Selling a Productor a ServiceSelling a Productor a Service

C H A P T E R 7

Learning Objective 1

Understand the three basic types of business activities: operating, investing, and financing.

Discuss the Major Activities of a Business

Operating Activities:

Discuss the Major Activities of a Business

Investing Activities:

Financing Activities::

Discuss the Major Activities of a Business

Review the Three Major Activities of a Business

Operating Activities

Financing Activities Investing Activities

Financial Statement Summary and Review

Learning Objective 2

Use the two revenue recognition criteria to decide when the revenue from a sale or service should be recorded in the accounting records.

Revenue Recognition

When: And:

Discuss Recognition Concerns

As a practical matter, how do most companies handle recognition?

record sales when goods are shipped to customers.

recognize credit sales as revenues before cash is collected.

recognize revenues from services when the service is performed, not necessarily when cash is received.

On January 1, Formal Apparel sold 20 top hats for cash and another 25 for credit. Each hat sold for $200. How should the $9,000 of revenue be recorded?

Revenue Recognition

Credit Sale and CollectionOn January 10, Mountain Mining sold Edison Excavation $2,000 of equipment on account. Mountain Mining received payment on February 1. What entries are made?

Learning Objective 3

Properly account for the collection of cash and describe the business controls necessary to safeguard cash.

Discuss the Complications withRevenue Recognition

Sales Discounts

Sales Returns and Allowances

Uncollectible Accounts

2/10, n/30

1/10, n/30

2/10, EOM

1/15, EOM

What Do These Sales Discount Terms Mean?

Credit Sale and CollectionTidy Paint Supplies sold $1,000 of equipment on account on January 3. The terms of the sales agreement are 2/10, n/30. What are the collection entries if paid on January 10 or on February 15?

What Are Contra-Revenue Accounts?

How Are Sales Returns and Allowances Reported?

Example: Sales Return

On January 10, Handy Man Hardware sold $2,500 of equipment during its annual sale. One week later, $250 of equipment was returned. What are the entries?

Review the Control of Cash.

Learning Objective 4

Record the losses resulting from credit customers who do not pay their bills.

What Are Receivables?

On January 10, Carson Cameras sold $1,000 of equipment on account. The terms of the agreement are 2/10, n/30. Payment was received on January 30. What are the entries?

Example: Accounts Receivable

Discuss Uncollectible Accounts.

Review The Direct Write-Off Method

Discuss The Allowance Method

Reversing Written-off Receivables

What are the entries if the credit customer eventually pays?

What are the three methods?

Estimating Uncollectible Accounts Receivable

Explain the Percentage of Credit Sales Method

Explain the Percentage of Total Receivables Method

AS A PERCENTAGE OF CREDIT SALES

Amount of uncollectibles = a straight percentage of the current year’s credit sales.

Based on experience of prior years, modified for changes expected in current year.

Any existing balance in Allowance for Bad Debts is not considered in the adjusting entry to record bad debt expense.

AS A PERCENTAGE OF TOTAL RECEIVABLES

Amount of uncollectibles = a percentage of total receivables balance at period’s end.

Focus is on estimating total bad debts existing at period’s end.

The ending balance in Allowance for Bad Debts is the amount of total receivables estimated to be uncollectible.

Estimating Uncollectible Accounts Receivable

AS A PERCENTAGE OF CREDIT SALES

AS A PERCENTAGE OF TOTAL RECEIVABLES

Estimating Uncollectible Accounts Receivable

In practice, a company should consider both

techniques to ensure that each yields roughly consistent results.

350 Bal.

End. Bal. 2,701 3,051 End. Bal.

Bad DebtExpense

Allowance for Bad Debts

Uncollectible Accounts AllowanceNorm’s Tools had credit sales of $100,000. The current accounts receivable balance is $30,510. The allowance for bad debts balance is $350. Historically, 10 percent of the accounts receivable ending balance is not collected. What is the adjusting entry?

Review Aging Accounts Receivable

Percentage Estimated to be

Age Balance Uncollectible AmountCurrent. . . . . . . . . . $10,000 1.5% $ 1501-30 days. . . . . . . . 4,000 4.0 16031-90 days. . . . . . . 2,100 20.0 420Over 90 days. . . . . 1,000 40.0 400

$17,100 $1,130

Uncollectible Accounts Expense

Aging Receivables Worksheet

Copy That had credit sales during the year of $200,000. Using the aging method and the data on the aging receivables worksheet, determine the journal entry needed. The beginning balance for Allowance for Bad Debts is $150.

150 Bal.

End. Bal. 980 1,130 End. Bal.

Bad DebtExpense

Allowance for Bad Debts

Uncollectible Accounts ExpenseCopy That had credit sales during the year of $200,000. Using the aging method and the data on the aging receivables worksheet, determine the journal entry needed. The beginning balance for Allowance for Bad Debts is $150.

Learning Objective 5

Evaluate a company’s management of its receivables by computing and analyzing appropriate financial ratios. %%

Comment on Assessing Managementof Receivables

Comment on Assessing Management

of Receivables

Management of Receivables

Accounts Receivable Turnover:

Average Collection Period:

Adjust It Square had net credit sales of $150,000 during 2001. The accounts receivables increased $5,000 to $40,000 during the same time. Calculate the accounts receivable turnover ratio and the average collection period.

Learning Objective 6

Match revenues and expenses by estimating and recording future warranty and service costs associated with a sale.

Discuss Customer Service Costs

Comment on Warranty Costs

Expanded MaterialLearning Objective 7

Reconcile a checking account.

2000

Bank Statement

The Big BankBank StatementJanuary 30, 2001

Cash Balance, January 1, 2001+ Deposits– Checks processedCash Balance, January 30, 2001

2000

What Causes Differences Between the Bank Statement and the Cash

Account?

Define and Explain the Bank Reconciliation

Bank Reconciliation

Bal per bank stmt $14,422Additions to Bank BalDeposit in Transit 3,100 Total $17,522

Deductions from bankBalanceOutstanding Checks #631 $326 #631 426 #634 185 (937)Adj. Bank Bal $16,585

Bal per Books $13,937Additions to book balDirect deposit $3,200Interest 60 3,260 Total $17,197

Deductions from book balService charge $ 7Bank transfer 425Error recording Ck#630(Jones wages) 180 (612)Adj. Book Bal $16,585

This Completes Chapter 7