The document summarizes key concepts about accounting for receivables and inventory. It discusses classifying receivables as accounts, notes, or other receivables. It describes two methods for accounting for uncollectible receivables - direct write-off and allowance. It also discusses classifying inventory as merchandise or manufacturing, and three inventory cost flow assumptions - specific identification, FIFO, and LIFO. The financial statement presentation of receivables at net realizable value and inventory at lower of cost or market is also covered.
The document discusses special journals that can be used for specific transaction types when an expanded general journal is no longer practical. It describes sales, cash receipts, and sales returns and allowances journals. For sales, accounts receivable is debited and sales and sales tax payable are credited. For cash receipts, cash is always debited and accounts are credited based on the transaction. Sales returns and allowances have a normal debit balance and are contra accounts that reduce the sales account.
This document discusses three methods of departmental accounting:
1) The columnar basis method maintains a single set of books with department accounts recorded together in a columnar or tabular form to enable preparation of departmental trading and profit/loss accounts.
2) The independent basis method maintains separate accounts for each department, with each department preparing its own trading and profit/loss account which are then consolidated.
3) Inter-departmental transfers must be credited to the supplying department and debited to the receiving department, and if transfers are made at cost price then no further adjustment is needed.
Bab 8 - Valuation of Inventories, a Cost-Basis Approachmsahuleka
This document discusses key concepts related to inventory valuation using a cost basis approach. It identifies major classifications of inventory, distinguishes between perpetual and periodic inventory systems, and describes how different cost flow assumptions like FIFO, LIFO, and average cost affect the valuation of inventory and calculation of cost of goods sold. The learning objectives cover inventory classification, the costs included in inventory valuation, LIFO reserves and liquidations, advantages and disadvantages of different methods, and why companies select certain valuation methods.
This document discusses departmental accounting in businesses that have multiple departments. It begins by explaining that large businesses often divide their activities into departments that each deal with a particular good or service. It then discusses how departmental accounting allows businesses to determine which departments need more attention and resources to achieve overall objectives. The objectives of departmental accounting are also outlined, such as comparing departmental performance over time and using profits to determine manager compensation. Methods for departmental accounting like separate accounting records and allocating shared expenses are also covered.
This document discusses key concepts related to inventory accounting, including determining inventory quantities through physical counts and assessing ownership, accounting for inventory using different cost flow methods like FIFO and LIFO, and understanding the financial statement and tax effects of different cost flow assumptions. The objectives are to explain steps to determine inventory quantities, apply cost flow methods, and analyze the impacts of assumptions on financial reporting and taxes.
This document discusses the reconciliation of cost accounts and financial accounts. When these two sets of accounts are maintained separately, the profits or losses reported may differ. A reconciliation statement is prepared to identify reasons for any differences. Common reasons for differences include items recorded in one set of accounts but not the other, different valuation methods for inventory, and over- or under-absorption of overhead costs. The reconciliation statement calculates the adjustments needed to make the profit/loss figures reported by the two sets of accounts agree.
The document discusses various topics related to accounting for inventory, property, plant and equipment, intangible assets, bonds payable, leases, and income taxes. It covers the different costs included in inventory, methods for valuing inventory, calculating depreciation and amortization expense, accounting for bonds payable including premiums and discounts, classification of leases, and temporary versus permanent differences between accounting and taxable income.
This document provides an overview of accounting for merchandising transactions using both perpetual and periodic inventory systems. It compares service and merchandising businesses, discusses types of inventory and sales transactions including purchases, returns, discounts and allowances. Journal entries are presented for purchases, sales, returns and adjustments under both perpetual and periodic inventory systems.
The document discusses special journals that can be used for specific transaction types when an expanded general journal is no longer practical. It describes sales, cash receipts, and sales returns and allowances journals. For sales, accounts receivable is debited and sales and sales tax payable are credited. For cash receipts, cash is always debited and accounts are credited based on the transaction. Sales returns and allowances have a normal debit balance and are contra accounts that reduce the sales account.
This document discusses three methods of departmental accounting:
1) The columnar basis method maintains a single set of books with department accounts recorded together in a columnar or tabular form to enable preparation of departmental trading and profit/loss accounts.
2) The independent basis method maintains separate accounts for each department, with each department preparing its own trading and profit/loss account which are then consolidated.
3) Inter-departmental transfers must be credited to the supplying department and debited to the receiving department, and if transfers are made at cost price then no further adjustment is needed.
Bab 8 - Valuation of Inventories, a Cost-Basis Approachmsahuleka
This document discusses key concepts related to inventory valuation using a cost basis approach. It identifies major classifications of inventory, distinguishes between perpetual and periodic inventory systems, and describes how different cost flow assumptions like FIFO, LIFO, and average cost affect the valuation of inventory and calculation of cost of goods sold. The learning objectives cover inventory classification, the costs included in inventory valuation, LIFO reserves and liquidations, advantages and disadvantages of different methods, and why companies select certain valuation methods.
This document discusses departmental accounting in businesses that have multiple departments. It begins by explaining that large businesses often divide their activities into departments that each deal with a particular good or service. It then discusses how departmental accounting allows businesses to determine which departments need more attention and resources to achieve overall objectives. The objectives of departmental accounting are also outlined, such as comparing departmental performance over time and using profits to determine manager compensation. Methods for departmental accounting like separate accounting records and allocating shared expenses are also covered.
This document discusses key concepts related to inventory accounting, including determining inventory quantities through physical counts and assessing ownership, accounting for inventory using different cost flow methods like FIFO and LIFO, and understanding the financial statement and tax effects of different cost flow assumptions. The objectives are to explain steps to determine inventory quantities, apply cost flow methods, and analyze the impacts of assumptions on financial reporting and taxes.
This document discusses the reconciliation of cost accounts and financial accounts. When these two sets of accounts are maintained separately, the profits or losses reported may differ. A reconciliation statement is prepared to identify reasons for any differences. Common reasons for differences include items recorded in one set of accounts but not the other, different valuation methods for inventory, and over- or under-absorption of overhead costs. The reconciliation statement calculates the adjustments needed to make the profit/loss figures reported by the two sets of accounts agree.
The document discusses various topics related to accounting for inventory, property, plant and equipment, intangible assets, bonds payable, leases, and income taxes. It covers the different costs included in inventory, methods for valuing inventory, calculating depreciation and amortization expense, accounting for bonds payable including premiums and discounts, classification of leases, and temporary versus permanent differences between accounting and taxable income.
