Chapter 05 – Accounting for Receivables and Inventory Cost Flow
5-1
WORK PAPERS FOR
DEMONSTRATION PROBLEMS
Demonstration Problem 5-1: Work Paper, part a.
Statements Model, 2014
Event
Assets
=
Liab.
+
Equity
Rev.
–
Exp.
=
Net Inc.
Cash Flow
No.
Cash
+
Acct.
Rec.
+
(Allow)
=
Ret. Ear.
Beg. Bal.
-0-
+
-0-
+
-0-
=
-0-
+
-0-
-0-
–
-0-
=
-0-
-0-
1.
+
+
=
+
–
=
2.
+
+
=
+
–
=
3.
+
+
=
+
–
=
Totals
3,000
+
1,000
+
(60)
=
-0-
+
3,940
4,000
–
60
=
3,940
+3,000 NC
Demonstration Problem 5-1: Work Paper, part a.
Statements Model, 2015
Event
Assets
=
Liab.
+
Equity
Rev.
–
Exp.
=
Net Inc.
Cash Flow
No.
Cash
+
Acct.
Rec.
+
(Allow)
=
Ret. Ear.
Beg. Bal.
3,000
+
1,000
+
(60)
=
-0-
+
3,940
-0-
–
-0-
=
-0-
-0-
1.
+
+
=
+
–
=
2.
+
+
=
+
–
=
3.
+
+
=
+
–
=
4.
+
+
=
+
–
=
5.
+
+
=
+
–
=
6.
+
+
=
+
–
=
Totals
8,405
+
2,060
+
(90)
=
-0-
+
10,375
6,500
–
65
=
6435
+5,405 NC
Demonstration Problem 5-1: Work paper, part b.
Net Realizable Value, 2014:
________ – _____ = ________
Net Realizable Value, 2015:
_______ – _____ = _________
Chapter 05 – Accounting for Receivables and Inventory Cost Flow
5-2
Demonstration Problem 5-2: Work Paper
2014 Accrued Interest Revenue:
Principal × Annual interest rate × Time outstanding = Interest revenue
2015 Accrued Interest Revenue:
Principal × Annual interest rate × Time outstanding = Interest revenue
2014 Cash Collected:
2015 Cash Collected:
Demonstration Problem 5-3: Work Paper
Statements Model
Event
Assets
=
Liab.
+
Equity
Rev.
–
Exp.
=
Net Inc.
Cash Flow
No.
Cash
+
Acct.
Rec.
=
Ret. Ear.
Beg. Bal.
-0-
+
-0-
=
-0-
+
-0-
-0-
–
-0-
=
-0-
-0-
1.
2.
Totals
7,600
+
-0-
=
-0-
+
7,600
8,000
–
400
=
7,600
+7,600 NC
Chapter 05 – Accounting for Receivables and Inventory Cost Flow
5-3
Demonstration Problem 5-4: Work Paper
FIFO
LIFO
Weighted
Average
Sales
Cost of Goods Sold
Gross Margin
Demonstration Problem 5-5: Work Paper, Inventory Summary
Crystal Apple’s 2014 inventory contains the following layers.
Units
Cost per Unit
Total Cost
Beginning Balance
x
=
First Purchase
x
=
Second Purchase
x
=
Total Available
2,200
n/a
$48,400
Demonstration Problem 5-5: Work Paper, part a.
Cost of Goods Sold and Ending Inventory
FIFO
LIFO
Weighted
Average
Cost of Goods Sold
Ending Inventory
$2,880
$3,520
Chapter 05 – Accounting for Receivables and Inventory Cost Flow
5-4
Demonstration Problem 5-5: Work Paper, part b.
Financial Statements
Crystal Apple Sales Company
Comparative Financial Statements
Income Statements for the Year Ended December 31, 2014
FIFO
LIFO
W. Avg.
Sales
$81,600
$81,600
$81,600
Cost of Goods Sold
Gross Margin
$37,040
$36,080
$36,720
Operating Expenses
Income before Taxes (IBT)
Income Tax Expense (IBT x .30)
Net Income
$ 7,728
$ 7,056
$ 7,504
Balance Sheets at December 31, 2014
Assets
FIFO
LIFO
W. Avg.
Cash
Inventory
Total Assets
Stockholders’ Equity
Common Stock
$ 2,500
$ 2,500
$ 2,500
Retained Earnings
Total Stockholders’ Equity
$13,328
$12,656
$13,104
Statements of Cash Flows for the Year Ended December 31, 2014
Operating Activities
FIFO
LIFO
W. Avg.
Cash Inflow from Customers
Cash Outflow for Inventory
Cash Outflow for Operating Exp.
