chapter 6: reporting and interpreting sales revenue...

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Chapter 6: Reporting and Interpreting Sales Revenue, Receivables and Cash

A. Recognition of Revenue for Merchandising Companies

FOB Shipping Point: title switch at shipping point

Once you get it to a point of shipment, the responsibility is of the buyer (i.e. sellers title is passed onto you after UPS aka buyers responsibility)

FOB Destination: title switch at destination

Seller owns merchandise until it gets to buyers location/destination (sellers responsibility for shipping charges)

B. Accounting for Sales Revenue

Example: On May 4, Sally Distribution sold answering machines to Harry Electronics onaccount for $2,200, using credit term 2/10, n/30. Sally Distribution also sold answering machinesto individual customers for $1,600 on credit card. The answering machines sold cost SallyDistribution $2,400. Record sales revenue and cost of goods sold for Sally Discounter.

Sales discount: 2/10, net30 (if customer makes payment within 10 days, customer will get 2% off of what they owe)

Initial sale:A/R 2200

Sales Revenue 2200

Credit card sale:A/R credit card/ cash 1600

Sales Revenue 1600***Assume Perpetual inventory system– every time they make a sale, COGS increases and inventory decreasesCost of goods sold 2400

Inventory 2400

Recognize sales revenue

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Recognize COGS

The credit card companies charge a fee for the service they provide. Sally Distribution was charged an average of 3% fee for its credit card sales. Record the credit card discount for Sally Distribution.

Credit Card Company will only pay Sally 97% of what was owed:Cash 1552Credit card Discount 48

A/R credit card 1600

**Credit card discount account is a contra-revenue account (decreases revenues therefore DR balance)

Harry Electronics returned some unsatisfactory answering machines to Sally Distribution onMay 8. These machines were sold to Harry for $200. The cost of these defective machines toSally is $140.

Sales, returns, and allowance – minor damage to item so item is slightly reduced (allowance i.e. $20 off) or customer returns item (returns) contra-revenue account (DR balance)Sales Returns and Allowances 200

A/R 200

Inventory 140Cost of Goods Sold 140

Harry Electronics paid Sally Distribution the balance due on May 12. Record the sales discountfor Sally Distribution.

Sales discount paid within 10 days (2% off); always take total amount for A/R:Cash 1960Sales Discount 40

A/R 2000

C. Reporting Net Sales and Gross Profit Percentage

1. Net Sales = Sales Revenue – Credit Card Discounts - Sales Returns and Allowances - Sales Discounts

Calculate Sally Distribution’s Net Sales in May:

Net Sales = 3800 – 48 – 200 – 40 = 3512

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2. Gross Profit Percentage=Gross Profit ÷ Net SalesTells you what % of each sales dollar can go toward paying for other expenses (or is profit)

Calculate Sally Distribution’s Gross Profit Percentage in May:

GP = Net Sales – COGS GP = 3512 – (2400 + 140) = 1252

GP % = 1252/3512 = 35.6%

**Must compare to industry or other company

Exercise: Calculate the gross profit percentage for Slate Co. for the year ended March 31,2012

Sales of merchandise for cash 220000Sales of merchandise on credit 32000Cost of Goods Sold 147000Selling expense 40200Administrative expense 19000Sales returns and allowances 7000

GP =

D. Receivables and Accounting for Bad Debts

1. Receivables: Amounts due from individuals and companies;- Expected to be collected in cash.- Types of receivables: accounts receivable, notes receivable, and other receivables (e.g. interest receivable).

2. Accounting for Bad Debts -A credit loss will be incurred when an accounts receivable becomes uncollectible. - Bad debt expense (uncollectible accounts expense): an operating expense that reflects

the cost of uncollectible receivables. - GAAP requires the allowance method to measure bad debt expense

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Bad Debt Expense (IS)Allowance for Doubtful Accounts (BS)

Allowance MethodAccounts Receivalbe Less: Allowance for Doubtful AccountsNet Realizable Value Accounts Receivable

Step 1: Estimate bad debt expense at the end of each accounting period

Example: At the end of the March, Jerry Co. estimated that of its credit sales of $65,000in the quarter, $1300 may become uncollectible.

ESTIMATION IS ALWAYS GOING TO BE THIS ENTRY:Bad debt expense 1300

Allowance for doubtful accounts (AFDA) 1300

*** AFDA is a contra-assetQ1: What effect did recording bad debt expense have on net income and total asset?

Estimation of bad debt decreases NI (expense increases)

Step 2: Write off specific accounts determined to be uncollectible during the period

In April, Jerry Co. determined that its credit sales to customer B in February, amounts$580, is uncollectible.

WHEN YOU HAVE A WRITE-OFF:AFDA 580

Accounts Receivable 580

Q2: What effect did the write-off have on the amount of net income and total assets?

