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1、LESSON THREE CURRENT ASSETSLESSON THREE CURRENT ASSETS? 2000 Prentice Hall Business Publishing Financial Accounting, 4/e Harrison and HorngrenAims:14. To explain the importance of cash and the accounting treatment of cash.2. To discuss the bad debt and the accounting treatment3. To make allowance fo
2、r doubtful account receivable.4. To write off an un-collectible account receivable.5. To explain two systems of inventory accounting.6. To introduce the inventory valuation method: FIFO & LIFO.7. To discuss the accounting treatment of current assets.? 2000 Prentice Hall Business Publishing Finan
3、cial Accounting, 4/e Harrison and Horngren3.1 Introduction to Assets Assets are future economic benefits obtained or controlled by an entity as a result of past transactions or events. Assets may be physical, such as land, buildings, inventory of supplies, material, or finished products. Assets may
4、also be intangible, such as patents and trademarks.Assets are normally divided into two major categories: current assets and long-term assets. ? 2000 Prentice Hall Business Publishing Financial Accounting, 4/e Harrison and Horngren3.2 Current Assets Current assets are assets:(1) in the form of cash,
5、 (2) that will normally be realized in cash, or (3) that conserve the use of cash during the operating cycle of a firm or for one year, whichever is longer. ? 2000 Prentice Hall Business Publishing Financial Accounting, 4/e Harrison and Horngren3.3 CashCash is money in the form of bills or coins, wh
6、ich can prompt payment for goods or services in currency or by check. Cash is listed first in the balance sheet, because it is the most liquid of all current assets.? 2000 Prentice Hall Business Publishing Financial Accounting, 4/e Harrison and Horngren3.4 Inventory Inventory refers to various asset
7、s that are stocked for the purpose of sale, production or consumption during the process of the production and operation for a business. The definition of inventory is applied to manufacturing enterprises as well as merchandising enterprises. ? 2000 Prentice Hall Business Publishing Financial Accoun
8、ting, 4/e Harrison and Horngren3.5 Four Common Inventory Cost Flow Methods1. Specific identification;2. First-in, first-out (FIFO);3. Last-in, fast-out (LIFO);4. Weighted-average.? 2000 Prentice Hall Business Publishing Financial Accounting, 4/e Harrison and Horngren3.6 Impact on the Income Statemen
9、t of the Cost Flow MethodThe cost flow method a company uses in its accounting has a straight influence on the income statement, cost of goods sold, and the gross margin, so the income must be influenced.? 2000 Prentice Hall Business Publishing Financial Accounting, 4/e Harrison and Horngren3.7 Impa
10、ct on the Balance Sheet of the Cost Flow MethodSince the cost of inventory is allocated between the cost of goods sold and the ending inventory, the type of the cost flow method employed by a company has effects on the balance sheet as well as the income statement. ? 2000 Prentice Hall Business Publ
11、ishing Financial Accounting, 4/e Harrison and HorngrenFIFO transfers the first costs to the income statement while leaving the last in the balance sheet. Contrary, LIFO moves the first cost to the income statement and remains the last cost in the balance sheet. The weighted-average uses the same ave
12、rage costs for both income statement and balance sheet.? 2000 Prentice Hall Business Publishing Financial Accounting, 4/e Harrison and Horngren3.8 An Example of the Perpetual Inventory System.Assume that a company named Youth Electric Motor had such ending balances in its accounts:? 2000 Prentice Ha
13、ll Business Publishing Financial Accounting, 4/e Harrison and Horngren? 2000 Prentice Hall Business Publishing Financial Accounting, 4/e Harrison and HorngrenNow consider the following transactions that happened in year 20X5:(1) Two purchases of electric motor were made;(2) One sale of the goods too
14、k place.The table below shows the quantities and costs of the layers: ? 2000 Prentice Hall Business Publishing Financial Accounting, 4/e Harrison and Horngren? 2000 Prentice Hall Business Publishing Financial Accounting, 4/e Harrison and Horngren3.7. The first one does not differ for any of the cost