Cash Outflow for Income Taxes
Net Cash Inflow from Operating Act.
Investing Activities
-0-
-0-
-0-
Financing Activities
-0-
-0-
-0-
Net Increase in Cash
$ 7,488
$ 7,776
$ 7,584
Beginning Cash Balance
Ending Cash Balance
Chapter 05 – Accounting for Receivables and Inventory Cost Flow
5-5
Quiz Questions for Chapter 5
Use the following information to answer the next three questions. Echo Company started the year with a $4,600
balance in accounts receivable and a $150 balance in the allowance for doubtful accounts. The company had credit
sales of $12,000, collections on accounts receivable of $13,000, and wrote off uncollectible accounts of $200 during
the year. The company believes that 2 percent of its credit sales will be uncollectible.
1. The balance in the accounts receivable account at the end of the year would be
a. $3,400.
b. $3,600.
c. $3,250.
d. $4,360.
2. The amount of uncollectible accounts expense appearing on the year’s income statement would be
a. $532.
b. $332.
c. $440.
d. $240.
3. The net realizable value of receivables at the end of the year would be
a. $3,250.
b. $3,350.
c. $3,210.
d. $3,410.
4. Recording the write-off of an uncollectible account will have what effect on the accounting equation?
a. Total assets decrease and equity decreases.
b. Total assets increase and equity decreases.
c. Total assets remain unchanged.
d. Liabilities increase and equity decreases.
5. ABC Company accepts a credit card in payment for $1,500 of services performed for a customer. The credit
card company charges a 4 percent service fee. Recording the transaction on ABC’s records will
a. increase assets by $1,440.
b. increase expenses by $60.
c. increase revenue by $1,500.
d. all of the above.
6. Training Services, Inc. (TSI) recognized accrued interest revenue at the end of its current accounting period.
The result of this recognition is to
a. Increase assets, liabilities, and equity.
b. Increase assets and equity with no effect on liabilities.
c. Increase assets and liabilities and decrease equity.
d. Increase cash flow from operating activities.
The following information pertains to the next three questions. On April 1, 2014, Hope Co. accepted a $5,000
face value note as evidence of a loan it made to Cannon Company. The note had a 12 percent interest rate and a
one-year term.
Chapter 05 – Accounting for Receivables and Inventory Cost Flow
5-6
7. The amount of interest revenue Hope recognized on the company’s December 31, 2014 income statement was
a. $150.
b. $450.
c. $600.
d. none of the above.
8. The cash flow from operating activities shown, on Hope’s December 31, 2015 statement of cash flows, would
be
a. $150.
b. $450.
c. $600.
d. none of the above.
9. Hope Company’s December 31, 2014 balance sheet would show total receivables in the amount of
a. $5,150.
b. $5,600.
c. $5,000.
d. $5,450.
10. EFG Company uses the allowance method to account for uncollectible accounts. The company wrote off an
uncollectible account receivable. Which of the following reflects how the write–off affects EFG’s financial
statements?
Assets
=
Liab.
+
Equity
Rev.
−
Exp.
=
Net Inc.
Cash Flow
a.
+ −
NA
NA
NA
NA
NA
NA
b.
+ −
NA
NA
NA
+
−
NA
c.
−
NA
−
NA
+
−
− OA
d.
+
+
NA
NA
NA
NA
− OA
The following data apply to the next three questions.
Units
Price
Beginning Inventory
200
$1.20
First Purchase
400
$1.30
Second Purchase
250
$1.40
Sales
550
$2.00
11. Assuming a FIFO cost flow, the amount of gross margin reported on the income statement would be
a. $405.
b. $695.
c. $415.
d. None of the above.
