Introduction

In this chapter, we learn inventory in greater detail. Obviously, inventory is a significant asset on the balance sheet. Therefore, it must be a standard principle for assigning value to it. In reality, not all firms operating exactly the same way, thus the methods are also different.

Recall My Favorite Local Merchants from Units 5 and 6. 

There's a bookstore chain called "Eslite Bookstore (https://www.eslitecorp.com/eslite/index.jsp)" who sells books and stationery in where I live. 

What inventory valuation method would you advise them to use? 

To do this suggestion, we must understand what inventory they are dealing with and digging some history of this industry. In this case, the store purchases multiple books for inventory to sell, and the merchandise that the bookstore stocks are books. Although there are so many electronic gadgets and apps such as Kindle Fire(Amazon), iPad, or other forms of e-books that tend to replace traditional books, they do not work as easily as they thought before. Traditional book sales still stand out in these modern days, regardless the prices are normally way more expensive than the electronic version(Pdf or word). We can not definitely predict the future, we only predict it probably. I suppose that if the resources for printing physical books are all on an increasing trend, and either the cost of owning a physical bookstore, then the prices of physical books are also on an increasing trend. Therefore, I advise them to use the LIFO (Last In, First Out) method to produce lower income on the financial reports and creating an increasing trend of the income statement.

Why?

Before we actually choose a mothod, we can do some comparison. Assume their business activities as the samples below:

Sample :

Day 1. Beginning Inventory = 200,000 books ($8 per book) = $1,600,000

Day 2. Net purchase 200,000 books ($10 per book) on Jan 31, 2020

Day 3. Net sales = 300,000 books at $30 each = $9,000,000

Day 4. Net purchase another 200,000 books ($12 per book)

Day 5. Net sales = 100,000 books at $30 each = $3,000,000

Based on the given information, we can do the calculate the cost of goods sold as below:

LIFO (Last In, First Out):

On the day 3, the cost of goods sold was $2,800,000 ( = 200,000 X $10 + 100,000 X $8 )

On the day 5, the cost of goods sold was $1,200,000 ( = 100,000 X $12 ) 

The total cost of goods sold = $2,800,000 + $1,200,000 = $4,000,000

The total net sales = $9,000,000 + $3,000,000 = $12,000,000

The gross profit = The Total Net Sales - Cost of goods sold = $12,000,000 - $4,000,000 = $8,000,000

FIFO (First In, First Out):

On the day 3, the cost of goods sold was $2,600,000 ( = 200,000 X $8 + 100,000 X $10 )

On the day 5, the cost of goods sold was $1,000,000 ( = 100,000 X $10 ) 

The total cost of goods sold = $2,600,000 + $1,000,000 = $3,600,000

The total net sales = $9,000,000 + $3,000,000 = $12,000,000

The gross profit = The Total Net Sales - Cost of goods sold = $12,000,000 - $3,600,000 = $8,400,000

Weighted Average:

The average cost on day 3 was = $9 ((200,000 x $8 + 200,000 x $10)/400,000)

On the day 3, the cost of goods sold was $2,700,000 ( = 300,000 X $9 )

The average cost on day 5 was = $11.33 ((100,000 x $10 + 200,000 x $12)/300,000)

On the day 5, the cost of goods sold was $1,133,000 ( = 100,000 X $11.33 ) 

The total cost of goods sold = $2,700,000 + $1,133,000 = $3,830,000

The total net sales = $9,000,000 + $3,000,000 = $12,000,000

The gross profit = The Total Net Sales - Cost of goods sold = $12,000,000 - $3,830,000 = $8,170,000

As a result, the LIFO (Last In, First Out) method produces the lowest profit while the cost of books is on an increasing trend. If we do the opposite of calculations, the amounts of FIFO and LIFO will be quite the opposite. The weighted average will be somewhere in between. Although the LIFO (Last In, First Out) method produces the lowest profit, it reflects the most recently incurred costs with the recently generated revenues. Lower profit also reduces the cost of the tax payments while the cost of books is on an increasing trend. 

Assume the tax rate is 20% times the Gross profit. The tax bills will be $1,600,000(LIFO), $1,680,000(FIFO), and $1,634,000(Weighted Average) as we sold exactly the same amounts of books. 

