ACCT5930 Chap.5 Receivables, Internal Control and Inventory
Receivables, Internal Control and Inventory
Receivables and inventory combine measurement with control. Credit sales create rights to collect, but expected non-payment means receivables may need an allowance so the balance sheet presents the amount expected to be realised. The allowance is a contra asset and the related expense belongs to the period in which the estimate is recognised. Inventory accounting separates recording system from cost-flow assumption.
A perpetual system updates inventory and cost of goods sold at each sale, while a periodic system derives cost of goods sold at period end. FIFO and weighted average allocate the same cost pool differently. Physical counts, authorisation, segregation of duties, documentation and independent checks provide evidence that recorded assets exist and are protected.
What this chapter covers
- 01
Accounts receivable records rights to collect from credit customers
- 02
The doubtful-debt allowance presents receivables at an expected collectible amount
- 03
Internal controls separate authorisation, custody, recording and review
- 04
Perpetual and periodic systems differ in record-update timing
- 05
FIFO and weighted average allocate cost without promising physical flow
- 06
Cost of goods available is allocated between COGS and closing inventory
- 07
Physical counts test quantities and reveal shrinkage or recording differences
- 08
Inventory is written down when net realisable value is below cost
Worked example · free
Allocate an inventory cost pool under two assumptions
- +1Total cost available is 30 × $16 + 70 × $20 = $480 + $1,400 = $1,880 for 100 units.
- +1FIFO COGS is 30 × $16 + 35 × $20 = $1,180; closing inventory is 35 × $20 = $700.
- +1Weighted-average unit cost is $1,880 divided by 100 = $18.80.
- +1Weighted-average COGS is 65 × $18.80 = $1,222; closing inventory is 35 × $18.80 = $658.
- +1Revenue is 65 × $33 = $2,145. FIFO gross profit is $965 and weighted-average gross profit is $923.
Key terms
- Accounts Receivable
- A current asset representing enforceable rights to collect amounts from customers after credit transactions.
- Doubtful Debt Allowance
- A contra asset that reduces gross receivables to an amount expected to be collected.
- Internal Control
- Policies and procedures designed to safeguard assets, support reliable records and prevent or detect errors and misuse.
- Perpetual System
- An inventory system that updates inventory and cost of goods sold as transactions occur.
- Periodic System
- An inventory system that derives cost of goods sold after determining closing inventory at period end.
- Net Realisable Value
- The amount expected from sale after considering costs needed to complete and sell the inventory.
Receivables, Internal Control and Inventory FAQ
Why is the doubtful-debt allowance a contra asset?
It reduces the gross receivable to a net amount expected to be collected while preserving the original customer balances. It is not a separate obligation to transfer resources, so classifying it as a liability would misstate the balance sheet.
Does FIFO mean the oldest physical units were sold?
Not necessarily. FIFO is a cost-flow assumption used to assign accounting costs. Physical movement can follow different operational patterns. Explain the cost allocation and resulting statement amounts rather than claiming a physical sequence not given in the question.
How do perpetual and periodic systems differ?
A perpetual system updates inventory and cost of goods sold at each sale. A periodic system waits until period end and uses opening inventory plus purchases less closing inventory to derive cost of goods sold. Both still require evidence about physical quantities.
Why can an inventory error affect profit?
Closing inventory is part of the cost allocation between the balance sheet and cost of goods sold. Overstating closing inventory understates cost of goods sold, which overstates profit, retained profits and assets for that period.
Exam move
Keep four headings on one page: receivable estimate, control design, inventory recording system and inventory cost flow. Place every problem under one heading before calculating. For cost-flow problems, write units and dollars on separate lines and check the full cost pool. For allowance questions, distinguish the required ending allowance from the adjustment needed after considering the existing balance.
For control questions, identify who authorises, holds the asset, records and independently reviews. End each misstatement problem with the direction across both profit and assets. Build inventory layers as a units-and-unit-cost table before multiplying.
Under FIFO, cross out the oldest costs first; under periodic weighted average, compute one rate from the full pool and prove that cost of goods sold plus closing inventory returns to that pool. Keep the recording system decision separate: perpetual versus periodic determines when records update, not which cost-flow rule is used.
For receivables, make a three-line reconciliation showing gross receivables, allowance and net amount expected to be collected. Use both an existing credit allowance and an existing debit balance so the adjustment is based on the required ending position.
Finally, diagnose one overstated-inventory and one understated-allowance error across assets, expenses, profit and retained profits, stating every direction rather than stopping at the first affected account. Add a physical-count discrepancy and identify the custody, recording and review controls that should investigate it.
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