12. Assuming a LIFO cost flow, the amount of ending inventory reported on the balance sheet would be
a. $240.
b. $415.
c. $130.
d. $370.
13. Assuming a weighted average cost flow, the amount of ending inventory reported on the balance sheet would
be (round the final answer to the nearest dollar)
a. $415.
b. $392.
c. $370.
d. $417.
5-8
Use the following information to answer the next two questions. ABC Company reports the following
information about inventory activity for 2014:
Quantity
Per Unit
Cost/Sales
Price
Beginning Inventory
200
$2.00
1st Purchase
150
$2.10
2nd Purchase
110
$2.15
Sales
220
$3.20
17. Assuming the company uses the perpetual inventory method and LIFO cost flow, cost of goods sold reported on
the 2014 income statement would be
a. $473.00.
b. $704.00.
c. $455.00.
d. $467.50.
18. Using the weighted average inventory cost flow method, the average unit cost would be (rounded to the nearest
penny),
a. $2.15.
b. $2.04.
c. $2.07.
d. $2.09.
Chapter 05 – Accounting for Receivables and Inventory Cost Flow
Solutions to Quiz Questions
Question
Answer
1
A
2
D
3
C
4
C
5
D
6
B
7
B
8
C
9
D
10
11
12
13
14
15
16
17
18
A
A
D
B
B
B
B
D
C
5-10
Summary Outline of a Lesson Plan for Chapter 5
I. Use multicycle Demonstration Problem 5-1 to illustrate how uncollectible accounts
affect financial statements over two cycles.
A. The first cycle illustrates recording uncollectible accounts expense and establishing
an allowance for doubtful accounts.
B. The second cycle illustrates accounting for the write-off of an uncollectible account,
the recovery of an account receivable previously written off, and recognizing
uncollectible accounts expense.
II. Use Exercise 5-9 to introduce accounting for uncollectible accounts expense using
the percent of receivables method.
III. Use Demonstration Problem 5-2 to introduce accounting for notes receivable and
accrued interest revenue.
IV. Use Demonstration Problem 5-3 to introduce accounting for credit card sales.
V. Use a two-layer, single-product model to introduce the cost flow methods. Use
Demonstration Problem 5-4 or set up a similar problem for students to work in class or
use the Problem-Based Learning Case.
VI. Demonstration Problem 5-5 introduces accounting for inventories with multiple
layers and prices. Have students use a vertical format to prepare income statements,
balance sheets, and statements of cash flows. Once they have prepared the statements,
have them make the following comparisons:
A. The cost flow method does not affect revenue.
B. The amount of cost of goods sold plus ending inventory is equal to the amount of cost
of goods available for sale. The total product cost is the same for all cost flow
methods. The difference lies in how the cost is allocated between cost of goods sold
and ending inventory.
C. With the exception of tax consequences, cash flow is not affected by the cost flow
method.
VII. Time considerations and homework assignments. Plan to spend approximately two
hours of class time on this chapter for uncollectible accounts and note receivable
coverage. Accounting for uncollectible accounts requires approximately one hour. Use
Demonstration Problem 5-1 to illustrate the basic concepts and then assign Problem 5-23
as homework. We recommend that you help your students start these problems in class.
Accounting for uncollectible accounts is a difficult subject for most students, and many
of them will need your assistance. Work as far into the problems as class time permits.
We recommend approximately 1 hour of class time for coverage of notes receivable and
Chapter 05 – Accounting for Receivables and Inventory Cost Flow
5-11
accrued interest revenue. You may wish to assign Exercise 5-11 or Exercise 5-12 as
follow-up homework for Demonstration Problem 5-2. Reserve approximately 10 minutes
to cover accounting for credit card sales. Use Exercise 5-14 to reinforce the students’
understanding of how credit card sales affect financial statements. Allot at least one class
hour for inventory topics. Students seem to grasp the inventory cost flow concepts
relatively easily when the method of calculating cost of goods sold is presented in a
manner consistent with the cost flow acronyms. Exercise 5-20 presents a good follow-up
on gross margins for FIFO and LIFO to complement Demonstration Problem 5-4.
Exercise 5-18 provides good follow-up to Demonstration Problem 5-5.