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Lecture Financial reporting for managers: A value-creation perspective - Chapter 7

Chapter 7 Operating transactions - revenues, expenses, and working capital. The following will be discussed in this chapter: Income statement: disclosure and presentation; operating revenues and expenses; other revenues and expenses; interest expense, net; disposal of a business segment – discontinued operations;. | CHAPTER 7 Operating Transactions—Revenues, Expenses, and Working Capital Working Capital Current assets minus current liabilities. Provides needed liquidity. Requires costly financing via long-term debt or equity. Current operating assets are intended to be used or converted into cash within a year (or the company’s operating cycle, if longer). Current operating liabilities are expected to require the use of current assets (or creation of other current liabilties). Cash Cash restrictions. Cash management. Cash control. Accounts Receivable and Revenue Recognition Managing receivables. Valuing receivables on the balance sheet. Accounting for bad debts. Estimate bad debts. Record a charge against income Bad debt write-off. Accounts receivable control and aging schedules. Inventory Acquire inventory. Carry inventory. Sell inventory. Ending inventory. Four Important Issues Acquiring Inventory What costs to capitalize? What units to include? What | CHAPTER 7 Operating Transactions—Revenues, Expenses, and Working Capital Working Capital Current assets minus current liabilities. Provides needed liquidity. Requires costly financing via long-term debt or equity. Current operating assets are intended to be used or converted into cash within a year (or the company’s operating cycle, if longer). Current operating liabilities are expected to require the use of current assets (or creation of other current liabilties). Cash Cash restrictions. Cash management. Cash control. Accounts Receivable and Revenue Recognition Managing receivables. Valuing receivables on the balance sheet. Accounting for bad debts. Estimate bad debts. Record a charge against income Bad debt write-off. Accounts receivable control and aging schedules. Inventory Acquire inventory. Carry inventory. Sell inventory. Ending inventory. Four Important Issues Acquiring Inventory What costs to capitalize? What units to include? What costs to attach? Carrying Inventory Technology has made this much easier than in the recent past. Bar codes facilitate recording of each inventory transaction. Perpetual Method Sell Inventory Which cost flow assumption? LIFO FIFO Average Specific identification Cost flow assumption affects cost of goods sold on the income statement. Inventory Cost Flow Assumptions: Effects of the Financial Statements The effect of the cost flow assumption varies depending on whether the inventory costs are increasing or decreasing. In an environment where costs are rising, FIFO will cause profits to be higher than the average method, and LIFO will cause profits to be lower than average method. Observations about LIFO Liquidations The LIFO assumption rarely matches the actual flow of costs. Use of LIFO has the effect of creating “layers” of inventory, based on the years during which the inventory levels grew . In years during which inventory decreases, the effect on .