Reporting and Interpreting Sales Revenue, Receivables, and Cash

1. Reporting andInterpretingSales Revenue,Receivables, and Cash Chapter 6

2. Learning Objectives Apply the revenue principle to determine the accepted time to record sales revenue for typical retailers, wholesalers, manufacturers, and service companies. LO1

3. The revenue principlerequires thatrevenues be recorded when earned: Accounting for Sales Revenue Goods or services have been delivered. Amount of customer payments known. Collection isreasonably assured.

4. Learning Objectives Analyze the impact of credit card sales, sales discounts, and sales returns on the amounts reported as net sales. LO2

5. Companies record credit card discounts,sales discounts, and sales returns and allowances separately to allow managementto monitor these transactions. Reporting Net Sales

6. Companies accept credit cardsfor several reasons: To increase sales. To avoid providing credit directly to customers. To avoid losses due to bad checks. To avoid losses due to fraudulent credit card sales. To receive payment quicker. Credit Card Sales

7. Credit Card Sales When credit card sales are made, the company must pay the credit card company a fee for the service it provides.

8. Fontana Shoes Sales on Account When companies allow customers to purchase merchandise on an open account, the customer promises to pay the company in the future for the purchase.

9. When customers purchase on open account, they may be offered a sales discountto encourage early payment. Sales Discounts 2/10, n/30 Read as: “Two ten, net thirty”

10. DiscountPercentage # of Days in Discount Period Otherwise, the Full Amount Is Due Maximum Days in Credit Period Sales Discounts 2/10, n/30

11. Amount SavedAmount Paid Interest Rate for 20 Days = $2$98 Interest Rate for 20 Days = = 2.04% 365 Days 20 Days Annual Interest Rate = × 2.04% = 37.23% To Take or Not Take the Discount With discount terms of 2/10,n/30, a customersaves $2 on a $100 purchase by payingon the 10th day instead of the 30th day.

12. Sales Returns and Allowances Debited for damaged merchandise. Debited for returned merchandise. Contra revenue account.

13. Learning Objectives Analyze and interpret the grossprofit percentage. LO3

14. Gross ProfitPercentage Gross ProfitNet Sales = Gross Profit Percentage In 2003, Deckers reported gross profit of $51,345,000 on sales of $121,055,000. All other things equal, a higher gross profit results in higher net income.

15. Gross ProfitPercentage Gross ProfitNet Sales = Gross Profit Percentage Gross ProfitPercentage $51,345,000$121,055,000 = = 42.4% All other things equal, a higher gross profit results in higher net income.

16. Measuring and Reporting Receivables Accounts Receivable Trade receivables are amounts owed to the business for credit sales of goods, or services. Nontrade receivables are amounts owed to the business for other than business transactions.

17. Term Payee $1,200 January 5, 2006 Goleta, CA Sixty days after date I promise to pay to Principal Deckers Outdoor Corporation the order of One thousand two hundred --------------------------------- Dollars Interest Rate First Goleta National Bank Payable at Maker 12% Value received with interest atper annum Ivan Goodson 10242 March 6, 2007 No. Due Goodson Sporting Goods Due Date Measuring and Reporting Receivables – Notes Receivable

18. Learning Objectives Estimate, report, and evaluate the effects of uncollectible accounts receivable (bad debts) on financial statements. LO4

19. Bad debtsresult from credit customers who will not pay the business the amountthey owe, regardless of collection efforts. Accounting for Bad Debts

20. Accounting for Bad Debts Bad Debt Expense Record in same accounting period. Matching Principle Sales Revenue

21. Accounting for Bad Debts Most businesses record an estimate ofthe bad debt expenseby an adjustingentry at the end of the accounting period.

22. Recording Bad Debt Expense Estimates Deckers estimated bad debt expensefor 2003 to be $504,000. Prepare the adjusting entry.

