a percentage of the endind
t epxense is calculate using the equation above.
As per GAAP
Receivable classified as current on the B/S if it is
expected to be cellected with in
a) Operating Cycle Or
b) 1 Year from reporting date
Whichever is longer

Period of next 6 Month

end of 6 month
Period of next 1 Year

Trade Receivable =
Credit Sales 150000
Crdit sale 10000
160000
At the time of write off bad debts
Dr. Allowance of Uncollectible A/C
Cr.Receibable A/C
Note . Write off of a paricular bad debt has no effect on expen
Note . WrWite off do not effect the carring amount of net rece
because reduction of gross receivabl and the allowan
Note. They also have no effect on working capital.

Allowance for the Period under I/S Approach

Allowance for the period = 3% x Credit Sales

300000 = 3% x 10,000,000

Dr. Bad Debt Exp A/C 300000

Cr. Allowance for Uncollectible A/C
 Cost of Manufactured Inventory

Cost of Opening Raw Mat xxx

Add Cost of Net Purchases xxx
Less Cost of Closing RM (xxx)
Cost of Material used
Add Conversion Costs
Cost of Labor
Cost of Overheads

Total Manufacturing Cost

ost will not be the part of inventory cost

 ase or sale
and hetrogeneous items
ntory and cost of goods sold accounts
ory costing are charged directly to inventory
d as sales occur
d at sepcific interval (quarterly or annually)

nexpensive and homogeneous items (grain dealers).

eir inventory and cost of goods sold.
in a separate temporary account (Purchases)
ed until the end of the period

are recorded only at the end of the period

atement should be based on a physical count

to detect

d cost of goods sold can be determined based

ir books at the end of period ?
ncludes the following

until shipping point

sible until destination

before year end

on before year end

ry at cost

ory for consignor)

 Opening Inventory Value
Plus Cost of production/Purchases
CG Available for Sale
Less Cost of Goods Sold
 Closing Inventory

OR CGS = Sales x (100 - GP%)

Cost of Goods Sold = Net sales x (100 - GP%)

$900000 x (100 - 40%)
$540000 = $900000 x ( 60%)

Opening inventory xxx

 Plus Net Purchases xxx
CG Available for sale xxx
Less Ending Inventory (xxx)
Cost of goods sold xxx

Profit Retained Earning

Understated Understated
Overstated Overstated

Overstated Overstated
Understated Understated

elation with CGS

ation with Profit
s direct relation
Closing Invetory is understated by = $130000
Cost of goods sold is overstated

Cost of Opening Raw Mat

Add Cost of Net Purchases
 Less Cost of Closing RM (undrst)
Cost of Material used(Over)
Add Conversion Costs
Cost of Labor
Cost of Overheads

Total Manufacturing Cost

Option D is correct answer

Retained Earning will be correctly stated next year

w methods

Cost Flow
Methods

First in First Last in First Out Retail

Out (FIFO) (LIFO) Inventory
First in First Last in First Out Retail
Out (FIFO) (LIFO) Inventory

Same for LIFO Periodic LIFO

Periodic & Perpetual
Perpetual

car cost
Sale price
Purchase Cost Value
20 2000

32 640
14 420

3060
Purchase Cost Value
20 2000

32 640
14 420

3060
 Cost of Goods Sold
FIFO LIFO

Lower Value Higher Value

 Higher Value Lower Value
(Replacement cost)

ost of Product
x 100%
etail Price
ales x Cost to Retail Ratio)

t A = $80

50/80 x100= 62.50%

10000
20000
30000

ales x Cost to Retail Ratio)

5000 x 62.5%
t for items that are broken or stolen.
across products. If different items have different
accurate.

o Initial Recognition

ement

Case 2- if company is using other

methods(FIFO, Average, etc.)
Lower of
a- Cost of inventory xxx
b- Net Realizable Value(Ceiling) N-1 xxx

This method is allowed under

GAAP and IFRS
d new asset to replace old one

timated selling in the ordinary course of business

s (Costs necessary to sell)

mpletion/processing)

ell the item what should be the minimum net proceed

ofit Margin)
- 10

ctual cost which we have paid to acquire the asset.

an be calculated by cost flow methods.
Case 2 NRV Ceiling = MARKET If,
Replacement cost > NRV Ceiling
Replace cost = 100
NRV Ceiling = 95 =Market
NRV Floor = 90
should be recorded as
asset in inventoy

inventory should be recorded

at this value

Lower off
a- Cost of inventory
b- Market = NRV Floor

Replacement cost =

NRV Ceiling = Sale Vlaue - cost of completi

 NRV Ceiling = 40000 - 12000
NRV Ceiling = 28000

NRV Floor = NRV Ceiling - Profit(10% of 400

NRV Floor = 28000 - 4000
NRV Floor = 24000

ement

Case 2- if company is using other

methods(FIFO, Average, etc.)
 Case 2- if company is using other
methods(FIFO, Average, etc.)
Lower of
a- Cost of inventory xxx
b- Net Realizable Value(Ceiling) N-1 xxx

This method is allowed under

GAAP and IFRS

g = Inventory loss
= (20) Loss
= Inventory Loss

s loss will never reverse in future (US GAAP)

ement

Case 2- if company is using other

methods(FIFO, Average, etc.)
Lower of
a- Cost of inventory xxx
b- Net Realizable Value(Ceiling) N-1 xxx

Inventory in B/S will be reproted at = 100000

Write Down Loss = -15000
Market 85000
 g = Inventory loss
= (20) Loss
= Inventory Loss

will be reveresed in subsequent quarters of same year,

e inventory at cost)

not be reversed,
ng the below entry

mount of loss

tr 3 Data
wer off
80
 NRV/Market 110
30

ote- This gain can be booked to reverse the privious loss

ut only upto the original amount of loss = 20

ecord the Gain

. Inventory 20
. Loss Reversal or Gain(I/S) 20

ote- Inventory in B/S will return to original cost

Cost = 80
Gain 20
Original Cost 100

Inventroy in B/S= 100

rec - all
 xxx

ses or income
 5000
-500
($2,000)
-4700

2200
n the B/S if it is

eriod of next 6 Month

Period of next 1 Year

ctible A/C xxx
xxx
debt has no effect on expenses.
e carring amount of net receivable
oss receivabl and the allowance are the same
on working capital.

/S Approach

% x Credit Sales
% x 10,000,000

300000
xxx

xxx
xxx
xxx
xxx
1000 5
-600
400 5 2000
250 5 1250
3250
Mr A = Consignor = cost of $60000
60% sold
40% unsold = 60000 x 40%= 24000
xxx
xxx
xxx
xxx
(xxx)
$740,000
$200,000
$540,000
xxx
xxx
 (xxx)
xxx

xxx
xxx
xxx
Overstated xxx

ar

Retail
Inventory
 Retail
Inventory

50000
80000
 Opening Units 100
Plus Units Purchased (20+30) 50
Units Available for sale 150
Less Unit Sold -110
Unsold (Closing) 40
$20.40 per unit
 26000
24000 Recorded in B/S

Rep cost < NRV Floor

NRV Floor = Market

26000
V Floor 24000

20000

ale Vlaue - cost of completion

40000 - 12000

V Ceiling - Profit(10% of 40000)

8000 - 4000
91
85 (Loss of 6)