***A write-off will have NO impact***

A/R = 5580 5000AFDA= 1200 620Net A/R= 4380 4380

Estimating Bad Debts:

a) Percentage of credit sales

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b) Aging of accounts receivable

Example:

a) Percentage of sales:

In March 2012, Richard Wholesale Company expected bad debt losses of 1% of creditsales and its credit sales were $65,000

Calculate Bad debt expense for March 2012:

65000*0.01 = 650

Adjusting entry at the end of March 2012:

March 31 Bad debt expense 650AFDA 650

Assuming the beginning balance in Allowance for Doubtful account was $350 beforeadjustment, show the ending balance in Allowance for Doubtful account after theadjusting entry.

Ending balance of AFDA = 350 + 650 = 1000 (credit balance) therefore A/R will now be brought down by 1000 in total.

b) Aging of accounts receivable:The older an A/R is, the more likely it is for you not to collect it (the greater the ‘percentage uncollectible’)

In March 2012, the aging schedule of Richard Wholesale Company is as follows

Aged Accounts Receivable Estimated Percentage Uncollectible Estimated Amounts UncollectibleNot Yet Due: 25000 x 2% = 500Up to 90 days past due: 6000 x 8% = 480Over 90 days past due: 100 x 25% = 25Total estimated uncollectible amount 1005

$1005 is the final ending balance we would like to have in the Allowance for Doubtful

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AccountsTotal A/R = 31,100 (25000+6000+100) – 1005 (ending balance you want in AFDA)

Assuming the beginning balance in Allowance for Doubtful account was $350 beforeadjustment, calculate Bad Debt Expense for March 2012:Adjusting Entry at the end of March 2012:

Exercise: Given the following information, determine the bad debt expense and ending balancein the Allowance for Doubtful Accounts under both the percent of credit sales method and agingof accounts receivable method. The percent of credit sales estimated to be uncollectible is ½%.The beginning balance in allowance for doubtful accounts was $10,000 and the company wrote off $6,000 of accounts receivable during the period.

Credit Sales Not yet due1-30 days past due

31-60 dayspast due

Over 60 days past due Total

1,500,000 300,000 28,000 25,000 10,000Estimated

uncollectible 2% 5% 10% 15%Total $6,000 $1,400 $2,500 $1,500 $11,400

D. Ratio Analysis (Financial analysis on receivables):

Liquidity Analyses:

Receivables Turnover Ratio=Net Sales ÷ Average Net Accounts Receivable

Average Collection Period= 365 ÷ Receivables Turnover Ratio

Heinz2012 2011

Net Sales 9,430,422 9,407,949Net accounts receivable 1,383,550 1,237,804

Class exercise: Compute receivables turnover ratio and average collection period forHeinz 2012

E. Cash Controls and Bank Reconciliation

1. Cash and Cash Equivalent:

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2. Internal Controls of Cash

• Segregation of Duties

• Use of a banko minimizes the amount of cash that must be kept on hand (petty cash fund);o provides a double record of all cash transactions (one by the business; one by thebank).

3. Reconciling the Bank Statement with the Cash Account:

Company balance and bank balance usually differ because of time lags, bank charges,interest, or errors.

For example:

a. Deposits in transit : deposits recorded by the depositor that have not been recorded By the bank. (due to time lag)

b. Outstanding checks: checks issued and recorded by the company that have not been paid by the bank. (due to time lag)

c. NSF checks : a check that is not paid by the bank because of insufficient funds in the check issuer’s bank account.

d. Interes t: the interest paid by the bank.

e. Bank Charges : Fees charged to you by the bank for maintaining the bank account or collecting notes for you, etc.

f. Error:

Reconciliation procedures:

1) The reconciliation should be prepared by an employee who has no other Responsibilities pertaining to cash

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2) Matching cash balance per bank with cash balance per book (bank reconciliation)

•Steps in getting the correct cash balance per bank

•Steps in getting the correct cash balance per books3) Journal entries after the bank reconciliation:

--Each reconciling item to the company’s book balance should be journalized and posted in order to show the correct balance in the company’s Cash account

--Journal entries should be made for bank service charge, for interest, for NSF checks, and for correcting bookkeeping errors.

Example:Richard Wholesale Company received the bank statement with the closing date March 31. Thecash balance on the bank statement was $32,500. On March 31, the cash balance in RichardWholesale’s book was $ 35,910. Comparing the bank statement with the cash account, thecompany identified the following events:

1. On March 19, Richard Wholesale issued Check No. 125 to Megan Co. for $2,000.Megan Co. had not deposited the check by March 30.

2. The bank statement included $50 for financial service charges.3. The bank statement included $125 interest earned by Richard Wholesale for the period.4. On March 27, the company recorded cash sales for $4,000. The deposit was received by the bank on April 5.5. The bank statement showed $1,000 for an NSF check written by ABG Ltd, a customer.6. On March 16, the company received $1,283 from a customer and deposited it in the

bank. The cash receipts journal entry was incorrectly made for $1,238. The bank did not make any error.

