Lifo – last in first out Fifo – first in first out Lifo, Fifo, Average Cost Tells you WHICH units you sell first Begin Inventory 40 units $10/u $400 Pruchase 1 50 units $11/u $550 Purcahse 2 50 units $12/u $600 Purchase 3 40 units 13/u $520 Purchase 4 50 units 14/u $700 230 units avail for sale 2770 cost of goods availabls for sale Prices are increasing Sold 170 units End Inventory – 60 LIFO – last in first out, the last units into your inventory are the first to be sold 50 units at $14, 40 units at $13, 50 units $12, 30 units at $11 $2150 dolalrs for the 170 units sold. 2150 = cost of good sold ending inventory was 60 units. 20 at 11, 40 at 10 FIFO – first in first out Sell the first produced units first. 40 at $10, 50 at $11, 50 at $12, 30 at $13 = Average Cost – take the cost of goods available for sales / # of units. $2270 / 230 = 12.043 Cogs = #units sold * average cost Ending inventory – 60 * 12.043 Lifo 2150, 1950 under fifo, average $2047.31 Lifo gives highest cost of goods sold, lowest ending inventory Fifo gave the lowest cost of goods sold, highest ending inventory COGS is going up Ending inventory is going down Sales – cost of goods sold = Gross margin – operating expenses – income before taxs – income tax expensie = net income
If COGS is high, your gross margin is lower If gross margin is low, income before taxes is low If income before taxes is slow, your income tax epense is low Net income is then low LIFO always gives the highest cost of goods sold during times of increasing prices FIFO always gives the lowest cost of goods sold Lowest income taxes drecreasing taxes… Shipping terms & ownership Fob – free on board destination – when in transit, is the sellers property until it arrives at destination Fob shippingn point (selling point) - Shippping point, it is property of the buyer, counted as inventory once it leaves the selling point Consignment – using a middle man to sell something, never actually transfer ownership to middle man, keep ownership until it goes to buyer. Inventory turnover ratio = COGS / average inventory Average inventory = Begin Inv + End Inv / 2 Average days in inventory = 365 / inventory turnover ratio Purchase something for $25,000 Market value - $23,500 On balance sheet, record lower value 23,500 Purchase 370 Market 390 On balance sheet, record lower value of 370 Inventory errors – Overstated ending inventory, understated cost of goods sold, we overstated our assets because ending inventory appears on balance sheet, net income overstated Understate ending inventory, overstate cost of goods sold, understate assets, understate ending inventory If begin inventory is overstated, cost of goods sold would be overstated, understated net income Chapter 7
Establish responsibility – assign a person to take the money to the bank every day Separation of duties – one person opens the mail, send checks to cash department, send things to the accts reciv deparment,, no one person handles all cash stuff Physical mechnical elect – password on computer, a safe with a combination, codes on the door Documentation procedures – checks that say “if over 10,000, requires 2 signatures”, return something have to get manager’s approval over a certain limit need 2nd approval, numbered checks, receipts etc. Indepdent internal audits – somebody in the accounts payable dept, do a spot check on the accts receiv department, random, Chicago office go to san Francisco office Other controls – background check on employees, having employess take vacations, rotating jobs Bank reconciliation – Bal per bank + deposit in transit - outstanding checks (checks you have written that the bank has not yet proessed) Bal per books (cash ledger) + interest revenue (income) + collection made by bank for you - service fees - automatic payments - nsf check from a customer (non sufficient funds) + or – errors recording ADJUSTED BANK BALANCE and ADJUSTED BOOKS BALANCE ARE TO BE EQUAL!
$3.47 of interst revenue bank collected $1000 note + $50 of interest from customer, bank charged $20 collection fee,. Cash 3.47 Interst Rev Cash 1030 Misc. Exp 20 Note Rec Interest Rev Misc Exp 20 Cash
3.47 1030 50 20
Accts Rec 57 Cash Util Exp 6 Cash Cash Management a. b. c. d.