Specific Identification Method

As we learned during this chapter, another method is the specific identification method, which requires the bookstore to identify each book with its cost and retain that identification until the inventory is sold. Once the specific book(or inventory) is sold, the cost of the specific book is assigned to cost of goods sold. It's pretty similar to your phone number. You are on the records each time you send messages, calling someone, or even doing purchases on your phone. With advanced information technology, computers and programs generate a barcode for each book, to identify each specific book. It's not impossible, but the problem is that does it is necessary and greater than the other methods we just described? If so, for instance, every coffee you order in Starbucks will have its own name, not the name on the menu, a real name. It needs tons of storage space and cloud computing. All of these cost money and make no sense to be an improvement in the financial report and management. Therefore, specific identification is suggested only used for uniquely identifiable goods that have a fairly high per-unit cost (Luxury cars, fine jewelry, or houses ).

The Perpetual or The Periodic System?

Whether the approach is perpetual or periodic, the financial statement results are the same. This is anticipated because the beginning inventory and early purchases are being allocated and charged to cost of goods sold in the same order. The difference is the calculations are done as soon as you click the button (perpetual) or at the time you prepare to report (periodic). Similar to the cloud sync function, it automatically syncs the data you just edit on your devices.

With tons of books to manage, I would advise them to use the perpetual system. Because it's an efficient one for managing such a huge bookstore who has so many books in stock.

The Lower of Cost or Market Technique

Before we decide to adjust the value and apply any method, we need to know the reason why we do this first. Start with the net realizable value (NRV), it helps us to know how worthy is the inventory when we convert it to cash. Assume that you are trying to sell your iPhone XR, and you post it on Amazon.com. Two weeks later, the iPhone XR sold and you get paid from the buyer. You convert your iPhone XR to the cash you get. 

We all want to keep the value forever after we purchase expensive goods. Unfortunately, obsolescence, oversupply, defects, and major price declines all cause the prices to decline. As this happens, your inventory is carried on the accounting records at greater than its net realizable value (NRV). To truly reflect the value, some adjustments are necessary. For instance, if you have 1,000 phonebooks in stock and you want to convert it to cash. The NRV would be very different when you value it in 1950 and 2020.

Overall, books are consist of knowledge, papers, and inks. Knowledge can be replaced by the electronic version but papers and inks are the special physical appearance of traditional books. The electronic version of books might be way cheaper than physical books, but in the real world, people prefer physical books, even though they have to pay more money. 

To apply the lower of cost or market rule means a business must record the cost of inventory at whichever cost is lower – the original cost or its current market price. Assume that Eslite Bookstore Imports resells five listed books. At the end of its reporting year, Eslite calculates the lower of its cost or net realizable value as the following table:

Merchandise	Quantity on Hand	Unit Cost	Inventory at Cost	Market per Unit	Lower of Cost or Market
Herry Porter	1,000	$19	$19,000	$23	$19,000
Don Quixote	750	$14	$10,500	$17	$10,500
The Little Prince	200	$14	$2,800	$12	$2,400
Rich dad, Poor dad	1,200	$28	$33,600	$16	$19,200
A Tale of Two Cities	800	$20	$16,000	$22	$16,000

Based on the table, the market value is lower than the cost on The Little Prince and Rich dad, Poor dad. Therefore, Eslite Bookstore recognizes a loss on The Little Prince of $400 ($2,800 - $2,400), as well as a loss of $14,400 ($33,600 - $19,200) on the Rich dad, Poor dad.

Reference

Chapter 8: Inventory. (n.d.). Retrieved from https://www.principlesofaccounting.com/chapter-8/

Specific Identification Method

Specific Identification Method Overview

As I learned during this chapter, the specific identification method requires the business to identify each unit of their inventory with its cost and retain that identification until the inventory is sold. Once the specific unit is sold, the cost of the specific unit is assigned to the cost of goods sold. Assume that Apple gives every iPhone a specific serial number, and records these numbers in an inventory management system. While Apple sold an iPhone, the system matches each serial number to its record to recognize its cost. 

Specific Identification Method Requirements

Be able to track each inventory item individually, such as paper labels, serial numbers, or unique numbers to identify each product.

Tracking the cost of each unit which means clearly identify the cost of each purchased item, and associate it with a unique identification.