This document provides an overview of accounting for merchandising transactions using both perpetual and periodic inventory systems. It compares service and merchandising businesses, discusses types of inventory and sales transactions including purchases, returns, discounts and allowances. Journal entries are presented for purchases, sales, returns and adjustments under both perpetual and periodic inventory systems.
The document discusses different methods for valuing inventory, including specific identification, FIFO, LIFO, average cost, retail, and gross profit methods. It compares the LIFO and FIFO methods, explaining that LIFO matches current costs to current revenues while FIFO provides a better measure of inventory value. The document also discusses the impact of errors in inventory valuation and how inventory value should be reported and disclosed in financial statements.
This document summarizes accounting concepts and procedures for merchandising businesses. It discusses the periodic and perpetual inventory systems, transactions involved in purchases and sales, and how the cost of goods sold is determined. It also outlines the multiple-step and single-step income statement formats for merchandising companies.
This document provides a review of key concepts related to financial reporting and analysis, including:
1. It reviews balance sheet items such as cash, investments, accounts receivable, and inventory, outlining the different accounting treatments for each.
2. It also discusses long-lived assets and how depreciation expense is calculated and matched to revenues over multiple periods.
3. Special topics like consolidations, foreign currency translation, and inventory costing methods such as LIFO and FIFO are covered at a high level.
Departmental accounts divide large businesses into departments handling different goods or services. This allows proprietors to compare departmental performance over time, formulate policy to expand successful departments, and reward managers based on departmental results. There are two main methods - maintaining separate individual sets of books for each department, or maintaining columnar accounts collectively with separate columns for each department and a total column. Both aim to provide information on individual departmental profits and losses as well as the overall business performance.
The document summarizes key financial statements including the income statement, balance sheet, cash flow statement, and statement of shareholders' equity. It then discusses three uses of financial statements in management: financial statement analysis to assess performance, financial control to monitor operations, and financial forecasting or planning. Finally, it outlines various ratios used to analyze a company's liquidity, capital structure, asset management efficiency, profitability, and market value.
This document provides an overview of management accounting concepts including ratio analysis, funds flow analysis, cash flow analysis, marginal costing, standard costing, budgetary control, costing for decision making, and responsibility accounting. It then discusses various types of ratios in detail, including liquidity ratios like current ratio and quick ratio, solvency ratios like debt-equity ratio and interest coverage ratio, activity ratios like stock turnover ratio and debtors turnover ratio, and profitability ratios like gross profit ratio and net profit ratio. Finally, it discusses cash flow statements, their objectives, important definitions as per accounting standards, and classification of cash flows.
This document discusses accounting concepts related to merchandising operations and the multiple-step income statement. It defines key terms like cost of goods sold, gross profit, and profit margin ratio. It explains the differences between perpetual and periodic inventory systems, and how to record purchases, sales, returns, and discounts under each. The document also distinguishes between single-step and multiple-step income statements and discusses factors that affect profitability.
The document provides explanations of key terms related to final accounts of a sole trader, including trading account, profit and loss account, and balance sheet. It defines terms like purchases, sales, opening/closing stock, returns, carriage, cost of goods sold, gross/net profit, assets, liabilities, capital, and drawings. Sample trading, profit and loss accounts and balance sheets are presented to illustrate the accounting process.
The document provides an overview and summary of key topics from chapters 3 and 4 of the textbook "Financial Accounting, An Introduction" by Weetman. It discusses financial statements including the balance sheet, income statement, and statement of cash flows. It explains how these statements are used, their purposes, and how the accounting equation relates to the balance sheet. The document also summarizes key concepts around ensuring quality in financial statements such as qualitative characteristics, measurement principles, materiality, prudence, and regulation.
This document discusses various accounting adjustments that may be needed when preparing final financial statements. It explains that adjustments are required to ensure revenues and expenses are matched and recorded in the correct accounting period. Common adjustments mentioned include closing stock, outstanding expenses, prepaid expenses, accrued income, depreciation, bad debts, and provisions. Formulas and journal entries for recording different types of adjustments are provided.
The document discusses three methods for valuing inventory: first-in, first-out (FIFO); last-in, first-out (LIFO); and average cost. FIFO matches the oldest inventory costs to cost of goods sold, providing higher reported profits during inflation. LIFO matches the newest costs to cost of goods sold, providing lower reported profits during inflation but higher accuracy of current inventory costs. Average cost averages all inventory costs, providing a middle ground between FIFO and LIFO. The choice of method impacts financial statements by affecting reported cost of goods sold, profits, and inventory values.
This chapter discusses cost of sales and inventories. It can be assigned in two parts, with the second focusing on inventory costing methods. Students often struggle to understand deducting cost of goods sold, so drill problems are important. The chapter also addresses the choice between LIFO and FIFO inventory methods and how LIFO can indefinitely defer taxes. Sample problems demonstrate calculating cost of goods sold and preparing income statements using different inventory methods.
This document discusses various techniques for inventory management. It begins by explaining the different types of inventories a company holds - raw materials, work in process, and finished goods. It then discusses the costs and benefits of holding inventory, including ordering costs, carrying costs, and shortage costs. The document introduces concepts like economic order quantity and just-in-time inventory to balance these costs. Finally, it summarizes inventory management techniques like the ABC approach to prioritize important inventory items.
This document discusses different methods for accounting for branch operations in the books of the head office, including the debtor system, final account system, and stock and debtors system. The debtor system records branch transactions through a branch account in the head office books. The final account system determines branch profit/loss through a branch trading and profit/loss account. The stock and debtors system provides more detailed information on branch assets, liabilities, debtors, and inventory movements.
- Merchandise inventory refers to goods purchased by a business for resale. It is classified as an asset on the balance sheet.
- Costs included in inventory are purchase price, shipping, insurance, storage, and any other costs to get goods ready for sale. These costs are debited to the inventory account.
- When inventory is sold, cost of goods sold is debited to match the expense with revenue. Inventory is then credited to reduce the asset on the balance sheet. This moves the inventory cost from asset to expense.
Accounting for current assets joseph f_valenciaJoseph Valencia
A current asset is cash and any other company asset that will be turning to cash within one year from the date shown in the heading of the company's balance sheet.
Accounting -Buying and Selling a non-current Assetmurcha
This presentation has been developed for embedding on a wiki, the procedures in accounting for recording the buying and selling of a non-current asset for my year 12 Accounting students.
Bab 9 - Inventories, Additional Valuation Issuesmsahuleka
The document discusses various inventory valuation methods including:
1) The lower-of-cost-or-market rule which values inventory at the lower of cost or net realizable value.
