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CHAPTER 6

CHAPTER 6 REPORTING AND INTERPRETING SALES REVENUE, RECEIVABLES, AND CASH PowerPoint Authors: Susan Coomer Galbreath, Ph.D.,
CHAPTER 6 REPORTING AND INTERPRETING SALES REVENUE, RECEIVABLES, AND CASH PowerPoint Authors: Susan Coomer Galbreath, Ph.D.,

REPORTING AND INTERPRETING SALES REVENUE, RECEIVABLES, AND CASH

PowerPoint Authors:

Susan Coomer Galbreath, Ph.D., CPA Charles W Caldwell, D.B.A., CMA Jon A. Booker, Ph.D., CPA, CIA Cynthia J. Rooney, Ph.D., CPA

McGraw-Hill/Irwin

Copyright © 2014 by The McGraw-Hill Companies, Inc. All

ACCOUNTING FOR NET SALES REVENUE

The revenue realization principle requires that revenues be recorded when earned.

Goods Goods have have been been delivered delivered or or services services

have have been been rendered. rendered.

There There is is persuasive persuasive evidence evidence of of an an

arrangement arrangement for for customer customer payment. payment.

Price Price is is fixed fixed or or

determinable. determinable.

Collection Collection is is

reasonably reasonably assured. assured.

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CREDIT CARD SALES TO CONSUMERS

Companies Companies accept accept credit credit cards cards for for several several reasons: reasons:

  • 1. 1. To To increase increase sales. sales.

  • 2. 2. To To avoid avoid costs costs of of providing providing credit credit directly directly to to customers. customers.

  • 3. 3. To To avoid avoid losses losses due due to to bad bad checks. checks.

  • 4. 4. To To avoid avoid losses losses due due to to fraudulent fraudulent credit credit card card sales. sales.

  • 5. 5. To To receive receive payment payment quicker. quicker.

When When credit credit card card sales sales are are made, made, the the company company must must pay pay the the

credit credit card card company company a a fee fee for for the the service service it it provides. provides.

CREDIT CARD SALES TO CONSUMERS Companies Companies accept accept credit credit cards cards for for several

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SALES DISCOUNTS TO BUSINESSES

When customers purchase on open account, they may be

offered a sales discount to encourage early payment.
offered a sales discount to encourage early payment.

Read as: “Two ten, net thirty”

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TO TAKE OR NOT TO TAKE THE DISCOUNT, THAT IS THE QUESTION

With With discount discount terms terms of of 2/10,n/30, 2/10,n/30, a a customer customer

saves saves $2 $2 on on a a $100 $100 purchase purchase by by paying paying

on on the the 10 10

th th

day day instead instead of of the the 30 30

th th

day. day.

Interest Rate for 20 Days =

Amount Saved

Amount Paid

$2 Interest Rate for 20 Days = = 2.04% $98 365 Days Annual Interest Rate =
$2
Interest Rate for 20 Days =
= 2.04%
$98
365 Days
Annual Interest Rate =
× 2.04% = 37.23%
20 Days

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SALES RETURNS AND ALLOWANCES

Customers have a right to return unsatisfactory or

damaged merchandise and receive a refund or an

adjustment to their bill. Such returns are often

accumulated in a separate account called Sales

Returns and Allowances.

SALES RETURNS AND ALLOWANCES Customers have a right to return unsatisfactory or damaged merchandise and receive
SALES RETURNS AND ALLOWANCES Customers have a right to return unsatisfactory or damaged merchandise and receive

Damaged

Merchandise

Returned

Merchandise

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REPORTING NET SALES

Companies Companies record record credit credit card card discounts, discounts,

sales sales discounts, discounts, and and sales sales returns returns and and allowances allowances

separately separately to to allow allow management management

to to monitor monitor these these transactions. transactions.

REPORTING NET SALES Companies Companies record record credit credit card card discounts, discounts, sales sales discounts,

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MEASURING AND REPORTING RECEIVABLES

Accounts receivable are

created when companies

have sales to customers

on open accounts.