Advantages and Disadvantages

These days, we have advanced information technology, computers and programs generate a barcode for each unit in inventory. In other words, It's not impossible. But the problem is, does it is necessary and greater than the other methods? It needs tons of storage space and cloud computing, and all of these cost money to maintain, another operating expense to pay. If it makes no sense to be an improvement in the financial report and management, it becomes a waste. For instance, assume that a cloud services company offering such services, but they charge the purchaser $100 per TB(1,000GB) and $3,000 monthly management fee. If your bookstore needs 1,000 TB to storage and operating with their algorithm, you will be charged $103,000 ($3,000 + $100 x 1,000) per month. Suppose your profits are around $10 per unit, the service expense has already offset your 10,300 units on the amounts of sales. On the other hand, if you are selling a Lamborghini Urus(A SUV) at $399,000, and the profit is $150,000 per car. The service expense just costs you 1 unit of your sales and It's 10,300 times less than the bookstore's space used to store that information. It is also very time-consuming to track inventory on an individual unit basis. Therefore, specific identification is suggested only used for uniquely identifiable goods that have a fairly high per-unit cost (Luxury cars, fine jewelry, or houses ).

The specific identification method provides a high degree of accuracy to the cost of inventory since the exact cost at which something was purchased can be identified, and connecting to the cost of goods sold when the related item is sold.

Example

In Taiwan, a big construction company called Huaku which holds a lot of building inventory. Each building, house, or other real estate, has its own specific name. They track each case individually by those specific names, and identify the cost of each built item, and associate it with the unique names. For instance, they built an apartment named “Huaku Sky Garden” and "Huaku Sky Lake" for sale. The Huaku Sky Garden and Huaku Sky Lake are two very different buildings and houses. Just like you can not sell the house in Alaska and then value its cost with the house in California or New York City. In the Huaku Sky Garden and Huaku Sky Lake cases, the cost of inventory is only valued by each apartment itself.

Retail Inventory Method

To estimate their ending inventory balances, the method is based on the relationship between the cost of the merchandise and its retail price. But be careful that the method is not entirely accurate, and periodically adjusted by physical inventory count is needed. As such, this method is normally for retailers to deal with their sales of small items since a hard count is often impractical. Retailers can attempt to estimate inventory levels and the cost of inventory based on the total cost and retail value of goods available for sale and the total sales over a certain period.

To calculate the cost of ending inventory using the retail inventory method:

1.The cost-to-retail percentage = Cost / Retail price.

2.The cost of goods available for sale = Cost of beginning inventory + Cost of purchases

3.The cost of goods sold = Sales × cost-to-retail percentage

4.The ending inventory = Cost of goods available for sale - Cost of sales during the period

For instance, Eslite bookstore sells Harry Potter for an average of $20, and it costs $14. This is a cost-to-retail percentage of 70%. Suppose Eslite bookstore’s beginning inventory has a cost of $100,000 it paid $180,000 for purchases during the month, and it had sales of $240,000. The ending inventory is $112,000 :

$100,000(Beginning inventory) + $180,000(Purchases) - $168,000(Sales of $240,000 x 70%) = $112,000(Ending inventory)

Retail Method? The Advantages and Disadvantages

The retail inventory method is a quick and easy way to determine an approximate ending inventory balance. However, It's only an estimate, not a physical inventory count. It only works if the business has a consistent mark-up across all products sold. If the mark-up was different, the results of the calculation will be incorrect.

What a receivable turnover calculation is?

What a receivable turnover calculation is?

Start with the formulation. 

Accounts Receivable Turnover Ratio = Net Annual Credit Sales / ((Beginning Accounts Receivable + Ending Accounts Receivable) / 2)

Sales on credit - Sales returns - Sales allowances = Net credit sales

Accounts Receivable Turnover Ratio = (Sales on credit - Sales returns - Sales allowances)/Average Net Accounts Receivable

Sample of The Calculation (Case 1)

In this case, I set the average number to a lower level to reflect a healthy financial situation.

Assume I am running a construction company called Starbruce had an annual net credit sales of $1,000,000 during 2019. The beginning accounts receivable (net of uncollectible) is $60,000, and ending accounts receivable (net of uncollectible) is $40,000. The average net accounts receivable = $50,000 (($60,000 + $40,000)/2)

The turnover ratio is “20” = $1,000,000 / $50,000

Thus, Starbruce's accounts receivable turned over 10 times during the past year, which means that the average account receivable was collected approximately in 19(18.25) days.

Sample of The Calculation (Case 2)

In this case, I set the average number to a higher level to reflect an unhealthier financial situation.

Assume that Starbruce had an annual net credit sales of $1,000,000 during 2019. The beginning accounts receivable (net of uncollectible) is $950,000, and ending accounts receivable (net of uncollectible) is $850,000. The average net accounts receivable = $900,000 (($950,000 + $850,000)/2)

The turnover ratio is approximately “1”(1.111) = $1,000,000 / $900,000

Thus, Starbruce's accounts receivable turned over 1 time during the past year, which means that the average account receivable was collected approximately in 365 days.

