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Revenue Recognition at the time of collection

Revenue Recognition at the time of collection. By: Jenna C., Alexa, Julia S., Melissa and Kristie. Collection of Cash. After goods or services are rendered, revenue is always recognized before or at the same time as cash payment.

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Revenue Recognition at the time of collection

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  1. Revenue Recognition at the time of collection By: Jenna C., Alexa, Julia S., Melissa and Kristie

  2. Collection of Cash • After goods or services are rendered, revenue is always recognized before or at the same time as cash payment. • There is flexibility in when cash is collected based on each situation.

  3. Introduction to Collectability of Cash • Scenario 1 • Cash Sales • Cash is paid immediately for the good or service that is rendered immediately • Revenue can be recognized immediately

  4. Scenario 2: • Instalment Method • This method is used when a company recognizes that it has generated a large sum of revenue but cannot immediately collect the full amount. • Instead, they agree to divide the payment into smaller sums so that the customer can pay the full amount over a longer period of time. • The total revenue is recognized at the time of the sale but revenue is not yet received until the end of the period of time. • Each payment is divided into 3 parts: Interest Revenue, Principal, and Gross Profit.

  5. Calculation of Installment Method • To calculate Profit Percentage: (Sale Price - COGS)/ Sale Price x 100% • To calculate the Gross Profit: (Cash Received per payment - Interest) x Profit Percent

  6. Scenario 3: • Distributor Sales • In the case that revenue cannot be accounted for until products are sold, revenue recognition must be delayed.

  7. Video Example • http://www.youtube.com/watch?v=WsD2Xvgitc8

  8. Video Summary • The company sells bonds to the people who were placed in jail so that they would released. Due to a glitch in the system, the government was not demanding payment and so the government was having collectability issues.

  9. Activity: Part 1 • Instructions: What is the best option to collect revenue for the following scenarios and why? (Cash sales, instalment method or distributor sales) 1) At Francesco’s Pizza, customers call in their order, which is delivered to their house within 45 minutes. 2) A customer decides to purchase a refrigerator for her new home at Karen’s Kitchen Store; she is unable to pay the full amount right away. 3) Buying a song on iTunes. 4) Purchasing a pair of boots form Aldo’s.

  10. Activity: Part 2 • Calculate the Profit Percentage and Gross Profit for the following scenario: • Sally decides to purchase a brand new Mercedes. The total price she must pay is $60, 000. She agrees to divide the payment up into 12 months. Mercedes Benz had to pay $40,000 for the car to be manufactured. The interest of the car was $20,000.

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