6-1 PowerPoint Authors: Susan Coomer Galbreath, Ph.D., CPA Charles W. Caldwell, D.B.A., CMA Jon A....

40
6-1 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 Reporting and Interpreting Sales Revenue, Receivables, and Cash Chapter 06 Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin
  • date post

    19-Dec-2015
  • Category

    Documents

  • view

    224
  • download

    2

Transcript of 6-1 PowerPoint Authors: Susan Coomer Galbreath, Ph.D., CPA Charles W. Caldwell, D.B.A., CMA Jon A....

6-1

PowerPoint Authors:Susan Coomer Galbreath, Ph.D., CPACharles W. Caldwell, D.B.A., CMAJon A. Booker, Ph.D., CPA, CIACynthia J. Rooney, Ph.D., CPA

Reporting and Interpreting Sales Revenue, Receivables, and Cash

Chapter 06

Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

6-2

Accounting for Sales RevenueThe The revenue principle revenue principle requires thatrequires thatrevenues be recorded when earned.revenues be recorded when earned.

Goods or services have been delivered.

Goods or services have been delivered.

Collection isreasonably assured.

Collection isreasonably assured.

Price is fixed or determinable.

Price is fixed or determinable.

There is persuasive evidence of a customer payment arrangement

There is persuasive evidence of a customer payment arrangement

6-3

Credit Card Sales to ConsumersCompanies accept credit cards for several reasons:

1. To increase sales.

2. To avoid providing credit directly to customers.

3. To avoid losses due to bad checks.

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

5. To receive payment quicker.

Companies accept credit cards for several reasons:

1. To increase sales.

2. To avoid providing credit directly to customers.

3. To avoid losses due to bad checks.

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

5. To receive payment quicker.

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

company a fee for the service it provides.

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

company a fee for the service it provides.

6-4

2/10, n/302/10, n/30

Sales Discounts to Businesses

When customers purchase on open account, they may be offered a sales discount to encourage early payment.

Read as: “Two ten, net thirty”

6-5

To Take or Not Take the Discount,That is the Question

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.

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.

$2$98

= 2.04%Interest Rate for 20 Days =

Interest Rate for 20 Days =Amount SavedAmount Paid

6-6

Sales Returns and Allowances

Damaged merchandise.

Returned merchandise.

These situations are recorded in a separate account called Sales Returns and Allowances.

6-7

Reporting Net Sales

Companies record credit card discounts,sales discounts, and sales returns and allowances

separately to allow managementto monitor these transactions.

Companies record credit card discounts,sales discounts, and sales returns and allowances

separately to allow managementto monitor these transactions.

6-8

Gross Profit Percentage

In 2008, Deckers reported gross profit of$305,318,000 on sales of $689,445,000.In 2008, Deckers reported gross profit of$305,318,000 on sales of $689,445,000.

Gross Profit

Percentage

Gross Profit

Net Sales=

Other things equal, higher gross profit results in higher net income. Other things equal, higher gross profit results in higher net income.

Deckers Skechers U.S.A. Timberland44.3% 41.4% 45.5%

2008 Gross Profit Comparisons

Gross Profit

Percentage

$305,318,000

$689,445,000= = 44.3%

6-9

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.

Nontrade receivables are amounts owed to the

business for other than business transactions.

Notes receivable are written promises from

another party to pay with specified terms.

Balance Sheet ClassificationsCurrent (short term)

Noncurrent (long term)

6-10

Accounting for Bad Debts Bad debts result from credit customers who will not pay the

amount they owe, regardless of collection efforts. Bad debts result from credit customers who will not pay the

amount they owe, regardless of collection efforts.

Matching Principle

Bad Debt Expense

Sales Revenue

Record in same accounting period.

Most businesses record an estimate of the bad debt expense with an adjusting entry at the end of the accounting period.

Most businesses record an estimate of the bad debt expense with an adjusting entry at the end of the accounting period.