Trade receivables are

amounts owed to the

business for credit sales of

goods or services.

Notes receivable are

written promises from

another party to pay with

specified terms.

Nontrade receivables are

amounts owed to the

business for other than

business transactions.

Balance Sheet Classifications

Current (short term)

Noncurrent (long term)

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ACCOUNTING FOR BAD DEBTS

Bad debts result from credit customers who will not pay the

amount they owe, regardless of collection efforts.

Bad Debt Expense Record in same accounting period. Sales Revenue
Bad Debt Expense
Record in same
accounting period.
Sales Revenue

Matching Principle

Most businesses record an estimate

of the bad debt expense with an

adjusting entry at the end of the

accounting period.

Allowance

Method

ACCOUNTING FOR BAD DEBTS Bad debts result from credit customers who will not pay the amount

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RECORDING BAD DEBT EXPENSE ESTIMATES

Deckers estimated bad debt expense for 2011 to

be $75,995. Prepare the adjusting entry.

RECORDING BAD DEBT EXPENSE ESTIMATES Deckers estimated bad debt expense for 2011 to be $75,995. Prepare
RECORDING BAD DEBT EXPENSE ESTIMATES Deckers estimated bad debt expense for 2011 to be $75,995. Prepare

Contra-asset account

Bad debt expense is normally classified as a selling expense and is closed at year-end.

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WRITING OFF SPECIFIC UNCOLLECTIBLE ACCOUNTS

When When it it is is clear clear that that a a specific specific customer’s customer’s account account

receivable receivable will will be be uncollectible, uncollectible, the the amount amount should should be be

removed removed from from the the Accounts Accounts Receivable Receivable account account and and

charged charged to to the the Allowance Allowance for for Doubtful Doubtful Accounts. Accounts.

Deckers’ Deckers’ total total write-offs write-offs for for 2011 2011 were were $68,075. $68,075.

Prepare Prepare a a summary summary journal journal entry entry for for these these write-offs. write-offs.

WRITING OFF SPECIFIC UNCOLLECTIBLE ACCOUNTS When When it it is is clear clear that that a
WRITING OFF SPECIFIC UNCOLLECTIBLE ACCOUNTS When When it it is is clear clear that that a

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SUMMARY OF THE ACCOUNTING PROCESS

Accounting for bad debts is a two step process.

SUMMARY OF THE ACCOUNTING PROCESS Accounting for bad debts is a two step process. 6-12

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REPORTING ACCOUNTS RECEIVABLE AND BAD DEBTS

REPORTING ACCOUNTS RECEIVABLE AND BAD DEBTS 6-13

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ESTIMATING BAD DEBTS ─ PERCENTAGE OF CREDIT SALES METHOD

Bad debt percentage is based

on historical percentage of

credit sales that result in bad

debts.

ESTIMATING BAD DEBTS ─ PERCENTAGE OF CREDIT SALES METHOD Bad debt percentage is based on historical
ESTIMATING BAD DEBTS ─ PERCENTAGE OF CREDIT SALES METHOD Bad debt percentage is based on historical

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ESTIMATING BAD DEBTS ─ PERCENTAGE OF CREDIT SALES METHOD

The focus of the percentage of credit

sales method is on determining the

amount to record on the income

statement as Bad Debt Expense.

ESTIMATING BAD DEBTS ─ PERCENTAGE OF CREDIT SALES METHOD The focus of the percentage of credit
ESTIMATING BAD DEBTS ─ PERCENTAGE OF CREDIT SALES METHOD The focus of the percentage of credit

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ESTIMATING BAD DEBTS ─ AGING OF ACCOUNTS RECEIVABLE

The focus of the aging of

accounts receivable method is

on determining the desired

balance in the Allowance for

Doubtful Accounts on the

balance sheet.