23. Contra asset account Recording Bad Debt Expense Estimates Deckers estimated bad debt expensefor 2003 to be $504,000. Prepare the adjusting entry. Bad Debt Expenseis normally classified as a selling expense and is closed at year-end.

24. Amount the businessexpects to collect. Allowance for Doubtful Accounts Balance Sheet Disclosure

25. When it is clear that a specific customer’s account receivable will be uncollectible, the amount should be removed from the Accounts Receivable account and charged to the Allowance for Doubtful Accounts. Writing Off Uncollectible Accounts

26. Writing Off Uncollectible Accounts Deckers’ total write-offs for2003 were $876,000. Prepare a summary journalentry for these write-offs.

27. Writing Off Uncollectible Accounts Deckers’ total write-offs for2003 were $876,000. Prepare a summary journalentry for these write-offs.

28. Writing Off Uncollectible Accounts Assume that before the write-off, Deckers’ Accounts Receivable balance was $11,000,000 and the Allowance forDoubtful Accountsbalance was $1,000,000. Let’s see what effect the total write-offs of $876,000 had on these accounts.

29. Writing Off Uncollectible Accounts Notice that the total write-offs of $876,000 did not change the net realizable value nor did it affect any income statement accounts.

30. Percentage of credit sales or Aging of accounts receivable ???? Methods for Estimating Bad Debts

31. Percentage of Credit Sales Bad debt percentage is based on actual uncollectible accounts from prior years’credit sales. Focus is on determining the amount to record on the income statement asBad Debt Expense.

32. Percentage of Credit Sales

33. Percentage of Credit Sales In 2006, Kid’s Clothes had credit sales of $600,000. Past experience indicates that bad debts are one percent of sales. What is the estimate of bad debts expense for 2006? $600,000 × .01 = $6,000 Now, prepare the adjusting entry.

34. Percentage of Credit Sales

35. Now let’s discuss another method that is used to account for uncollectible accounts.

36. Aging of Accounts Receivable Focus is on determining the desired balance in theAllowance for Doubtful Accountson the balance sheet.

37. Each customer’s account is aged by breaking down the balance by showing the age (in number of days) of each part of the balance. An aging of accounts receivable for Kid’s Clothes in 2006 might look like this . . . Aging Schedule

38. Aging Schedule Based on past experience, the business estimates the percentage of uncollectible accounts in each time category.

39. Aging Schedule These percentages are then multiplied by the appropriate column totals.

40. Aging Schedule The column totals are then added to arrive at the total estimate of uncollectible accounts of $1,201.

41. Record the Dec. 31, 2006, adjusting entry assuming that the Allowance for Doubtful Accounts currently has a $50 credit balance. Aging of Accounts Receivable

42. Aging of Accounts Receivable After posting, the Allowance account would look like this . . .

43. Aging of Accounts Receivable Allowance for Doubtful Accounts Notice that the balance after adjustment is equal to the estimate of $1,201 based on the aging analysis performed earlier.

44. Aging of Accounts Receivable

45. Learning Objectives Analyze and interpret the accounts receivable turnover ratio and the effects of accounts receivable on cash flows. LO5

46. Receivables Turnover Net Sales Average Net Trade Receivables = Receivables Turnover Deckers reported 2003 net sales of $121,055,000.December 31, 2002, receivables were $18,745,000 andDecember 31, 2003, receivables were $20,851,000. This ratio measures how many times average receivables are recorded and collected for the year.

47. Receivables Turnover Net Sales Average Net Trade Receivables = Receivables Turnover $121,055,000 ($18,745,000 + $20,851,000) ÷ 2 = Receivables Turnover = 6.1 This ratio measures how many times average receivables are recorded and collected for the year.

48. Add Decrease in Accounts Receivable Cash Collected from Customers Subtract Increase in Accounts Receivable Focus on Cash Flows Sales Revenue

49. Learning Objectives Report, control, and safeguard cash. LO6

50. Cash and Cash Equivalents Cash and Cash Equivalents Checks Money Orders Certificates of Deposit Bank Drafts T-Bills