Review the case 1 and case 2, we can see a tremendous difference between the expectation of how many days does the company take to collect its account receivable. Moreover, it also means the Starbuce has to forego the alternative use of the money, or even cut down the reinvestment on the growth of its business, and the interest income is also way different between the two. The 346(365-19) days difference can be a significant loss on interest income if you deposit huge amounts of money in a bank. 

Let's see other different cases which have the same average net accounts receivables, but a different beginning and ending amounts of accounts receivables.

Sample of The Calculation (Case 3)

In this case, I set very high and low amounts of account receivables to reflect the tricky of the average number.

Assume Starbruce had an annual net credit sales of $1,000,000 during 2019. The beginning accounts receivable (net of uncollectible) is $850,000, and ending accounts receivable (net of uncollectible) is $50,000. The average net accounts receivable = $450,000 (($850,000 + $50,000)/2)

The turnover ratio is “2”(2.2222) = $1,000,000 / $450,000

Thus, Starbruce's accounts receivable turned over 10 times during the past year, which means that the average account receivable was collected approximately in 182.5 days.

Sample of The Calculation (Case 4)

Assume that Starbruce had an annual net credit sales of $1,000,000 during 2019. The beginning accounts receivable (net of uncollectible) is $500,000, and ending accounts receivable (net of uncollectible) is $400,000. The average net accounts receivable = $450,000 (($500,000 + $400,000)/2)

The turnover ratio is “2”(2.2222) = $1,000,000 / $450,000

Thus, Starbruce's accounts receivable turned over 10 times during the past year, which means that the average account receivable was collected approximately in 182.5 days.

As you can see, the average net accounts receivables are the same. But the beginning and ending amounts are very different. It may cause by choosing a specific period, or similar to the very last day of a credit card bill. If a note receivable is in a 2-year promise, the accounting result would be very different between choosing 1 and 2 years. 

What does it mean?

Accounts Receivable Turnover Ratio reveals how many times a firm’s receivables are converted to cash during the year. A high turnover ratio may indicate a conservative credit policy or several high-quality customers. For instance, American Express qualifies its clients by charging them a higher annual fee relative to other credit card companies. 

On the other hand, a low turnover ratio represents a loose credit policy, an inadequate collections function, or a large proportion of customers having financial difficulties. 

How it is used?

The ratio is used to evaluate the ability of a company to efficiently issue credits to its customers and collect funds from them promptly. It also indicates an excessive amount of bad debt. It is used to track the collection activities, and drawing a trend line to see its efficiency. But just be careful the tricky cases like I introduced priorly.

Notice that the net credit sales are revenues generated by a firm that it allows to customers on credit. Therefore, net credit sales do not include any sales for which payment is made immediately in cash. 

Enhancing Cash Flows

A company that operates where I live

There's a branded coffee company Nespresso (https://www.nespresso.com/tw/en/) who selling espresso machines and coffee capsules in Taiwan. 

How does the company enhance its cash flows? 

To enhance cash flows, the company has inflow and outflow solutions. And there are also internal and external solutions.

Internal Solutions

Inflow Solution/Crowded

They open their stores at crowded places to enhance the sales since crowded streets relative to higher possibilities of product views. Higher sales mean higher inflows of cash.

Inflow Solution/Accelerate Cash Collections

No matter how excellent your products are, you still need a great checkout system to ensure your customers can easily pay for your products. Mobile payments such as Apple Pay, LINE Pay, or credit cards, debit cards, are increasing recently. If their stores only accept cash, their sales will drop down for sure. Prices of their espresso machines are not that cheap and It's not the amounts of money for everyone would like to carry. Credit cards also induce people to purchase more since it's not an immediate outflow from their pockets. Once the customers feel less pain on their purchases, they would like to buy more than expected.

Inflow Solution/Discounts

Are you experienced a buy one, get one free promotion? Or the second one is 40% off? These kinds of promotions induce your heart to think it's cheaper if you purchase more, and the company gets higher inflows of cash from sales. Festivals such as New Year, Christmas, or Thanksgiving, and Valentine's Day, are all opportunities to announce some activities or discounts. 

Outflow Solution/Controls

The future agreement is the solution for possible price changes in coffee supply, to reduce the fluctuations of their cash outflows, and a long-term supply contract might also get better prices. Moreover, their expenses are outflow "on time", the electronic system is scheduled to pay for checks. In order to take better control of there cash flows internally, there are sensors and cameras around their store, also a passcard is needed for accessing the register. From the beginning, they even have to detect the counterfeit money by using a detector of counterfeit money. 

