EN.662.611 Chap.3 Net Sales, Receivables and Inventory
Net Sales, Receivables and Inventory
Revenue the company expects to keep
Week 3 starts with monetary assets, whose value is fixed in dollars, and with cash and cash equivalents: currency, checks and investments maturing within three months that are readily convertible and unlikely to change in value.
Revenue is recognized when goods are delivered or services rendered, a customer arrangement is evidenced, the price is fixed or determinable and collection is reasonably assured.
Net sales is gross revenue less contra-revenue accounts: credit card discounts on consumer card sales and sales discounts offered to business customers on terms such as 2/10, n/30.
Receivables at net realizable value
Credit sales create accounts receivable, reported at the amount expected to be collected: gross billings less the allowance for doubtful accounts.
Bad debt expense is estimated in the period of the sale and sits within selling, general and administrative expenses. The percentage of credit sales method computes the expense directly; the aging method, preferred under GAAP, computes the ending allowance and derives the expense.
Writing off an account reduces both the receivable and the allowance, so net realizable value does not change.
Inventory and the cost of what was sold
Beginning inventory plus purchases gives goods available for sale, split between ending inventory and cost of goods sold. FIFO, LIFO and average cost divide the same total differently.
With rising prices LIFO reports the lowest income and the lowest tax, and the LIFO conformity rule requires a company using LIFO for tax to use it in its financial statements too.
Once a year the ending value is compared with market under the lower of cost or market rule, and any write-down goes to cost of goods sold.
Ratios that measure speed
Gross profit percentage shows what each sales dollar keeps after product cost. Receivables turnover and days sales outstanding measure how quickly customers pay; inventory turnover and days in inventory measure how quickly goods sell.
The lecture also lists management responses, from automated credit profiling and factoring to discounting aging stock and just-in-time buying.
Keeping inventory honest
The inventory lecture ends with control. Physical counts confirm that the ending balance is real and expose theft, shrinkage and spoilage, all of which inflate inventory if they go unrecorded.
To shorten the time goods sit on the shelf, companies discount products nearing the end of their shelf life and move toward just-in-time buying, receiving goods only when they are needed.
What this chapter covers
- 01
Cash equivalents and separation of duties
- 02
Revenue recognition criteria
- 03
Credit card and sales discounts
- 04
Allowance for doubtful accounts
- 05
Percentage of credit sales and aging methods
- 06
FIFO, LIFO, average cost and LIFO conformity
- 07
Lower of cost or market
- 08
Turnover ratios and days
Worked example · free
Compute bad debt expense by the aging method
- 1The aging schedule sets the ending allowance at $9,000.
- 2Bad debt expense is $9,000 less the existing $2,500 credit, or $6,500.
- 1Net realizable value is $120,000 less $9,000, or $111,000.
Key terms
- Contra-Revenue Account
- An account that reduces gross revenue to net sales, such as sales discounts or card discounts.
- Allowance for Doubtful Accounts
- A contra-asset estimating receivables that will not be collected.
- LIFO Conformity Rule
- The requirement that a company using LIFO for tax also use it in its financial statements.
- Days Sales Outstanding
- The average number of days from a credit sale to collection: 365 divided by receivables turnover.
- Inventory Write-Down
- A year-end reduction of inventory to market value when market falls below recorded cost, charged to cost of goods sold.
- Days in Inventory
- The average number of days goods are held before sale: 365 divided by inventory turnover.
Net Sales, Receivables and Inventory FAQ
Why are card sales treated as cash sales?
The bank converts bundled card receipts to cash almost immediately, so the seller holds no receivable from the customer. The processing fee is recorded as a credit card discount that reduces net sales.
Which bad debt method does GAAP prefer?
The aging method, because older receivables are less likely to be collected and the schedule sets the allowance from that pattern. It needs more data, but the lecture also calls it the better management tool.
Why would a company choose LIFO if it reports lower profit?
When prices rise, lower reported profit means lower income tax, which leaves more cash in the business. The conformity rule means the company must accept the lower figure in its published statements as well.
Exam move
Build one small ledger and run it through both bad debt methods, then take one purchase history through FIFO, LIFO and average cost. Finish by computing turnover and days for two years and explaining each change in a single sentence.
Working through Net Sales, Receivables and Inventory in EN.662.611? Sia is AskSia’s AI Accounting tutor — ask any EN.662.611 Net Sales, Receivables and Inventory question and get a clear, step-by-step explanation grounded in how EN.662.611 is taught and assessed. Read this chapter free, then take your hardest questions to Sia.
