Acc 200: chapter 6 Current Assests
Acc 200: chapter 6 Current Assests ACCT 200
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This 2 page Class Notes was uploaded by Carly Rocco on Friday October 14, 2016. The Class Notes belongs to ACCT 200 at University of Tennessee - Knoxville taught by Ellen Anderson in Fall 2016. Since its upload, it has received 2 views. For similar materials see Foundations of Accounting - 43530 - ACCT 200 - 004 in Accounting at University of Tennessee - Knoxville.
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Date Created: 10/14/16
Chapter 6 Current Assets Review Chapter 2&3 concepts on Receivables, current assets, and Long-term assets New information about receivables o Accounts receivable (current assets) o Notes Receivable (current of long- term assets) o Interest receivable (current assets) In chapter 6 we learn that the number found in accounts receivable is actually a lie Accounts receivable: uncollectible o By selling “on Account” a business takes the risk that they will never get the cash. o Uncollectibility risk can be reduced by: Refusing to sell on account (usually done by small businesses) Transferring collection risk to credit card companies. ( the business usually pays a 5-10% transaction fee Transferring collection risk to a Factor (a company that buys receivables) o When a business keeps the risk they are required to report a estimate and report each period of how much of the receivable it will NOT collect At the end of each accounting period the business estimates its risk o This is done on the Balance Sheet Current assets Accounts receivable -Allowance doubtful account (the uncollectible) = Net realized value Notes Receivables o A note is an unconditional promise with: 1. Principal (face) amount 2. Stated due (maturity) date 3. Interest rate on face amount of the term of the note 4. Term: from issuance to maturity o Notes receivables are generated when a business converts an open account receivable to a formal note, or they lend money to another business. This is from the lenders perspective, so when business A sells goods on account to business B , Business A records it as a Down Account Receivable and Up notes receivable. Business B records it as Up sales Revenue and Up account receivable. o Notes payable are generated when a business is required to convert an open account payable to a formal note, or they barrow money Interest Rates o To find the interest rate multiple: Principle * Rate* time o *the time is ALLWAYS divided by 360* Cost of inventory: this is everything to a business o Current assets on the balance sheet until goods are sold o Cost of goods sold expense on the income statement when goods are sold *it has to be one of the two above. Sold or unsold* Most businesses cannot identify which unit they have sold, so they must choose a cost flow method The Average cost method: each unit cost the same and the units sold were sold in no particular order Cost of goods available for sale / Goods available for sale Multiple the average with the amount of units sold. FIFO (first-in-first-out) method: the oldest unit are the ones that were sold first. o This is how real businesses operate, but many businesses do not use it, they use LIFO. LIFO (last-in-fist-out): the newest units are the first units that were sold. o This s used by most businesses because it results in less income tax.