Does it contact outside parties to obtain investment funds by issuing stock, bonds, or borrowing in another way?

Nespresso Coffee Stores is a brand of the Nestlé Group. The Nestlé Group issues billions of shares of stock to obtain more operating funds from investors around the globe. Although this solution dilutes the ownership of original owners, it still a necessary step for such a big international company. Your shares can be much worthy if they use the funds effectively.

Instead of issuing stock, Nestlé sold some departments of their company. For instance, their famous brands like Haagen-Daze, Dreyer's and Drumstick are sold to Froneri company for cash. 

Reference

Chapter 6: Cash and Highly-Liquid Investments. (n.d.). Retrieved from 

https://www.principlesofaccounting.com/chapter-6/

Nestlé. (2020, March 1). Retrieved from https://en.wikipedia.org/wiki/Nestlé

The Accounting Cycle

Now we begin to look at the "accounting cycle", culminates in closing the books and producing financial statements. While expanding the picture to take in the full accounting cycle and culminates in closing the books and producing financial statements, balances of some accounts are carried forward from period to period, some were not. To understand why, we need to know the differences between these two types of account, which are "nominal" and "real" accounts. 

The Nominal Accounts

The nominal accounts are revenue, expense, and dividend accounts, these accounts must be reset to begin the next accounting period. 

The Real Accounts

The real accounts are asset, liabilities, and equity accounts, these accounts must be carried forward from period to period. 

What Are The Differences?

1.Reset or not

The balance of the real accounts, asset, liabilities, and equity accounts, be carried forward from period to period. In contrast, the nominal accounts are revenue, expense, and dividend accounts, these accounts must be reset to begin the next accounting period. For instance, It's just like your bank accounts, the balance of the account(Real account) is carried forward while you deposit or withdraw. The nominal accounts, on the other hand, reflect the amounts of your deposit and withdraw.

2.The Results or Happening

The amounts of revenues, expenses, and dividend accounts during a particular period, depending on how much you earned or paid. In short, it's the happening events of the period. In contrast, the amounts of assets, liabilities, and equity depend on the results of the prior, it's the achievements that you have already done before measuring the revenues, expenses, and dividends. Recall the example of your bank account, your balance reflects the result of your deposits and withdraw. Your deposits and withdraw are printed on the record of transactions, they are events and activities of your account, reflect the happening nominal events.

Why are they so-called?

The reason why they are so-called "nominal" and "real" accounts, is actually achieved or not. As we know that the net income equals revenues minus expenses, so we have the actual increase or decrease on the balance sheet after the result of the net income. If you have $1,000,000 in revenue, but you also have $1,000,000 in expense, you will end up with zero increase in the assets. Moreover, if the expense is $2,000,000 , you will end up with $1,000,000 in liabilities. The result will finanlly accumulate to the real accounts, the balance sheet, assets, liabilities, and equity.

What type of information is contained in nominal accounts?

Since the nominal accounts are the revenues, expenses, and dividend accounts, so they contain the information to record revenues, expenses, and dividend accounts. The information contained in nominal accounts is usually income statement accounts such as revenue data, expense data, and gain or lose data.

What types in real accounts? 

The real accounts are also known as capital accounts, which contain balance sheet accounts, asset data, liability data, and equity data. 

Which financial statement contains the information from nominal accounts?

Obviously, the income statement contains the information from nominal accounts, since it has the amounts of revenues and expenses.

Which contains the information from real accounts?

Clearly, the balance sheet involved assets, liabilities, and equity, which contains the information for real accounts.

References

Walther, L. M. (2012). Principles of accounting. Logan, UT: Utah State University. Retrieved from https://www.principlesofaccounting.com/chapter-4/

Which journal should be used to record each of the following transactions?

Medical Supply Company uses a cash receipts journal, a cash payments journal, a sales journal, a purchases journal, and a general journal. 

Which journal should be used to record each of the following transactions?

A. Payment of Property Taxes

Cash Payment Journal

B. Purchase of Office Equipment on Credit 

General journal 

C. Sale of Merchandise on Credit

Sales Journal

D. Sale of Merchandise for Cash

Cash Receipts Journal

E. Cash refund to a customer who returned Merchandise

Cash Payment Journal

F. Return of Merchandise to a supplier

General journal 

G. Adjusting entry to record depreciation

General journal 

H. Purchase of a delivery truck for cash

Cash Payment Journal

I. Purchase of merchandise on credit

Purchases journal.