15、 flow method since only one amount is in use - the selling price of the goods sold, that is the same for FIFO, LIFO, or weighted-average. In our example it is $21,600 for 540 electric motor sold. The revenue recognition increases both assets (Cash) and equity (Sales Revenue). ? 2000 Prentice Hall Bu
16、siness Publishing Financial Accounting, 4/e Harrison and Horngren? 2000 Prentice Hall Business Publishing Financial Accounting, 4/e Harrison and Horngren3.10 LIFO MethodAs it names implies (last-in, first-out), the cost of goods sold is calculated using the costs of the electric motor that the compa
17、ny purchased last. The computations are below:? 2000 Prentice Hall Business Publishing Financial Accounting, 4/e Harrison and Horngren? 2000 Prentice Hall Business Publishing Financial Accounting, 4/e Harrison and HorngrenThe 60 units from the beginning inventory remain in Inventory.The income is de
18、termined by subtracting all the expenses (in our case, they only include the cost of goods sold) from the sales revenue: $11,.e., $21,600 - $. The income tax to be paid is $3,5.e., $11,.? 2000 Prentice Hall Business Publishing Financial Accounting, 4/e Harrison and Horngren3.11 Weighted-Average Meth
19、odUnder this method it is important first to calculate weighted-average cost per unit. This is done by dividing the total cost of goods available for sale by the total number of goods available for sale:The cost of goods available for sale: 200 $15 + 240 $18 + 160 $20 = $10,520The number of goods av
20、ailable for sale: 200 + 240 + 160 = 600 units? 2000 Prentice Hall Business Publishing Financial Accounting, 4/e Harrison and Horngren3.12 The Differences in the Financial Statements under the Three MethodsThere are differences in the amounts of income before taxes, inventory, etc. under the three me
21、thods:? 2000 Prentice Hall Business Publishing Financial Accounting, 4/e Harrison and Horngren? 2000 Prentice Hall Business Publishing Financial Accounting, 4/e Harrison and Horngren? 2000 Prentice Hall Business Publishing Financial Accounting, 4/e Harrison and Horngren? 2000 Prentice Hall Business
22、Publishing Financial Accounting, 4/e Harrison and Horngren3.13 The Difference in the Income Before Taxes under the Three MethodsYou have possibly noticed that the amount of income before taxes is the biggest for FIFO ($12,280), and the lowest for LIFO ($11,. Why so? Consider that the ending inventor
23、ies are just vise versa for the two methods (respectively, $1200 and $. So, the cost of goods sold for FIFO is lower ($9,320) than that for LIFO ($. As a result, we can see the difference in the income before taxes. ? 2000 Prentice Hall Business Publishing Financial Accounting, 4/e Harrison and Horn
24、grenSince the income for FIFO is greater, the companies that employ FIFO pay higher income taxes. In contrast, companies using LIFO pay lower income taxes. As it was said before, this is a way to manipulate with figures of the financial statements. Usually, companies use FIFO, and then go businesses
25、 that use LIFO.? 2000 Prentice Hall Business Publishing Financial Accounting, 4/e Harrison and Horngren3.14 What If We Have Sales and Purchases Mixed? 2000 Prentice Hall Business Publishing Financial Accounting, 4/e Harrison and HorngrenTotal number of goods available for sale is 420 units (i.e., 10
26、0 + 200 + 120).Total number of goods sold is 380 units (i.e., 240 + 140).Ending inventory is 40 units (i.e., 420-380).? 2000 Prentice Hall Business Publishing Financial Accounting, 4/e Harrison and Horngren3.15 Periodic SystemUnder periodic system inventory records are not changed when purchases and
27、 sales occur. The amount of ending inventory is determined by a physical count of the goods remaining on hand at the end of an accounting period. The cost of goods sold is computed then by subtracting the amount of ending inventory from the goods available for sale. ? 2000 Prentice Hall Business Pub
28、lishing Financial Accounting, 4/e Harrison and Horngren3.16 The Use of the Lower of Cost or Market RuleThe lower of cost or market rule can be applied to:(1) each individual inventory item;(2) major classes or categories of inventory;(3) entire cost of inventory in aggregate.? 2000 Prentice Hall Bus