ESTIMATING BAD DEBTS ─ AGING OF ACCOUNTS RECEIVABLE The focus of the aging of accounts receivable

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ESTIMATING BAD DEBTS ─ AGING OF ACCOUNTS RECEIVABLE

ESTIMATING BAD DEBTS ─ AGING OF ACCOUNTS RECEIVABLE 6-17

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CONTROL OVER ACCOUNTS RECEIVABLE

Practices That Can Help Minimize Bad Debts

Require approval of customers’ credit by a person independent of the sales and collections functions. Age
Require approval of
customers’ credit by a
person independent of
the sales and
collections functions.
Age accounts
receivable periodically
and contact customers
with overdue payments.
Reward both sales and
collections personnel
for speedy collections.
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RECEIVABLES TURNOVER

This receivables turnover ratio measures how many times

average receivables are recorded and collected for the year.

RECEIVABLES TURNOVER This receivables turnover ratio measures how many times average receivables are recorded and collected

Deckers 2011

Deckers 2011
RECEIVABLES TURNOVER This receivables turnover ratio measures how many times average receivables are recorded and collected
RECEIVABLES TURNOVER This receivables turnover ratio measures how many times average receivables are recorded and collected
Add Decrease in Accounts Receivable Subtract Increase in Accounts Receivable
Add Decrease
in Accounts
Receivable
Subtract
Increase in
Accounts
Receivable

FOCUS ON CASH FLOWS

Sales Revenue
Sales
Revenue

Cash Collected

from Customers

Excerpt from Cash Flow Statement 6-20
Excerpt from Cash Flow Statement
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CASH AND CASH EQUIVALENTS

Money

Cash
Cash
Cash Equivalents
Cash
Equivalents

Checks

Money

Orders

Bank Drafts

Certificates of Deposit

T-Bills

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CASH MANAGEMENT

Cash Management Procedures

Accurate accounting so that reports of cash flows and balances may be prepared. Controls to ensure
Accurate accounting so
that reports of cash
flows and balances may
be prepared.
Controls to ensure
that enough cash is
available to meet
current operating needs,
maturing liabilities, and
unexpected
emergencies.
Prevention of the
accumulation of excess
amounts of idle cash.
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INTERNAL CONTROL OF CASH

Internal control refers to policies and procedures designed to:

 
         
         
Internal control refers to policies and procedures designed to: Safeguard Provide Provide Provide assets. reasonable reasonable
Internal control refers to policies and procedures designed to: Safeguard Provide Provide Provide assets. reasonable reasonable
Internal control refers to policies and procedures designed to: Safeguard Provide Provide Provide assets. reasonable reasonable
Internal control refers to policies and procedures designed to: Safeguard Provide Provide Provide assets. reasonable reasonable

Safeguard

Provide

Provide

Provide

 

assets.

reasonable

reasonable

reasonable

 

assurance on

assurance on

assurance on

the reliability of

 

the

the compliance

financial

effectiveness

with laws and

records.

and efficiency

regulations.

 

of operations.

 
Cash Cash is is the the asset asset most most vulnerable vulnerable to to theft theft
Cash Cash is is the the asset asset most most vulnerable vulnerable to to theft theft and and fraud. fraud.

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INTERNAL CONTROL OF CASH

Separate jobs of receiving cash and disbursing cash.

Separation of Duties Policies and Procedures
Separation
of Duties
Policies and
Procedures

Separate procedures of accounting for cash receipts and cash disbursements.

Separate the physical handling of cash and all phases of the accounting function.

Require that all cash receipts be deposited in a bank daily.

Require separate approval of the purchases and the actual cash payments.

Assign responsibilities for cash payment approval and check-signing to different individuals.

Require monthly reconciliation of bank accounts with the cash accounts on the company’s books.