57 6
increase speed of collections delay paying liabilities plan the timing of major purchases invest idle cash
Cash Budgeting Beg Cash $8000 Receipts $37000 Disbursements $44000 (Payments) Requires Balance 5,000 Beg cash + receptibts = 45,000 cash available Cash avail – disembursements = 1000 ammount before borrowing Need to borrow $4000 Chapter 8 Types of receivables Accounts receivable Notes receivable – signed contract, paymenet arrangements in it Other receivable – intereset receivable, income tax refund receivable, advance to employees Apr 1st issued $10,000 notes receivable to J. Brown, interest 9%, due in 5 months for a cash loan Apri 1 Notes Receivable 10,000 Cash 10,000 st Sept 1 Cash 10,375 Notes Receiv 10,000 Interest Revenue 375 Principal * interest rate * part of the year = interest 10,000 * 9% * 5 / 12 = $375 Dec 1st Notes receivable 10,000
Cash 10,000 Dec 31 Interest Receiv. 75 Interest Revenue 75 st May 1 Cash 10,375 Notes Reciv 10,000 Interest Receviable 75 Interest Revenue 300 Allowance for doubtful accounts IS A CONTRA ASSET.. normal balance is a credit Estimates how much of accounts receivable you think you will not receive Cash (Net) Realizable A/R A/R - Balance in allow d.a. Cash(net) real. A/R Aging or A/R method Sales $1,000,000 A/R 270,000 Allow D.A. 400 (CR) Est. 2% of A/R will be uncollectible $270,000 * 2% = 5400 = desired ending balance, balance in allowance for doubtful accounts 2nd step. Calculate adjusting amount using the T account for allowance d.a. Started out with 400 credit balance Desired balance goes on credit side Debit to bad debit expense Credit to doubtful accounts Cash realizable accounts receivable? 270,000 – 5,400 Write offs & recoveries A/R 58,000 Allow D.A. - $1060 (CR) Accts J. Jones - $500 write off.
Net real Before w/o 58,000 – 1060 = 56940 net real 58,000 – 500 – 560 = $56940 Write off Allow DC A/R 500 500
March 1st wrote account off June 15th, receive a check from J. Jones, bad car accident now on his feet June 15th A/R 500 Allow DC Cash 500 A/r 500 500
Receivable turnover ratio - Net credit sales / average gross a/r Average collection period – 365 / receivable turnover ratio Current assets Cash Accts receivable Less allowance doubtful accounts Cash real Supplies Inventory Total current assets Methods to manage receivable 1. 2. 3. 4. 5. determine to whom to extend credit establish a payment period monitor collections evaluate rec. balances – receiveable turnover ratio accelerate cash – receipts 10700 270,000 5400 264600 2000 17000 2943000
Chapter 9 Determining the cost of planned assets Cost of an asset = all one time costs to get an asset ready for use.
Examples of one time cost – back taxes on land (land), broker’s commission (land), cleared (land), proceeds from salvage like cacti (lowers cost of land Land does not depreciate. You can depreciate land improvements Land improvements - sidewalks - lighting - curbs - roads March 1st Land 100,000 6600 1700 salvage 1100 4000 = 110,000 value of land Building 8700 160,000 = 168700 value of building Land Improvements 14,000 = 14,000 value of land improvements painting of name on truck would be part of the cost of the asset motor vehicle licence – operating expense, yearly amount, not part of the cost of the truck new factory machine that’s not installed, anything to get it ready to use is part of the cost of the machinery, to have it installed, inspected, how to use it, it’s part of the cost of the machine. If you have reinforce floor of factory, part of machinery cost… 900 for 1 year insurance policly on truck – operating expense $200 to cover insurance while in transit for 1 time, part of machinery cost book value – how much is the value of asset on records
cost of asset – balanceacc depreciation account = straight line depreciation – cost of asset – salvage value / # of years of useful life = depreciation for 1 full year car that cost $27,000 salvage $4500 useful life 5 years 27,000 – 4500 / 5 = 4500/year Dec 31 2002 Depreciation Exp 4500 Accumulated Depreciation Dec 31 2003 Depreciation Exp 4500 Accumulated Depreciation Dec Book Value as of 2002 – 22500 Book value as of 2003 – 18,000 Book value as of 2004 – 13,500 Accum depreciation = contra asset Sell call Apr 1st, 2005 4/12 Apr 1 2005 1125 Accump Depcitation 1125 Ammount received – book value 8000 – 12375 = (4375) lost $4375 – loss sale Cash Acc Depreciation Loss Car Debits = credits 8000 14625 4375 27000
4500 4500
Credit gain on sale, debit loss on sale Totaled July 1st, 2006 –
July 2006, Intangable Assets have legal life, cannot depreciate, We “amortization expense” eating away at a balance Patent that cost $50,000 Legal life of 40 years Useful life of 10 years Amortize it over the 10 years Cost of intangible asset / # years of useful life 50,000 / 10 = 5,000 amortization per year amortization expense patent Intangible Assets Patent 5000 5000 45,000
Cash flows for tangible and intangible assets Cash flows would be in investing section of cash flows section, if you purchase prop, plant, equip.. sell you have a cash inflow