6-11

Recording Bad Debt Expense Estimates

Deckers estimated bad debt expense for 2008 to be $27,567,000. Prepare the adjusting entry.

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

Contra asset account

Date Description Debit Credit

Dec. 31 Bad Debt Expense (+E, -SE) 27,567,000

Allowance for Doubtful Accounts (+XA, -A) 27,567,000

GENERAL JOURNAL

6-12

Allowance for Doubtful Accounts

Accounts receivableLess: Allowance for doubtful accountsNet realizable value of accounts receivable

Accounts receivableLess: Allowance for doubtful accountsNet realizable value of accounts receivable

Amount the businessexpects to collect.

Balance Sheet Disclosure

6-13

Writing Off Specific Uncollectible Accounts

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.

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.

Deckers’ total write-offs for 2008 were $25,216,000.Prepare a summary journal entry for these write-offs.

Deckers’ total write-offs for 2008 were $25,216,000.Prepare a summary journal entry for these write-offs.

6-14

Writing Off Specific Uncollectible Accounts

Before Write-Off

After Write-Off

Accounts receivable 144,051,000$ 118,835,000$ Less: Allow. for doubtful accts. 35,922,000 10,706,000 Net realizable value 108,129,000$ 108,129,000$

The total write-offs of $25,216,000 did The total write-offs of $25,216,000 did not changenot change the net the net realizable value nor did it affect any income statement accounts.realizable value nor did it affect any income statement accounts.

Assume that before the write-off, Deckers’ Accounts Receivable balance was $144,051,000 and the Allowance for Doubtful

Accounts balance was $35,922,000. Let’s see what effect the total write-offs of $25,216,000 had on these accounts.

6-15

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 as

Bad Debt Expense.

Net credit sales% Bad debt loss rate

Bad Debt Expense

Net credit sales% Bad debt loss rate

Bad Debt Expense

Estimating Bad Debts ─ Percentage of Credit Sales Method

6-16

Estimating Bad Debts ─ Percentage of Credit Sales

In 2010, 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 2010?

In 2010, 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 2010?

$600,000 × .01 = $6,000

Prepare the adjusting entry.

Date Description Debit Credit

Dec. 31 Bad Debt Expense (+E,-SE) 6,000

Allowance for Doubtful Accounts (+XA,-A) 6,000

GENERAL JOURNAL

6-17

Estimating Bad Debts ─ Aging of Accounts Receivable

Focus is on determining the desired balance in the Allowance for Doubtful Accounts

on the balance sheet.

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 2010 might look like this . . .

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 2010 might look like this . . .

6-18

Aging ScheduleDays Past Due

CustomerNot Yet

Due 1-30 31-60 61-90 Over 90

Total A/R

BalanceAaron, R. 235$ 235$ Baxter, T. 1,200$ 300 1,500 Clark, J. 50$ 200$ 500$ 750

Zak, R. 325 325 Total 3,500$ 2,550$ 1,830$ 1,540$ 1,240$ 10,660$ % Uncollectible 0.01 0.04 0.10 0.25 0.40

Based on past experience, the business estimates the percentage of uncollectible accounts in each time category. These percentages

are then multiplied by the appropriate column totals.

6-19

Days Past Due

CustomerNot Yet

Due 1-30 31-60 61-90 Over 90

Total A/R

BalanceAaron, R. 235$ 235$ Baxter, T. 1,200$ 300 1,500 Clark, J. 50$ 200$ 500$ 750

Zak, R. 325 325 Total 3,500$ 2,550$ 1,830$ 1,540$ 1,240$ 10,660$ % Uncollectible 0.01 0.04 0.10 0.25 0.40 EstimatedUncoll. Amount 35$ 102$ 183$ 385$ 496$ 1,201$

Aging Schedule

Record the Dec. 31, 2010, adjusting entry assuming that the Allowance for Doubtful Accounts currently has a $50 credit

balance.