29、iness Publishing Financial Accounting, 4/e Harrison and Horngren3.17 Inventory LossIf the market value of an item (or items in aggregate) is lower than its cost, the company has to reduce its ending inventory by the amount of difference. ? 2000 Prentice Hall Business Publishing Financial Accounting,
30、 4/e Harrison and Horngren? 2000 Prentice Hall Business Publishing Financial Accounting, 4/e Harrison and Horngren3.18 Account Receivable (or: Debtors ) Accounts receivable are very liquid assets, usually being converted into cash within a period of 30 to 60 days. Accounts receivable from customers
31、(and notes receivable as well) classified as current assets appear in the balance sheet immediately after cash and cash equivalents.? 2000 Prentice Hall Business Publishing Financial Accounting, 4/e Harrison and Horngren3.20 The Allowance Method of Accounting for Bad debts: an ExampleA company that
32、specializes in training services incurred the following transactions that pertain to 20X5:(1) Recognized $6,000 of service revenue earned on account;(2) Collected 3,600 cash from accounts receivable;(3) Recognized $400 of bad debt expense for accounts receivable that are expected to be uncollectible
33、 in the future.? 2000 Prentice Hall Business Publishing Financial Accounting, 4/e Harrison and Horngren? 2000 Prentice Hall Business Publishing Financial Accounting, 4/e Harrison and Horngren3.21 The General Journal and T-accountsThe transactions and the closing entry are shown in the general journa
34、l and T-accounts as follows:? 2000 Prentice Hall Business Publishing Financial Accounting, 4/e Harrison and Horngren? 2000 Prentice Hall Business Publishing Financial Accounting, 4/e Harrison and Horngren? 2000 Prentice Hall Business Publishing Financial Accounting, 4/e Harrison and Horngren3.22 Thr
35、ee Financial Statements:? 2000 Prentice Hall Business Publishing Financial Accounting, 4/e Harrison and Horngren3.23 How is the Amount of Allowance for Doubtful Debts EstimatedIn the illustration above we assumed the amount of allowance for doubtful debts ($200). However, how is it estimated in real
36、ity ? Usually, accountants use records from previous years and adjust it to current situations. For example, in preceding accounting periods of a business receivables that appeared to be doubtful amounted to 5% of the total accounts receivable. ? 2000 Prentice Hall Business Publishing Financial Acco
37、unting, 4/e Harrison and HorngrenHowever, in this accounting period it is expected that a bigger amount will not be collected since there were many purchases by customers with bad credit history. In this connection, the accountants decide to increase this percentage to 7. So, if the company has the
38、ending balance of the accounts receivable of $20,000, then the allowance for doubtful debts will be $1,400 (i.e., $20,000 7%), and the net realizable value - $18,600 ($20,000 - $1,400). ? 2000 Prentice Hall Business Publishing Financial Accounting, 4/e Harrison and Horngren3.24 Direct Write-off Meth
39、odThere is no need for estimates, adjusting entries, or use of the Allowance for Doubtful Debts account under this method. Direct write-off method is used only when the amount of uncollectible receivables is immaterial (that is small comparing to receivables themselves). Under this method bad debts
40、expense is recognized at the point when an account receivable is known to be uncollectible. ? 2000 Prentice Hall Business Publishing Financial Accounting, 4/e Harrison and Horngren? 2000 Prentice Hall Business Publishing Financial Accounting, 4/e Harrison and Horngren3.25 Warranty A warranty of a co
41、mpany is its promise to do something (repair a car, accept a goods return if it is damaged, etc.) for a client during a specified period of time without a charge (for free). Even though warranties represent an uncertainty in time, amount, or customer, it is usually deemed as an obligation and must b
42、e recorded in accounting books. The following example deals with warranties and how the latter are recorded in the accounts.? 2000 Prentice Hall Business Publishing Financial Accounting, 4/e Harrison and Horngren3.27 General Journal and Ledger T-accounts ? 2000 Prentice Hall Business Publishing Financial Accounting, 4/e Harrison and Horngren? 2000 Prentice Hall Business Publishing Financial Accounting, 4/e Harrison and Horngren