2) Net realizable value and relative sales value methods which are used in specific situations.
3) Gross profit and retail inventory methods which are used to estimate ending inventory balances.
The document discusses several key accounting concepts related to financial statements including:
1) The revenue recognition principle which states revenue is recognized when earned through a four step process, not necessarily when cash is collected.
2) Basic inventory valuation methods including specific identification, FIFO, LIFO, and weighted average and how they affect ending inventory and cost of goods sold.
3) Calculation of earnings per share and how transactions like treasury stock purchases or stock splits can impact the number of shares outstanding and EPS.
The document provides an overview of basic financial accounting concepts. It explains that accounting is based on the accounting equation of assets equaling liabilities plus owners' equity. Assets are valuable resources owned, while liabilities are obligations, and owners' equity is the residual interest in assets. Revenues increase owners' equity by providing goods/services, while expenses decrease it by consuming resources to generate revenue. Financial statements like the balance sheet present a company's assets, liabilities, and owners' equity at a point in time.
This chapter discusses financial statement analysis and its importance in assessing the solvency and profitability of a business. It covers common analytical methods like horizontal analysis, vertical analysis, and calculating ratios using data from the income statement, balance sheet, and statement of cash flows. Key ratios examined include current ratio, inventory turnover, debt-to-equity, profit margin, and return on assets. The chapter also describes the typical contents of annual reports, including financial statements, management discussion and analysis, and the independent auditor's report.
This chapter introduces key concepts in accounting and business. It describes the main types of businesses, forms of business organization, and how businesses make money. The three main business activities are financing, investing, and operating. Accounting is defined as an information system that provides financial reports to stakeholders about a business's economic activities and condition. The four basic financial statements are the income statement, retained earnings statement, balance sheet, and statement of cash flows. Eight important accounting concepts that underlie financial reporting are also outlined.
The document discusses different methods for valuing inventory, including specific identification, FIFO, LIFO, average cost, retail, and gross profit methods. It compares the LIFO and FIFO methods, explaining that LIFO matches current costs to current revenues while FIFO provides a better measure of inventory value. The document also discusses the impact of errors in inventory valuation and how inventory value should be reported and disclosed in financial statements.
This document summarizes accounting concepts and procedures for merchandising businesses. It discusses the periodic and perpetual inventory systems, transactions involved in purchases and sales, and how the cost of goods sold is determined. It also outlines the multiple-step and single-step income statement formats for merchandising companies.
This document provides a review of key concepts related to financial reporting and analysis, including:
1. It reviews balance sheet items such as cash, investments, accounts receivable, and inventory, outlining the different accounting treatments for each.
2. It also discusses long-lived assets and how depreciation expense is calculated and matched to revenues over multiple periods.
3. Special topics like consolidations, foreign currency translation, and inventory costing methods such as LIFO and FIFO are covered at a high level.
Departmental accounts divide large businesses into departments handling different goods or services. This allows proprietors to compare departmental performance over time, formulate policy to expand successful departments, and reward managers based on departmental results. There are two main methods - maintaining separate individual sets of books for each department, or maintaining columnar accounts collectively with separate columns for each department and a total column. Both aim to provide information on individual departmental profits and losses as well as the overall business performance.
The document summarizes key financial statements including the income statement, balance sheet, cash flow statement, and statement of shareholders' equity. It then discusses three uses of financial statements in management: financial statement analysis to assess performance, financial control to monitor operations, and financial forecasting or planning. Finally, it outlines various ratios used to analyze a company's liquidity, capital structure, asset management efficiency, profitability, and market value.
This document provides an overview of management accounting concepts including ratio analysis, funds flow analysis, cash flow analysis, marginal costing, standard costing, budgetary control, costing for decision making, and responsibility accounting. It then discusses various types of ratios in detail, including liquidity ratios like current ratio and quick ratio, solvency ratios like debt-equity ratio and interest coverage ratio, activity ratios like stock turnover ratio and debtors turnover ratio, and profitability ratios like gross profit ratio and net profit ratio. Finally, it discusses cash flow statements, their objectives, important definitions as per accounting standards, and classification of cash flows.
This document discusses accounting concepts related to merchandising operations and the multiple-step income statement. It defines key terms like cost of goods sold, gross profit, and profit margin ratio. It explains the differences between perpetual and periodic inventory systems, and how to record purchases, sales, returns, and discounts under each. The document also distinguishes between single-step and multiple-step income statements and discusses factors that affect profitability.
The document provides explanations of key terms related to final accounts of a sole trader, including trading account, profit and loss account, and balance sheet. It defines terms like purchases, sales, opening/closing stock, returns, carriage, cost of goods sold, gross/net profit, assets, liabilities, capital, and drawings. Sample trading, profit and loss accounts and balance sheets are presented to illustrate the accounting process.
The document provides an overview and summary of key topics from chapters 3 and 4 of the textbook "Financial Accounting, An Introduction" by Weetman. It discusses financial statements including the balance sheet, income statement, and statement of cash flows. It explains how these statements are used, their purposes, and how the accounting equation relates to the balance sheet. The document also summarizes key concepts around ensuring quality in financial statements such as qualitative characteristics, measurement principles, materiality, prudence, and regulation.
This document discusses various accounting adjustments that may be needed when preparing final financial statements. It explains that adjustments are required to ensure revenues and expenses are matched and recorded in the correct accounting period. Common adjustments mentioned include closing stock, outstanding expenses, prepaid expenses, accrued income, depreciation, bad debts, and provisions. Formulas and journal entries for recording different types of adjustments are provided.
The document discusses three methods for valuing inventory: first-in, first-out (FIFO); last-in, first-out (LIFO); and average cost. FIFO matches the oldest inventory costs to cost of goods sold, providing higher reported profits during inflation. LIFO matches the newest costs to cost of goods sold, providing lower reported profits during inflation but higher accuracy of current inventory costs. Average cost averages all inventory costs, providing a middle ground between FIFO and LIFO. The choice of method impacts financial statements by affecting reported cost of goods sold, profits, and inventory values.
This chapter discusses cost of sales and inventories. It can be assigned in two parts, with the second focusing on inventory costing methods. Students often struggle to understand deducting cost of goods sold, so drill problems are important. The chapter also addresses the choice between LIFO and FIFO inventory methods and how LIFO can indefinitely defer taxes. Sample problems demonstrate calculating cost of goods sold and preparing income statements using different inventory methods.
