Awards Etc. carries an inventory of trophies and ribbons for local sports teams and school clubs. The cost of trophies has dropped in the past year, which pleases the company except for the fact that it has on hand considerable inventory that was purchased at the higher prices. The president is not pleased with the lower profit margin the company is earning. “The lower profit margin will continue until we sell all of this old inventory,” he grumbled to the new accountant. “Not really,” said the accountant. “Let’s write down the inventory to the replacement cost this year, and then next year our profit margin will be in line with the competition.” Explain why the inventory can be carried at an amount less than its cost. Which accounts will be affected by the write-down? What will be the effect on income in the current year and future years?
Bad Debts
At the end of the accounting period, a financial statement is prepared by every company, then at that time while preparing the financial statement, the company determines among its total receivable amount how much portion of receivables is collected by the company during that accounting period.
Accounts Receivable
The word “account receivable” means the payment is yet to be made for the work that is already done. Generally, each and every business sells its goods and services either in cash or in credit. So, when the goods are sold on credit account receivable arise which means the company is going to get the payment from its customer to whom the goods are sold on credit. Usually, the credit period may be for a very short period of time and in some rare cases it takes a year.
Exercise 5-25: Awards Etc. carries an inventory of trophies and ribbons for local sports teams and school clubs. The cost of trophies has dropped in the past year, which pleases the company except for the fact that it has on hand considerable inventory that was purchased at the higher prices. The president is not pleased with the lower profit margin the company is earning. “The lower profit margin will continue until we sell all of this old inventory,” he grumbled to the new accountant. “Not really,” said the accountant. “Let’s write down the inventory to the replacement cost this year, and then next year our profit margin will be in line with the competition.”
Explain why the inventory can be carried at an amount less than its cost. Which accounts will be affected by the write-down? What will be the effect on income in the current year and future years?
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