J. Return of merchandise by a customer company for credit to its account

General journal 

Would you extend trade credit to your customers?

As a proprietor of "Starbruce"

As a proprietor of the "Starbruce" construction company that sells houses, offices, and other buildings in Taipei, I offer multiple types of houses and buildings to individuals and business owners. Further, I also offer decorating services, to help my clients create a comfortable place with warm lighting and comforting interiors, and a beautiful cozy atmosphere. Starbruce’s vision is to be the leading construction company in all markets and to build a legacy of excellence.

Should I extend trade direct credit to your customers? 

The answer is sometimes yes, sometimes not. It's similar to a poker game. If we know the chance of uncollectible is pretty low, we will reduce the bids we put on them. With information technology, we can do the investigation much better. 

Why?

Yes, some people do deserve our trust. Credit sales can entice customers to make a purchase decision. However, trust must be earned. With a membership program, I can trust my customers who already earned my trust. I don't want to treat everyone with the same rules since there is always someone you can rely on and someone just can't. 

Why not?

Every devil was once an angel. As I said, in the real world, there is always someone we can trust, but someone just can't. Credit sales facilitate many business transactions, but it is also costly. Moreover, It's an opportunity cost, which means I must forego the alternative uses of the money while credit is extended. 

How will this decision affect my sales and profits?

Although credit sales are costly, it facilitates many business transactions. That's also why we do this, why we often take the risk. 

For instance, suppose my company builds a house for sale, and the price is $300,000, but my client only has $200,000 cash on hand. And my client can not get any more funds from banks because of the credit limit. In this case, I have to decide whether I should offer a $100,000 direct loan to the potential client or not. If I do, I have to forego the alternative uses of the money and take the risk of the uncollectible expenses. But it can be a good deal, the direct loan induce the client to make the purchasing decision, and it's worthwhile if the collections of the payments are smooth. While the house is delivered, the $300,000 is recognized as revenue. Therefore, I have $200,000 inflow of cash, and $100,000 notes receivable. 

If I don't offer any direct loan to the potential client, I will lose the deal, the $300,000 revenue, $200,000 inflow of cash, and the $100,000 notes receivable. However, I don't have to take the risk and feeling stressed about the receivable. Also, I can put the $100,000 on a treasury bond to gain my profits. 

How would I ensure that my firm is paid by its clients?

In the business field, I always thinking about how to get a win-win situation. I gain my profits and my clients get great deals. However, trust must be earned. The first step is to check the credit history of the client which is a normal procedure of doing business, to ensure they have the ability to repay the direct loan. The first step is the most important one I think because it reduces the risk substantially in the first place. 

To reduce the risk, I will request some collaterals, such as the house. The step is to increase their opportunity cost when they really have to decide to repay or not. Because of the collaterals, they have to make their choices among the opportunity cost. Would you like to risk your future on a payment you can afford? That's the third step, affordable. 

Everyone has their affordable life and products. My firm does not offer a direct loan to individuals or business owners who can not afford it in the first place. The future may be unpredictable, but the past has clear records. What you have done, what you have achieved, are the basic start point. For instance, if my client's life is struggling at around $1,000 per month, my firm does not offer a direct loan to the client if the loan has to be repaid $999 per month. 

How would you account for those who fail to pay?

As we learned from this chapter, there are "Direct Write-Off Method" and "Allowance Methods".  Under the direct write-off method, a bad debt is charged to expense as it apparently shows not to be paid. The allowance method, on the other hand, is an estimate of the future amount of bad debt that is charged to a reserve account as a sale is made. In short, the keywords are estimating the future or not.

Normally, it depends on what is material? It is material if its omission or misstatement could influence the economic decisions of my firm's taken on the basis of the financial statements. Materiality is relative to the size and particular circumstances of individual companies.

It depends on the size. If my firm is a big construction company that has net assets worth $10 billion, a default by a customer who owes only $1,000 to my firm is immaterial to the financial statements of my firm.

It also depends on the nature. As my firm is a construction company, selling houses is a major source of revenue for my company, then this information should be disclosed in the financial statements as it is by its nature material to understanding my firm's scope of operations in the future.

Reference 

Chapter 7: Accounts Receivable. (n.d.). Retrieved from https://www.principlesofaccounting.com/chapter-7/

Materiality Concept. (n.d.). Retrieved from https://accounting-simplified.com/financial-accounting/accounting-concepts-and-principles/accounting-materiality.html