This document discusses various techniques for inventory management. It begins by explaining the different types of inventories a company holds - raw materials, work in process, and finished goods. It then discusses the costs and benefits of holding inventory, including ordering costs, carrying costs, and shortage costs. The document introduces concepts like economic order quantity and just-in-time inventory to balance these costs. Finally, it summarizes inventory management techniques like the ABC approach to prioritize important inventory items.
This document discusses different methods for accounting for branch operations in the books of the head office, including the debtor system, final account system, and stock and debtors system. The debtor system records branch transactions through a branch account in the head office books. The final account system determines branch profit/loss through a branch trading and profit/loss account. The stock and debtors system provides more detailed information on branch assets, liabilities, debtors, and inventory movements.
- Merchandise inventory refers to goods purchased by a business for resale. It is classified as an asset on the balance sheet.
- Costs included in inventory are purchase price, shipping, insurance, storage, and any other costs to get goods ready for sale. These costs are debited to the inventory account.
- When inventory is sold, cost of goods sold is debited to match the expense with revenue. Inventory is then credited to reduce the asset on the balance sheet. This moves the inventory cost from asset to expense.
Accounting for current assets joseph f_valenciaJoseph Valencia
A current asset is cash and any other company asset that will be turning to cash within one year from the date shown in the heading of the company's balance sheet.
Accounting -Buying and Selling a non-current Assetmurcha
This presentation has been developed for embedding on a wiki, the procedures in accounting for recording the buying and selling of a non-current asset for my year 12 Accounting students.
Bab 9 - Inventories, Additional Valuation Issuesmsahuleka
The document discusses various inventory valuation methods including:
1) The lower-of-cost-or-market rule which values inventory at the lower of cost or net realizable value.
2) Net realizable value and relative sales value methods which are used in specific situations.
3) Gross profit and retail inventory methods which are used to estimate ending inventory balances.
The document discusses several key accounting concepts related to financial statements including:
1) The revenue recognition principle which states revenue is recognized when earned through a four step process, not necessarily when cash is collected.
2) Basic inventory valuation methods including specific identification, FIFO, LIFO, and weighted average and how they affect ending inventory and cost of goods sold.
3) Calculation of earnings per share and how transactions like treasury stock purchases or stock splits can impact the number of shares outstanding and EPS.
The document provides an overview of basic financial accounting concepts. It explains that accounting is based on the accounting equation of assets equaling liabilities plus owners' equity. Assets are valuable resources owned, while liabilities are obligations, and owners' equity is the residual interest in assets. Revenues increase owners' equity by providing goods/services, while expenses decrease it by consuming resources to generate revenue. Financial statements like the balance sheet present a company's assets, liabilities, and owners' equity at a point in time.
This chapter discusses financial statement analysis and its importance in assessing the solvency and profitability of a business. It covers common analytical methods like horizontal analysis, vertical analysis, and calculating ratios using data from the income statement, balance sheet, and statement of cash flows. Key ratios examined include current ratio, inventory turnover, debt-to-equity, profit margin, and return on assets. The chapter also describes the typical contents of annual reports, including financial statements, management discussion and analysis, and the independent auditor's report.
This chapter introduces key concepts in accounting and business. It describes the main types of businesses, forms of business organization, and how businesses make money. The three main business activities are financing, investing, and operating. Accounting is defined as an information system that provides financial reports to stakeholders about a business's economic activities and condition. The four basic financial statements are the income statement, retained earnings statement, balance sheet, and statement of cash flows. Eight important accounting concepts that underlie financial reporting are also outlined.
This chapter discusses accounting for merchandising businesses. It describes how merchandising businesses differ from service businesses in that they buy and sell goods. The key financial statements for merchandising businesses are the income statement, which considers returns and discounts, balance sheet, which includes the value of inventory, and statement of cash flows. The chapter covers accounting for purchases and sales of merchandise, including discounts, returns, transportation costs, sales taxes, and merchandise shrinkage. It illustrates how merchandising transactions have a dual impact, being recorded as both a sale and purchase between companies.
This document outlines the learning objectives of a chapter on basic accounting concepts. It will teach students to describe the basic elements of a financial accounting system, analyze and record transactions for a corporation's first two periods of operations, and prepare the corresponding financial statements. It introduces key concepts like the accounting equation, integrated financial statement framework, and controls to ensure the accounting equation balances. Sample transactions are provided for a medical practice's startup and first month of operations, and the resulting income statement, retained earnings statement, balance sheet, and statement of cash flows are presented.
A goalie redeemed himself from a poor performance in game 5 with an acrobatic save that cost Montreal the series. A player was suspended after getting into a confrontation with a linesman, and another player returned from a year-long sabbatical following his wife's death from cancer and scored a series-winning goal against the Canadiens. A player led the Kings to the finals with a series-winning overtime goal against the defending champion Blackhawks in game 7.
This document summarizes chapters from an accounting textbook. Chapter 1 discusses accounting for merchandising operations, including the recording of purchases and sales under a perpetual inventory system and the steps in the accounting cycle. Chapter 2 covers determining inventory quantities, cost flow assumptions, the lower-of-cost-or-market valuation method, and the inventory turnover ratio. Chapter 3 addresses cash controls, including controls over cash receipts, disbursements, bank reconciliations, and the presentation of cash on the balance sheet.
The document discusses accounting for assets, including:
- Methods for accounting for uncollectible accounts receivable like the direct write-off and allowance methods.
- Distinguishing between tangible and intangible long-term assets.
- Inventory valuation methods like periodic and perpetual, and issues like lower of cost or market.
This presentation is based on the subject Financial Accounting which helps the beginners to know the basic concept of accounting . This is according to the syllabus of Pt. Ravishankar University , Raipur and Durg University, Durg.
Accounting provides economic information to support business decisions. The three main financial statements are the income statement, balance sheet, and cash flow statement. The balance sheet presents assets, liabilities, and owner's equity on a given date to show the resources and how they are financed. Key assets include fixed assets, current assets, and inventory. The income statement matches revenues and expenses over a period to determine profit or loss.
This document provides an overview of key concepts related to financial statements, cash flows, and taxes. It discusses generally accepted accounting principles, the four main financial statements (balance sheet, income statement, statement of retained earnings, statement of cash flows), how the statements are related, and important tax concepts like average vs marginal tax rates. The learning objectives cover topics like the balance sheet identity, differences between book and market values, calculating cash flows, and using financial statements to identify cash flows to investors.