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CONTENT OF A BANK STATEMENT

CONTENT OF A BANK STATEMENT Interest Earned (INT) Electronic Funds Transfer (EFT) Not Sufficient Funds (NSF)

Interest Earned (INT)

Electronic Funds Transfer (EFT)

Not Sufficient Funds (NSF)

Service Charge (SC)

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NEED FOR RECONCILIATION

Explains the difference between cash reported on bank statement and cash balance on company’s books. Reasons:
Explains the difference between cash reported on bank
statement and cash balance on company’s books.
Reasons:
1.
Timing Differences
a)
Transactions recorded in the books but not shown
on the bank statement.
b)
Transactions shown on the bank statement but not
recorded in the books.
2.
Errors in Recording Transactions
Outstanding
Interest
Checks
Bank Service
Charges
Earned
Deposits in
Transit
NSF
Errors
Checks

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BANK RECONCILIATION ILLUSTRATED

General Format of Bank Reconciliation

BANK RECONCILIATION ILLUSTRATED General Format of Bank Reconciliation 6-27
BANK RECONCILIATION ILLUSTRATED General Format of Bank Reconciliation 6-27
BANK RECONCILIATION ILLUSTRATED General Format of Bank Reconciliation 6-27

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BANK RECONCILIATION ILLUSTRATED

Example of a Bank Reconciliation

BANK RECONCILIATION ILLUSTRATED Example of a Bank Reconciliation 6-28

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BANK RECONCILIATION ILLUSTRATED

The bank reconciliation identifies previously unrecorded transactions or changes that are necessary to cause the company’s Cash account(s) to

show the correct cash balance. Any transactions or changes on the company’s books side of the bank reconciliation need journal entries.

BANK RECONCILIATION ILLUSTRATED The bank reconciliation identifies previously unrecorded transactions or changes that are necessary to

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CHAPTER SUPPLEMENT:

RECORDING DISCOUNTS AND RETURNS

Assume Assume a a credit credit card card company company is is charging charging a a 3 3 percent percent fee fee for for

its its service service and and Deckers' Deckers' Internet Internet credit credit card card sales sales are are $3,000 $3,000

for for January January 2. 2.

Prepare the journal entry.

Prepare the journal entry.

CHAPTER SUPPLEMENT: RECORDING DISCOUNTS AND RETURNS Assume Assume a a credit credit card card company company
CHAPTER SUPPLEMENT: RECORDING DISCOUNTS AND RETURNS Assume Assume a a credit credit card card company company

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CHAPTER SUPPLEMENT:

RECORDING DISCOUNTS AND RETURNS

Similarly, Similarly, assume assume that that credit credit sales sales of of $1,000 $1,000 are are

recorded recorded with with terms terms 2/10, 2/10, n/30, n/30, and and payment payment is is made made

within within the the discount discount period. period.

Prepare the journal entries.

Prepare the journal entries.

CHAPTER SUPPLEMENT: RECORDING DISCOUNTS AND RETURNS Similarly, Similarly, assume assume that that credit credit sales sales
CHAPTER SUPPLEMENT: RECORDING DISCOUNTS AND RETURNS Similarly, Similarly, assume assume that that credit credit sales sales

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:

RECORDING DISCOUNTS AND RETURNS

Sales returns and allowances should always be treated as a

Sales returns and allowances should always be treated as a

contra-revenue.

contra-revenue.

Assume Assume that that Fontana Fontana Shoes Shoes of of Ithaca, Ithaca, New New York, York, buys buys 40 40

pairs pairs of of sandals sandals from from Deckers Deckers for for $2,000 $2,000 on on account. account. Before Before

paying paying for for the the sandals, sandals, however, however, Fontana Fontana discovers discovers that that 10 10

pairs pairs of of sandals sandals are are not not the the color color ordered ordered and and returns returns them them

to to Deckers. Deckers.

Prepare the journal entries.

Prepare the journal entries.

: RECORDING DISCOUNTS AND RETURNS Sales returns and allowances should always be treated as a Sales

END OF CHAPTER 6

END OF CHAPTER 6 6-33
END OF CHAPTER 6 6-33