The column totals are then added to arrive at thetotal estimate of uncollectible accounts of $1,201.

6-20

After posting, the Allowance account

would look like this . . .

Date Description Debit Credit

Dec. 31 Bad Debt Expense (+E,-SE) 1,151

Allowance for Doubtful Accounts (+XA,-A) 1,151

GENERAL JOURNAL

1,201 Desired Balance- 50 Credit Balance

1,151$ Adjusting Entry

1,201 Desired Balance- 50 Credit Balance

1,151$ Adjusting Entry

Estimating Bad Debts ─ Aging of Accounts Receivable

6-21

Allowance for Doubtful Accounts (XA)

50 Balance at 12/31/2010before adj.

1,151 2010 adjustment1,201 Balance at

12/31/2010after adj.

Notice that the balance after adjustment is equal to the estimate of $1,201

based on the aging analysis performed

earlier.

Estimating Bad Debts ─ Aging of Accounts Receivable

6-22

Accounts Receivable% Estimated Uncollectible

Desired Balance in Allowance Account- Allowance Account Credit Balance

Amount of Journal Entry

Accounts Receivable% Estimated Uncollectible

Desired Balance in Allowance Account- Allowance Account Credit Balance

Amount of Journal Entry

Accounts Receivable% Estimated Uncollectible

Desired Balance in Allowance Account+ Allowance Account Debit Balance

Amount of Journal Entry

Accounts Receivable% Estimated Uncollectible

Desired Balance in Allowance Account+ Allowance Account Debit Balance

Amount of Journal Entry

Estimating Bad Debts ─ Aging of Accounts Receivable

6-23

Deckers reported 2008 net sales of $689,445,000.December 31, 2007, receivables were $72,209,000 and

December 31, 2008, receivables were $108,129,000.

This ratio measures how many times average receivables are recorded and collected for the year.

Receivables Turnover

Net Sales

Average Net Trade Receivables

Receivables

Turnover=

Deckers Skechers Timberland7.6 6.7 7.6

2008 Receivables Turnover Comparisons

$689,445,000

($72,209,000 + $108,129,000) ÷ 2

Receivables

Turnover= = 7.6

6-24

Deckers Receivables Turnover was 7.6.

This ratio indicates the average time ittakes a customer to pay its accounts.

Average Collection Period

365

Receivables Turnover

Average

Collection Period=

365

7.6

Average

Collection Period= = 48 days

6-25

Focus on Cash Flows

Sales Revenue

Cash Collected from

Customers

6-26

Cash and Cash Equivalents

Cash and Cash

Equivalents

ChecksMoney Orders

Bank DraftsCertificates of Deposit

T-Bills

6-27

Internal Control of Cash

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

Internal control refers to policies and procedures designed to:

Separationof Duties

Authorization

Recording

Custody

6-28

Daily Deposits

Purchase Approval

Prenumbered Checks

Payment Approval

Cash Controls

Check Signatures

Bank Reconciliations

Internal Control of Cash

6-29

Balance per Bank

+ Deposits in Transit

- Outstanding Checks

± Bank Errors

= Correct Balance

Balance per Book

+ Deposits by Bank (credit memos)

- Service Charge - NSF Checks

± Book Errors

= Correct Balance

Bank ReconciliationExplains the difference between cash reported on bank

statement and cash balance on company’s books and provides information for reconciling journal entries.

6-30

Balance per Bank

+ Deposits in Transit

- Outstanding Checks

± Bank Errors

= Correct Balance

Balance per Book

+ Deposits by Bank (credit memos)

- Service Charge - NSF Checks

± Book Errors

= Correct Balance

Bank Reconciliation

All reconciling items on the

book side require an adjusting

entry to the cash account.

Explains the difference between cash reported on bank statement and cash balance on company’s books and provides

information for reconciling journal entries.

