Wednesday, July 31, 2024
Accounting: The Language of Business - Vol. 2 (Intermediate: Part 156)
Whoever is greedy troubles his household (Proverbs 15:27)
Short-Term Operating Assets: Inventory (Part B)
by
Charles Lamson
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Inventory Systems Companies use either a periodic or perpetual inventory system. Periodic Inventory System. Under a periodic system, a company determines the inventory balance and the cost of goods sold at the end of the accounting period. Each time a sale is made, a company does not reduce inventory and increase cost of goods sold. Rather, a company determines them periodically. The balance sheet includes the opening balance of inventory. Purchases made during the period increase inventory available for sale. Firms net any purchase returns, allowances, and discourses with purchases made. Firms record purchases in a separate purchases account, a temporary account used to accumulate inventory acquisitions during a period that is closed out at the end of the period. The beginning inventory balance plus the net purchases is the cost of goods available for sale—that is, the total amount of inventory that will either be sold during the period or remain in ending inventory. The ending inventory balance is based on a physical count of the inventory made by going to manufacturing and storage facilities and actually counting the inventory located at these sites. Firms determine the cost of goods sold at the end of the period using the computation illustrated in Exhibit 10.3. EXHIBIT 10.3 Computation of Cost of Goods Sold: Periodic Inventory System %20(2)%20(2)%20(2)%20(1)%20(1)%20(3)%20(3)%20(1)%20(1)%20(3)%20(3)%20(1).jpg)  Example 10.1 illustrates accounting under the periodic inventory system. %20(2)%20(2)%20(2)%20(1)%20(1)%20(3)%20(3)%20(1)%20(1)%20(3)%20(5)%20(2)%20(1).jpg) %20(2)%20(2)%20(2)%20(1)%20(1)%20(3)%20(3)%20(1)%20(1)%20(3)%20(5)%20(3)%20(1)%20(1).jpg) %20(2)%20(2)%20(2)%20(1)%20(1)%20(3)%20(3)%20(1)%20(1)%20(3)%20(5)%20(3)%20(2)%20(1).jpg) *GORDON, RAEDY, SANNELLA, 2019, INTERMEDIATE ACCOUNTING, 2ND ED., PP. 509-510* end |
Tuesday, July 30, 2024
Monday, July 29, 2024
Sunday, July 28, 2024
Accounting: The Language of Business - Vol. 2 (Intermediate: Part 155)
Short-Term Operating Assets: Inventory (Part A)
by
Charles Lamson
Introduction
Go into any store and you will see inventory (see Image 1) all around you. Grocery stores are stocked with fresh fruits and vegetables, boxes of cereal, and gallons of milk. Retailers like Abercrombie & Fitch and Old Navy sell all types of clothing such as pants, shirts, and sweaters. Best Buy is stocked with computers, cell phones, and flat screen televisions. Maintaining sufficient inventory levels is critical to operating a successful business.  Image 1: Inventory Consider Foot Locker, Inc., the world's leading retailer of athletically inspired footwear and apparel. Foot Locker's $1.307 billion inventory represented about 34% of its total assets at the end of 2016. Foot Locker seeks to accurately predict the market for the merchandise and its stores as well as its customers' purchasing habits, which enables it to maintain sufficient inventory levels to increase inventory turnover and merchandise flow. If Foot Locker accumulates excess inventory, it may be forced to mark down or hold promotional sales to dispose of any excess or slow-moving inventory. Both outcomes could have a materially adverse effect on Foot Locker's business, financial condition, and results of operations. By analyzing its market and consumer purchasing habits and maintaining sufficient levels of inventory, Foot Locker increased its gross profit percentage by 0.1% from 33.8% in 2015 to 33.9% in 2016. In the next several parts, we discuss key issues in accounting for inventory. Inventory is a short-term operating asset consisting of goods held for resale for a merchandising company and inventory of raw materials, work in process, and finished goods for a manufacturing company. As is the case with Foot Locker, inventory is typically a significant portion of a company's total current assets. The evaluation of inventory affects the company's balance sheet and the cost of goods sold on the income statement. We first cover the periodic and perpetual methods company uses to account for inventory. Then, we address costs to include an inventory and present inventory cost flow assumptions including specific identification, first in, first out (FIFO), last in, first out (LIFO), and moving average. We also consider the issues related to the LIFO cost flow assumption and the tax and cash flow implications of Interational Financial Recording Standards (IFRS) not allowing the LIFO inventory cost flow assumption. Next, we address specific guidelines for reporting inventory with the lower of cost or market rule, including differences between generally accepted accounting principles (GAAP or U.S. GAAP) and IFRS. Then, we discuss the conventional retail inventory method, a technique that Foot Locker uses. Finally, we illustrate estimating ending inventory using the gross profit method and detail required disclosures. We discuss inventory errors in a future part.  Types of Inventory and Inventory Systems We begin our discussion of inventory measurements with an overview of the inventory classifications and the two types of inventory systems [For most of the relevant authoritative literature for the topic, see FASB ASC 330 - Inventory for U.S. GAAP and IASC, International Accounting Standard 2, “Inventories” (London, UK International Accounting Standards Committee, revised) for IFRS.] Types of Inventory Retail, wholesale, and manufacturing firms hold inventory. Retailers and wholesalers typically hold only merchandise inventory, which consists of goods purchased to resell without any additional manufacturing. Manufacturing firms generally report three types of inventory based on the stage of the production process:
Raw materials inventory is composed of inputs that the firm has not paid placed into production. For example, cloth would be included in the raw materials inventory for a clothing manufacturer. The raw materials inventory is increased by purchases and decreased when these items are transferred into work-in-process inventory. Work-in-process inventory, the goods that are currently in the manufacturing process, includes three different types of costs: raw materials, cost of labor, and allocated overhead costs. Overhead includes expenditures made for factory-related costs such as supervisory salaries, utilities, and supplies.  Work in process inventory becomes finished goods at the end of the production process. Finished goods inventory includes those goods for which the manufacturing process is complete. A company charges the value of finished goods to the cost of goods sold account when it sells the inventory. Increases in raw materials and work-in-process inventories are often indicators that a company plans to expand production to meet expected future sales increases. Exhibit 10.1 summarizes the flow of inventory costs on the balance sheet and income statement from raw materials inventory to work-in-process inventory and finish the goods inventory, and finally to cost of goods sold when the inventory is sold. EXHIBIT 10.1 Cost Flows In A Manufacturing Firm %20(2)%20(2)%20(2)%20(1)%20(1)%20(3)%20(3)%20(1)%20(1)%20(3)%20(1)%20(1).jpg) Exhibit 10.2 shows Johnson & Johnson's disclosures by types of inventory from its 2016 annual report. Approximately 61% of Johnson & Johnson's inventories are comprised of finished goods, and 39% is made up of raw materials and work in process.  EXHIBIT 10.2 Types of Inventories, Johnson & Johnson, Financial Statements, January 1, 2017 %20(2)%20(2)%20(2)%20(1)%20(1)%20(3)%20(3)%20(1)%20(1)%20(3)%20(2)%20(1).jpg) SOURCE: Johnson & Johnson's 2016 Annual Report. *GORDON, RAEDY, SANNELLA, 2019, IINTERMEDIATE ACCOUNTING, 2ND ED., PP. 507-509* end |
Saturday, July 27, 2024
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Sunday, July 21, 2024
Accounting: The Language of Business - Vol. 2 (Intermediate: Part 154)
- Sit down and estimate the cost (Luke 14:28)
Short-Term Operating Assets: Cash and Receivables (Part S)
by
Charles Lamson
Petty Cash
Petty cash funds are minor amounts of cash that a company keeps on hand in order to pay for small, miscellaneous expenses such as visitor parking, lunches, and reimbursements for tools and supplies. It is impractical to issue checks through the company's cash disbursement system to pay for these minor expenses. Therefore, cash is held for these purposes. An imprest petty cash system provides the best internal control over cash on hand. An imprest petty cash system involves a cash fund for which a fixed amount of cash is reserved on hand and is then replenished at the end of the period. At any point in time, the sum of cash on hand plus petty cash receipts must equal the fixed amount of the fund. If there is a shortage or overage, the company uses a cash short and over account to record the difference from the imprest amount. Shortage and overage amounts are reported on the income statement as other expenses and revenues, respectively. Example 9A.2 illustrates accounting for an imprest petty cash fund. %20(2)%20(2)%20(2)%20(1)%20(1)%20(3)%20(2)%20(1).jpg) %20(2)%20(2)%20(2)%20(1)%20(1)%20(3)%20(3)%20(1)%20(1)%20(2).jpg) *GORDON, RAEDY, SANNELLA, 2019, INTERMEDIATE ACCOUNTING, 2ND ED., P. 505* end |
Saturday, July 20, 2024
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Thursday, July 18, 2024
Wednesday, July 17, 2024
Tuesday, July 16, 2024
Monday, July 15, 2024
Accounting: The Language of Business - Vol. 2 (Intermediate: Part 153)
Short-Term Operating Assets: Cash and Receivables (Part R)
by
Charles Lamson
Controlling Cash by Use of a Bank Account
Bank accounts provide a company with several important controls over cash because banks have standing procedures to safeguard cash. For example, key documents used by banks to protect depositors' cash include checks, deposit tickets, signature cards, and bank statements. Bank Reconciliation Referring to the bank statements, companies prepare a bank reconciliation each month. A bank reconciliation compares the bank statement to the amount recorded in the company general ledger cash account. Any differences between the company's books and the bank statement amounts must be reconciled. The bank reconciliation is a significant part of internal controls over cash: If differences cannot be explained, the company will investigate and determine whether any misappropriation has occurred. There are four common reconciling items:
Deposits in Transit. Deposits in transit reflect a timing difference that occurs when a company makes a bank deposit at the end of the current month and the amount of that deposit is recorded in the company's books. However, that deposit may not be recorded by the bank until the following months.  Outstanding Checks. Outstanding checks also results from timing differences. The company will deduct checks written on the books, but the checks may not have cleared the bank in time to be reported on the bank statement. Bank Charges and Credits. Bank charges are fees that depositors pay for services such as check printing, safe deposit box rentals, and other services. There are also charges for nonsufficient funds (NSF checks). The company is usually not aware of the amount of these charges until receiving the bank statement. Bank credits are deposits of cash such as interest accrued. The company is not notified regarding any interest earned until it receives the bank statement. Errors. The company may make one or more errors, such as incorrectly recording or omitting a check or deposit. The bank may also make an error, but that is far less common. When a company learns about bank charges and bank credits or company errors in the preparation of its bank reconciliation, it makes any journal entries required to record these in its accounting system.  Format for the Bank Reconciliation There are two formats used to construct a bank reconciliation:
The most common approach used in practice is to reconcile both the bank and book balances to the correct cash balance:
After completing the bank reconciliation, the company makes journal entries to reflect accrued interest revenue, other bank credits, and bank charges because these events are not previously recorded on the company's books. Entries are also required to correct any book errors. Example 9A.1 illustrates a reconciliation of both the bank and book balances to the correct amounts. %20(1).jpg) %20(1)%20(1)%20(1)%20(1)%20(1)%20(1).jpg) %20(1)%20(1).jpg) %20(2)%20(1)%20(1).jpg) %20(2)%20(2)%20(1)%20(2).jpg) %20(2)%20(2)%20(2)%20(1)%20(1)%20(2).jpg) %20(2)%20(2)%20(2)%20(1)%20(1)%20(3)%20(1)%20(1).jpg) *GORDON, RAEDY, SANNELLA, 2019, INTERMEDIATE ACCOUNTING, 2ND ED., PP. 501-504* end |
Sunday, July 14, 2024
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Wednesday, July 10, 2024
Tuesday, July 9, 2024
Accounting: The Language of Business - Vol. 2 (Intermediate: Part 152)
- A wise man thinks ahead (Proverbs 13:16) ...
Short-Term Operating Assets: Cash and Receivables (Part Q)
by
Charles Lamson
Internal Controls over Cash
Internal controls are processes implemented in a company to ensure that key objectives are met, including the objectives of reliable financial reporting, effective and efficient operations, and compliance with regulations. Internal controls over cash must be highly effective because cash is an asset that is highly susceptible to misappropriation. Cash Control Guidelines An effective system of internal controls over cash receipts and disbursements:
Separation of duties is one of the most critical internal controls to deter theft and misappropriation of cash. Any individuals who have physical custody over cash should not also handle accounting records. Specifically, any employees handling cash should not have access to ledger accounts and bank statements and should not be responsible for reconciling the bank statements to the ledger accounts. Similarly, the responsibility for approving, signing, and mailing checks and handling cash disbursements documents and records should be separate functions.  A typical cash receipts process should include the following steps:
Control procedures to prevent any misappropriation and irregularities in the cash disbursements process include the following:
The Sarbanes-Oxley Act of 2002 (SOX) requires that publicly traded U.S. companies maintain an effective system of internal controls. SOX also establishes the Public Company Accounting Oversight Board (PCAOB), which is responsible for establishing generally accepted auditing standards and overseeing assurance functions for publicly traded companies. Section 404 of SOX requires the documentation and assessment of internal control systems by publicly traded entities. PCAOB Standard No. 5 requires that auditors issue an opinion on the effectiveness of these systems over financial reporting (Public Company Accounting Oversight Board, Auditing Standards No. 5, “An Audit of Internal Control over Financial Reporting that is Integrated with an Audit of Financial Statements” (Washington, DC: PCAOB, 2007).  Important internal control procedures for cash include the use of bank reconciliations and an imprest petty cash fund. We discuss both of these in the next part. *GORDON, RAEDY, SANNELLA, 2019, INTERMEDIATE ACCOUNTING, 2ND ED., PP. 500-501* end |
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Measurement Methods by Charles Lamson There are two major measurement methods: counting and judging. While counting is preferre...
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Product Life Cycles by Charles Lamson Marketers theorize that just as humans pass through stages in life from infancy to death,...