The document discusses various aspects of financial analysis including the four main financial statements: balance sheet, income statement, shareholders' statement, and statement of cash flows. It provides details on how to analyze each statement. The balance sheet shows a company's assets, liabilities, and equity at a point in time. The income statement measures performance over a period of time by showing revenues and expenses. Cash flow analysis examines sources and uses of cash by tracing changes in the balance sheet. Financial ratios are also covered as tools to analyze liquidity, leverage, asset management, profitability, and market value.
This document provides an overview of various accounting concepts related to financial accounting. It discusses accounting treatments for bad debts, methods for writing off bad debts such as direct write-off and provision methods. It also covers topics such as aging schedules, percentage of sales method, bad debt recovery, stock/inventory costing methods including FIFO, LIFO, weighted average. The document also discusses perpetual and periodic inventory systems, accounting for property, plant and equipment, depreciation methods, revaluation of assets, amortization of intangibles, depletion and more.
this presentation will cover the following topics:
Merchandising Companies
Perpetual Inventory System
Periodic Inventory Systems
Transactions Related to Purchase
Transactions Related to Sale
The Flow of Inventory Costs
This document discusses key financial documents and concepts for businesses: the balance sheet, income statement, statement of cash flows, financial projections, budgets, forecasts, and break-even analysis. It explains how to calculate and use ratios from the balance sheet to analyze a company's financial health. Preparing budgets, forecasts, and break-even analysis can help entrepreneurs understand their business's financial requirements and determine if a certain output level will be profitable.
1. The company is taking a physical inventory of its fashion products that are currently outdated.
2. The CFO recommends writing down the inventory value to reflect that it cannot be sold for cost currently.
3. However, the manager believes the inventory will become popular again and wants to keep the higher valuation, hoping to sell it later once styles change.
As an accountant, one should advise adhering to the lower of cost or market principle when valuing inventory. Even if the manager expects future sales, the current fair market value should be reflected per accounting standards.
Various method of Inventory Accounting.pptxSoumajitRoy33
There are three methods for inventory valuation: FIFO (First In, First Out), LIFO (Last In, First Out), and WAC (Weighted Average Cost).
In FIFO, you assume that the first items purchased are the first to leave the warehouse. In other words, whenever you make a sale, under FIFO, the items will be subtracted from the first list of products which entered your store or warehouse.
In LIFO, you make the opposite assumption: that the last items that enter your store are the first ones to leave.
The WAC method uses the item’s average cost throughout the year. The average cost per unit is calculated by dividing the total cost by the total number of units purchased during the year.
Analysis and Interpretation of Financial Statement.pptxmarvinrosel4
The document discusses various techniques for analyzing financial statements, including horizontal analysis, vertical analysis, ratio analysis, and calculations. It defines each technique and provides examples of key financial ratios used to evaluate a company's profitability, liquidity, solvency, operational efficiency, and financial health. These ratios include gross profit margin, return on assets, current ratio, debt-to-equity ratio, inventory turnover, and accounts receivable turnover. The document aims to teach learners how to interpret financial statement data using these analytical methods.
Accounting is the process of recording, classifying, and summarizing financial transactions. It involves identifying transactions, recording them in journals, posting them to ledgers, and preparing trial balances and financial statements. The key types of accounts are personal, real, and nominal accounts which follow the golden rules of debit/credit. Subsidiary books like cash books, purchase books, and sales books are used to record regular transactions to ease the accounting process.
The document discusses inventory costing methods for merchandising companies. It covers topics such as taking a physical inventory, determining inventory quantities, cost flow assumptions under FIFO and average costing, and the effects of inventory errors on financial statements. Proper internal controls over physical inventory counts include segregating inventory custody and counting duties and verifying counts through independent verification.
The document provides an overview of basic financial accounting concepts. It explains that accounting is based on the accounting equation of Assets = Liabilities + Owners' Equity. The balance sheet expresses this equation by listing assets, liabilities, and owners' equity. It also defines key elements like assets, liabilities, owners' equity, revenues and expenses. Transactions must follow the accounting equation and be recorded and analyzed to maintain accurate financial records.
Accrual accounting records revenue as earned and expense as incurred. This presentation explains the concept of accrual accounting and the basic terms that entail a balance sheet.
The accountant advised the trader not to consider an expected loss from a legal damages payment in finalizing the accounts for the year because the amount owed is uncertain. The summary agrees, stating contingent liabilities from uncertain amounts should not be recorded as expected losses but instead disclosed in notes. Actual losses will adjust book profit once amounts are certain from the court judgment.
This document provides a summary of key topics covered in an accounting exam review, including inventory costing methods, receivables, bad debt expense calculation, interest calculation, long-term asset cost recovery methods, and capital versus revenue expenditures. Sample problems are provided for inventory costing under FIFO, LIFO, and weighted average as well as calculating bad debt expense using percentage of sales and percentage of receivables methods.
Accounting is the system that records and reports financial information about a business. It identifies, records, and communicates economic events to users. The chapter outlines key accounting concepts like the accounting equation, direct and indirect costs, fixed and variable costs, and the difference between inventoriable and period costs. It explains the four main financial statements - income statement, balance sheet, statement of owner's equity, and statement of cash flows - and how they are used to report on a business's financial performance and position.
This document provides an overview of accounting concepts including the accounting equation, accounting activities and users, accounting principles and assumptions, and the accounting cycle. It discusses how accounting records business transactions using debits and credits in journals and ledgers. It also covers adjusting entries, preparing financial statements, and accounting for merchandising operations including perpetual and periodic inventory systems.
Financial Assets: Debit vs Equity Securities.pptxWrito-Finance
financial assets represent claim for future benefit or cash. Financial assets are formed by establishing contracts between participants. These financial assets are used for collection of huge amounts of money for business purposes.
Two major Types: Debt Securities and Equity Securities.
Debt Securities are Also known as fixed-income securities or instruments. The type of assets is formed by establishing contracts between investor and issuer of the asset.
• The first type of Debit securities is BONDS. Bonds are issued by corporations and government (both local and national government).
• The second important type of Debit security is NOTES. Apart from similarities associated with notes and bonds, notes have shorter term maturity.
• The 3rd important type of Debit security is TRESURY BILLS. These securities have short-term ranging from three months, six months, and one year. Issuer of such securities are governments.
• Above discussed debit securities are mostly issued by governments and corporations. CERTIFICATE OF DEPOSITS CDs are issued by Banks and Financial Institutions. Risk factor associated with CDs gets reduced when issued by reputable institutions or Banks.