6-31

Prepare a July 31 bank reconciliation statement and the resulting journal entries for the Simmons Company. The July 31 bank

statement indicated a cash balance of $9,610, while the cash ledger account on that date

shows a balance of $7,430.

Additional information necessary for the reconciliation is shown on the next page.

Prepare a July 31 bank reconciliation statement and the resulting journal entries for the Simmons Company. The July 31 bank

statement indicated a cash balance of $9,610, while the cash ledger account on that date

shows a balance of $7,430.

Additional information necessary for the reconciliation is shown on the next page.

Bank Reconciliation

6-32

Bank Reconciliation

• Outstanding checks totaled $2,417.• A $500 check mailed to the bank for deposit had not

reached the bank at the statement date.• The bank returned a customer’s NSF check for $225

received as payment of an account receivable.• The bank statement showed $30 interest earned on the

bank balance for the month of July.• Check 781 for supplies cleared the bank for $268 but was

erroneously recorded in our books as $240.• A $486 deposit by Acme Company was erroneously

credited to our account by the bank.

• Outstanding checks totaled $2,417.• A $500 check mailed to the bank for deposit had not

reached the bank at the statement date.• The bank returned a customer’s NSF check for $225

received as payment of an account receivable.• The bank statement showed $30 interest earned on the

bank balance for the month of July.• Check 781 for supplies cleared the bank for $268 but was

erroneously recorded in our books as $240.• A $486 deposit by Acme Company was erroneously

credited to our account by the bank.

6-33

Ending bank balance, July 31 9,610$ Additions: Deposit in transit 500 Deductions: Bank error 486$ Outstanding checks 2,417 2,903 Correct cash balance 7,207$

Ending book balance, July 31 7,430$ Additions: Interest 30 Deductions: Recording error 28$ NSF check 225 253 Correct cash balance 7,207$

Bank Reconciliation

6-34

Bank Reconciliation

Based on the bank reconciliation, these are the entries needed to adjust the Cash account.

6-35

On January 2, a Deckers factory store’s credit card sales were $3,000. The credit card company charges a 3%

service fee.

On January 2, a Deckers factory store’s credit card sales were $3,000. The credit card company charges a 3%

service fee.

Supplement A: Recording Discounts and Returns

Date Description Debit Credit

Jan. 2 Cash (+A) 2,910

Credit Card Discounts (+XR,-R,-SE) 90

Sales Revenue (+R,+SE) 3,000

$3,000 × 3% = $90 Credit Card Fee

GENERAL JOURNAL

Credit Card Discounts are reportedas a contra-revenue account.

6-36

On January 6, Deckers sold $1,000 of merchandise on credit with terms of 2/10, n/30.

Prepare the Deckers journal entry.

On January 6, Deckers sold $1,000 of merchandise on credit with terms of 2/10, n/30.

Prepare the Deckers journal entry.

Supplement A: Recording Discounts and Returns

6-37

On January 14, Deckers receives the appropriate payment from the customer for the January 6 sale.

Prepare the Deckers journal entry.

On January 14, Deckers receives the appropriate payment from the customer for the January 6 sale.

Prepare the Deckers journal entry.

$1,000 × 2% = $20 sales discount$1,000 - $20 = $980 cash receipt

Supplement A: Recording Discounts and Returns

6-38

If the customer remits the appropriate amounton January 20 instead of January 14, what

entry would Deckers make?

If the customer remits the appropriate amounton January 20 instead of January 14, what

entry would Deckers make?

Since the customer paid outside of the discount period, a sales discount is not granted.

Supplement A: Recording Discounts and Returns

6-39

On July 8, before paying, a customer returns $500 of sandals originally purchased on account from Deckers.

Prepare the Deckers journal entry.

On July 8, before paying, a customer returns $500 of sandals originally purchased on account from Deckers.

Prepare the Deckers journal entry.

Supplement A: Recording Discounts and Returns

6-40

End of Chapter 06