Following are the risk attached with debt securities: Credit risk, interest rate risk and currency risk
There are no fixed maturity dates in such securities, and asset’s value is determined by company’s performance. There are two major types of equity securities: common stock and preferred stock.
Common Stock: These are simple equity securities and bear no complexities which the preferred stock bears. Holders of such securities or instrument have the voting rights when it comes to select the company’s board of director or the business decisions to be made.
Preferred Stock: Preferred stocks are sometime referred to as hybrid securities, because it contains elements of both debit security and equity security. Preferred stock confers ownership rights to security holder that is why it is equity instrument
<a href="https://www.writofinance.com/equity-securities-features-types-risk/" >Equity securities </a> as a whole is used for capital funding for companies. Companies have multiple expenses to cover. Potential growth of company is required in competitive market. So, these securities are used for capital generation, and then uses it for company’s growth.
Concluding remarks
Both are employed in business. Businesses are often established through debit securities, then what is the need for equity securities. Companies have to cover multiple expenses and expansion of business. They can also use equity instruments for repayment of debits. So, there are multiple uses for securities. As an investor, you need tools for analysis. Investment decisions are made by carefully analyzing the market. For better analysis of the stock market, investors often employ financial analysis of companies.
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After this second you should be able to: Explain the main determinants of demand for any mineral product, and their relative importance; recognise and explain how demand for any product is likely to change with economic activity; recognise and explain the roles of technology and relative prices in influencing demand; be able to explain the differences between the rates of growth of demand for different products.
1. Elemental Economics - Introduction to mining.pdfNeal Brewster
After this first you should: Understand the nature of mining; have an awareness of the industry’s boundaries, corporate structure and size; appreciation the complex motivations and objectives of the industries’ various participants; know how mineral reserves are defined and estimated, and how they evolve over time.
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Let's be real for a second – the world of meme coins can feel like a bit of a circus at times. Every other day, there's a new token promising to take you "to the moon" or offering some groundbreaking utility that'll change the game forever. But how many of them actually deliver on that hype?
2. Learning Objectives
After studying this chapter, you should be able to…
Describe the common classifications of receivables
Describe the nature of and the accounting for
uncollectible receivables
Describe the direct write-off method of accounting for
uncollectible receivables
Describe the allowance method of accounting for
uncollectible receivables
3. Learning Objectives (continued)
After studying this chapter, you should be able to…
Describe the common classifications of inventories
Describe three inventory cost flow assumptions and
how they impact the financial statements
Compare and contrast the use of the three inventory
costing methods
Describe how receivables and inventory are reported
on the financial statements
5. Classifying Receivables
• Accounts Receivable
─ Credit terms extended to customers
• Notes Receivable
─ More formal agreement
─ Includes a maker and payee
• Other Receivables
─ Can include interest receivable, taxes receivable, and receivables from
employees or officers
7. Learning Objective 2
Describe the nature of and the
accounting for uncollectible receivables
8. Uncollectible Receivables
Q. What if a customer does not pay the balance owed
to the company?
A. Companies must recognize an operating expense
for accounts that are not collectible. It is called Bad
Debt Expense.
9. Bad Debt Expense
Two Methods
Direct
Allowance
Write-Off
Method
Method
10. Learning Objective 3
Describe the direct write-off method of
accounting for uncollectible receivables
11. Direct Write-Off Method
• Bad Debt Expense is recorded and the receivable written off
when the account is determined to be worthless.
12. If payment is collected after the write-off, the write-off
entry is reversed and the cash collection is recorded
13. Learning Objective 4
Describe the allowance method of
accounting for uncollectible
receivables
14. Allowance Method
• Required by GAAP for companies with large accounts
receivable
• Estimates the accounts receivable that will not be collected
and records bad debt expense for this estimate at the end of
each period using an allowance account
15. Estimate of Uncollectible Accounts Receivable:
$30,000
• If the total accounts receivable balance is $200,000,
the new net realizable value is $170,000
16. Write-Offs to the Allowance Account
• When a customer’s account is identified as uncollectible, it is
written off against the allowance account
17. If payment is collected after the write-off, the write-off
entry is reversed and the cash collection is recorded.
• Assume a $5,000 account had been previously written off.
18. Estimating Uncollectible Accounts
• Based on past experiences and forecasts of the future
• Two common methods:
Analysis
Percent of of the
Sales Receivables
20. Estimate Based on Percent of Sales
• Assume that on December 31, 2009, the Allowance for
Doubtful Accounts for ExTone Company has a negative
balance of $3,250. In addition, ExTone estimates that 3/4% of
2009 credit sales will be uncollectible. Credit sales for the year
are $3,000,000.
21. Estimate Based on Analysis of Receivables
• Comparing the $26,490 estimate with the unadjusted balance
in the allowance account determines the needed adjustment for
bad debt expense. Assume the unadjusted balance in the
allowance account is a negative $3,250. $23,240 more is
needed in the allowance account.
23. Inventory Classification for Merchandisers
• In Chapter 4, we learned that merchandise on hand is called
merchandise inventory. Inventory sold becomes the cost of
merchandise sold
• Cost of inventory includes all costs of ownership (e.g.,
purchase price, transportation costs, insurance costs, etc.)
25. Manufacturing Inventories
• Materials Inventory
• Raw material used to make the product
• Work In Process Inventory
• Cost of partially completed products
• Finished Goods Inventory
• Total cost of completed goods: material, labor, manufacturing overhead
28. Learning Objective 6
Describe three inventory cost flow
assumptions and how they impact the
financial statements
29. Inventory Cost Flow
Units Purchased Units Sold
• Identical units purchased at different unit costs during a period
• When units are sold, it is necessary to determine the cost of
units sold
• Cost of units sold can be determined using a cost flow
assumption
30. Specific Identification
• If the merchandise can be identified with a specific purchase,
the specific identification method can be used
• Each unit of merchandise can be identified with a specific
purchase price
• Only practical if each unit has a unique identification number
(e.g., VIN for an automobile)
40. Reporting Receivables and Inventory
• Accounts Receivable
• Classified as a current asset if collection is expected within 1 year.
• Reported at net realizable value: A/R – Allowance for Doubtful
Accounts
• Inventory
• Reported at the net realizable value
• Net realizable value = selling price – direct costs of disposal
• Reported at Lower of Cost or Market (LCM)
The term “receivables” includes all money claims a company has against other entities, including people, customers, and other organizations. The most common receivable on a company’s books is Accounts Receivable. Accounts receivable represents money owed to the company from customers for sales of merchandise or services on account (on credit). Accounts receivable are generally short-term credit, usually due in 30 – 60 days. Notes Receivable are amounts that customers owe for which a formal, written promissory note has been issued by the customer. Notes receivable generally have longer terms than Accounts receivable and usually bear interest. Other Receivables are normally recorded separately on the balance sheet. If they are expected to be collected within one year, they are reported in the Current Asset section. Longer term other receivables are classified as noncurrent assets and reported under the Investments section.
A promissory note is a written promise to pay the face amount, usually with interest, on demand or at a date in the future. The makes is the party making the promise to pay, the payee is the party to whom the note is payable. Interest on a note is computed as follows: Interest = Face Amount * Interest Rate * (Term/360 days) The maturity value of a note is the amount that must be paid at the due date of the note. Maturity value equals the face amount of the note plus the interest accrued over the life of the note.
Some customers will not pay their accounts receivable balances, that is, some accounts receivables will become uncollectible. Companies can mitigate this risk in a variety of ways: Not accept credit sales except for credit cards – this shifts the risk of non-payment to the credit card company Sell receivables to another company for collection – this shifts the risk on non-payment to another company. This is common in organizations like Home Depot or JC Penney, who issue their own credit cards. Regardless of how careful a company is in granting credit, some credit sales will become uncollectible. Some warning signs are: Receivable is past due Customers do not respond to the company’s attempts to collect Customer files for bankruptcy Customer closes its business Customer can not be located
If a customer does not pay, a company may turn the account over to a collection agency. After the collection agency attempts to collect payment are complete, any balance remaining will need to be written off. There are two methods to account for uncollectible accounts, the direct write-off method and the allowance method. The direct write-off method is only used by small companies or companies with a small amount of receivables. Generally accepted accounting principles (GAAP) require large companies or companies with a material amount of receivables to use the allowance method.
Under the direct write-off method, the bad debt expense is not recorded until the time the account is determined to be worthless. At that time, the accounts receivable account is reduced and the bad debt is recorded as an expense, reducing Retained Earnings.
In some instances, an account that has been written off may be collected at a later date. In such cases, the account is reinstated by reversing the write-off. The payment is then applied as a receipt on the account.
The allowance method estimates the uncollectible accounts receivable at the end of the accounting period. Based on this estimate, Bad Debt Expense is recorded by an adjustment before it is known that any specific account balance is uncollectible.
Based on industry averages, a company estimates that of the $200,000 accounts receivable balance, $30,000 is estimated to be uncollectible. However, the company will not know which customers will be uncollectible so specific customer accounts can not be adjusted. Instead, a contra asset account, Allowance for Doubtful Accounts, is used. This adjustment affects both the income statement and balance sheet. On the Income Statement, the $30,000 of Bad Debts Expense will be matched against the related sales revenues of the period. On the Balance Sheet, the value of Accounts Receivable is reduced to then amount that is expected to be collected or realized. This amount, $170,000, is the net realizable value of Accounts Receivable.
Once a specific customer account is determined to be worthless, it is written off against the allowance account. The expense for that worthless account had already been estimated and recorded in a prior period that related to when the original sale was made. This transaction removes the specific accounts receivable and an equal amount from the allowance account.
An account receivable that has been written off may be collected later. Like the direct write-off method, the account is reinstated by reversing the write-off. The cash received in payment is then applied as a receipt on the account. Reinstating the account requires an increase to the Accounts Receivable account for the amount to be reinstated; to reverse the original write-off, the Allowance for that receivable is also re-established. In the second transaction, the cash payment is applied to the account.
The allowance method require an estimate of uncollectible accounts at the end of the period. The estimate can be made using two different methods, both based on past experience. The estimate based on percent of sales determines the uncollectible amount as a percentage of credit sales. Since credit sales create the account receivable, if the portion of credit sales to total sales is relatively constant, this estimate can be a reliable forecast of the future. The analysis of receivables method is based on the experience that the longer a receivable is outstanding, the more likely that receivable will become uncollectible.
In preparing an aging schedule, the first step is to always determine the due date of each receivable. Then, based on the date of the analysis (the date the aging schedule is being prepared), the number of days each account is past due is determined. The accounts are then assigned to the category that matches their number of days past due. Typical categories start at “not past due” and increase to higher days outstanding. Once all the accounts are classified, the totals for each aged category are determined. Each category will have an estimated percentage of uncollectible accounts for that class. This percentage is usually determined by historical experience. Finally, the estimated total of all uncollectible accounts is determined as the sum of all the estimates of uncollectible balances for each category.
Under this method, the Bad Debt Expense is calculated by multiplying total credit sales by the estimated percentage of sales expected to be uncollectible: $3,000,000 * .0075 = $22,500 The transaction records this amount as the Bad Debt Expense for the period and increases the allowance account. After the adjustment, the total balance in the allowance account is $25,750 ($3,250 + $22,500). Under the percent of sales method, the amount of the adjustment is always the amount estimated for the Bad Debt Expense, or the percent applied against credit sales.
The sum of the estimated uncollectible accounts balances for each category on the aging schedule is the estimated uncollectible accounts at the end of the accounting period. This is what the balance in the contra-asset account, Allowance for Doubtful Accounts, should be after adjustment. The actual adjustment amount for the period is then determined by calculating the difference between the current balance reported in the allowance account and the what the balance in the allowance account should be based on the current analysis of the aging schedule. For example, the aging schedule determined the total in the allowance account should be a total of $26,490. The current balance reported is a negative $3,250. The difference between $26,490 and $3,250 is $23,240. This represents the amount of adjustment needed to bring the balance in the allowance account to $26,490. Bad Debt Expense is recorded in the amount of $23,240 and the Allowance for Doubtful Accounts balance is also increased by $23,240. After this adjustment, the balance in the Allowance for Doubtful Accounts equals $26,490.
For a merchandising company, units of products on hand (not sold) at the end of an accounting period is called Merchandise Inventory on the Balance Sheet. As units of merchandise are sold, their related costs are transferred from Merchandise Inventory on the Balance Sheet to Cost of Goods Sold expense on the Income Statement, matching the cost of units sold to the revenue generated from the sale of those units. The cost of merchandise is its purchase price, less any purchase discounts. Merchandise inventory also includes other costs, such as freight, import duties, insurance, etc.
Merchandise inventory is a large asset for most merchandising companies, both as a percentage of current assets and a percentage of total assets. For many merchandising companies, a material percentage of current assets is in their inventory. Managing those inventory levels becomes an important business strategy for merchandising companies.
Manufacturers convert raw materials into final products and these final products are often sold to merchandising businesses. Every manufacturing business has three types of inventory: materials inventory, work in process inventory, and finished goods inventory.
The manufacturing costs for Hershey candy bars includes: Materials inventory of cocoa and sugar Work-in-Process which accounts for the materials put into production and labor costs and overhead costs incurred to make the candy bars. Work-in-Process inventory accounts for units started, but not yet completed. Finished Goods for a manufacturing organization represents the costs of completed candy bars, which are made up of materials, labor, and overhead. When finished goods are sold, the related costs of the units sold moves from the Finished Goods inventory account on the Balance Sheet to the Cost of Goods Sold expense account on the Income Statement, matching the cost of units sold to the revenue generated from the sale of those units.
Manufacturing inventory information is normally disclosed in the footnotes to the financial statements of the manufacturing company.
An accounting issue arises when identical units of merchandise are acquired over a period of time at different costs. In such cases, when units are sold, it is necessary to determine the cost of units sold by using a cost flow assumption and related inventory cost flow method.
Under the specific identification inventory cost flow method, the unit sold can be identified with a specific unit purchased. Then ending inventory is made up of remaining units on hand. This method is not practical unless each inventory unit can be separately identified.
If specific identification cannot be used and identical units of merchandise are acquired at different unit costs, an inventory cost flow assumption is needed to determine a unit cost at the time of sale. Three common methods of cost flow assumption are: First-in, First-out (FIFO) Last-in, First-out (LIFO) Average Cost The method used can significantly affect the financial statements.
Under the FIFO inventory cost flow method, the first units purchased are assumed to be the first units sold. The ending inventory is made up of the most recent units purchased. In this example, the unit purchased first, on May 10 th , is the unit assumed to be sold. The cost of the unit purchased on May 10 was $9, so the gross profit on the sale is $11 ($20 selling price - $9 cost). The ending inventory under the FIFO method consists of 2 units, the unit purchased on May 18 for a cost of $13 and the unit purchased on May 24 for a cost of $14. Therefore, the total value of ending inventory under the FIFO method is $27.
Under the LIFO inventory cost flow method, the last units purchased are assumed to be the first units sold. The ending inventory is made up of the oldest units purchased. In this example, the unit purchased last, on May 24 th , is the unit assumed to be sold. The cost of the unit purchased on May 324 was $14, so the gross profit on the sale is $6 ($20 selling price - $14 cost). The ending inventory under the LIFO method consists of 2 units, the unit purchased on May 18 for a cost of $13 and the unit purchased on May 10 for a cost of $9. Therefore, the total value of ending inventory under the LIFO method is $22.
Under the Average Cost inventory cost flow method, the cost of the units sold and the cost of the units in ending inventory is an average of the purchase costs. In this example, the average cost of units purchased is $12 per unit, calculated by adding up the total cost of the purchases and dividing by the number of units purchased ($36 total purchased / 3 units purchased = $12 average cost. The average cost of the units purchased is $12, so the gross profit on the sale is $8 ($20 selling price - $12 average cost). The ending inventory under the Average Cost method consists of 2 units at an average cost of $12 per unit. Therefore, the total value of ending inventory under the Average Cost method is $24.
When prices change, the different inventory costing methods affect the income statement and balance sheet differently. When the FIFO method is used during a period of inflation or rising prices, the earlier units cost less than more recent purchases. Therefore, a lower cost of goods sold results in higher profits for the period. The ending inventory is valued at the higher costs, which more represent the current replacement value of unit costs. When the LIFO method is used during a period of inflation or rising prices, the result will be a higher cost of goods sold because the most recent purchases at the higher costs are considered the first units sold. This will result in a lower gross profit for the period. However, it could be argued that the LIFO method results in a better match of current costs with current revenues. The inventory balance on the balance sheet will be comprised of units purchased earlier, at lower cost than more recent purchases. Usually, a footnote to the financial statements will state the estimated difference between inventory values between LIFO and FIFO. The average cost method is, in a sense, a compromise between LIFO and FIFO. The effect of price trends is averaged in determining the cost of units sold and ending inventory values.
Receivables and inventory are reported as current assets on the balance sheet. In addition, generally accepted accounting principles require that supplementary information for these accounts be reported in the footnotes that accompany the financial statements.
If the cost of replacing the inventory is lower than its recorded purchase cost, the lower-of-cost-or-market (LCM) method is used to value the inventory. Market in this valuation is considered to be the cost to replace the inventory. The cost, market price, and any declines under LCM can be determined in three different ways: Each item in the inventory Each major class or category of the inventory Total inventory as a whole The total amount of any price decline is included in the cost of merchandise sold for the period. This matches the impact of price declines to the period in which they occur. If the example illustrates the applying of LCM to each inventory item, in the illustration, Item A has a replacement cost lower than the original unit cost price. Therefore, the value of the units of Item A is $3,800, the 400 units at a $9.50 market price. For Item B, the current market is more than the original unit cost price, so Item B is valued at the original unit cost price of $22.50 per unit. Item C had a unit market price lower than the original unit cost price, so the inventory value of Item C would be at the market price of $7.75. Item D ending inventory would be valued at the original unit cost price of $14.00 since it is lower than the market price of $14.75 for Unit D. Overall, the inventory under this illustration would be valued at $15,070, the sum of each individual item’s valuation at LCM. If the total inventory method was applied, the value of ending inventory would be $15,472, the total market value of all the items because, in total, the market value is still lower than the total cost.
All receivables expected to be realized in cash within the year are presented in the Current Assets section of the Balance Sheet. The allowance for doubtful accounts must be deducted from total Accounts Receivable in order to determine the net realizable value, or amount the company can ultimately expect to collect in cash. Merchandise inventory is also presented in the Current Assets section of the Balance Sheet, usually after Receivables. The method for determining the inventory value (FIFO, LIFO, Average Cost) should also be shown. Merchandise that is out of date, spoiled, or damaged often can only be sold at a price below original cost. Such merchandise must be valued at net realizable value, or the value the company can expect to receive for such inventory. Net realizable value equals the selling price less any direct costs of disposal. Direct costs of disposal could include such items as special advertising or sales commissions to generate the sales. Inventory can also be valued at an amount other than cost when (1) the cost of replacing the inventory would be below the recorded cost, and (2) the inventory is not salable at normal sales prices. The latter case may be due to imperfections, shop wear, style changes, or other causes. In either situation, the method to value the inventory, lower of cost or market, must be disclosed on the balance sheet.