7. The bank incorrectly charged $530 to Richard Wholesale during the period.

Bank reconciliation

From balance per bank to adjusted cash balance

From balance per books to adjusted cash balance

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Journal entries by Richard Wholesale:

Chapter 6 Problems

Jameson Company has the following accounts at December 31, 2012.

Dr. Cr.

Net sales 30,000,000Accounts receivable 8,000,000Allowance for doubtful accounts 14,500

a) Make the entry at December 31, 2012 to estimate bad debts, assuming that the company has done an aging of receivables that indicates that about $160,000 worth of receivables are probably uncollectible.

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b) In May 2012, Jameson is notified that Lindsey Corporation is in bankruptcy and will not be able to pay a debt of $140,000. Record this write‐off.

c) What effect did the write‐off in (b) have on the amount of total assets? (Circle answer)

Increased assets Decreased assets Had no effect on assets

d) If Jameson Company used the percentage of sales method instead of the aging of receivables method to estimate bad debts, what would have been your bad debts expense in entry a) if they estimated that half of 1% of sales would eventually be uncollectible?

Chapter 6 Exercises

Merchandise Sales: Credit Card, Sales Returns, and Sales Discounts

The following transactions were selected from the records of All You Need Supplies:

February 10 Sold merchandise to Able Company, who charged the $1,000 purchase on its Visa credit card. Visa charges a 2% credit card fee.

13 Sold merchandise to Baker Enterprises at an invoice price of $5,000, terms 3/10, n/30.

15 Sold merchandise to Charlie Corporation at an invoice price

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of $3,000, terms 3/10/, n/30.

17 Charlie Corporation returned items purchased on February 15 with an invoice price of $1,000 due to

product defect.

20 Collected payment from Baker Enterprises from the February 13 sale.

28 Collected payment from Charlie Corporation from theFebruary 17 sale.

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Allowance Method of Accounting for Bad Debts: Income Statement Approach

During 2012, Credit, Inc., recorded total sales of $2,500,000, $250,000 of which were “over-the-counter” cash sales. Based on experience, the company estimates that 0.75% of credit sales may prove to be uncollectible. The Allowance for Doubtful Accounts reflects a $15,000 unadjusted normal balance.

REQUIRED: (a) Record the adjusting entry to estimate bad debts.

(b) Give the balance sheet presentation after theadjustment.

(c) Assume a customer who owed $200 has provento be uncollectible. Write off the account.

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Allowance Method of Accounting for Bad Debts: Balance Sheet Approach

AFDA Company provides the following aging analysis of its accountsreceivable:

Total Bad Debt ExperienceCurrent $20,000 2%31 – 60 days past due 8,000 10%61 – 90 days past due 3,000 30%Over 90 days past due 1,000 60%

The Allowance for Doubtful Accounts reflects an unadjusted normalbalance of $2,000.

REQUIRED: (a ) Record the adjusting entry to estimate bad debts.

(b) Assume that the Allowance for Doubtful Accountshas an unadjusted debit balance of $500. Recordthe adjusting entry to estimate bad debts.

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Activity Indicators: Accounts Receivable Turnover and Days’ Sales in Accounts Receivable

UCC Company provides the following information for its two (2) most recentyears:

2012 2011Accounts receivable $3,200,000 $2,800,000Less: Allowance for

doubtful accounts (120,000 ) (100,000 ) Net realizable value $3,080,000 $2,700,000

======== ========

Net credit sales $25,000,000=========

REQUIRED: Determine the:

(a) Accounts receivable turnover

(b) Days’ sales in accounts receivable

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Bank Reconciliation

The January 31, 2012, bank statement for FDIC, Inc., and the January ledger accounts for cash are given below:

BANK STATEMENT

Checks and Deposits and Other Debits Other Credits Balance

Balance, 1/1/12 $ 6,300Deposits clearing $27,000 33,300Checks clearing $28,500 4,800NSF check 250 4,550Service charges 50 4,500Balance, 1/31/12 4,500

=====

Cash in Bank |

January 1 Balance 6,300 | January Checks written 28,800January Deposits 28,000 |

|January 31 Balance 5,500 |

===== |

REQUIRED: (a) Prepare a bank reconciliation in good form.

(b) Record any necessary general entries.

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HANDOUT 6 – 1

ACCOUNTS RECEIVABLE JOURNAL ENTRIES

Prepare journal entries to record the following transactions:(1) On December 15, 2012, the company recorded $150,000 sales on credit.

Dec. 15

2012

Ensure the equation still balances and debits = creditsAssets = Liabilities + Stockholders’ Equity

(2) On December 31, 2012, the company estimated bad debt expenses of $15,000.

Dec. 31

2012


(3) On January 12, 2012, collect $100,000 worth of accounts receivable.

Jan. 12

2012


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HANDOUT 6 – 1, CONTINUED (4) After many collection attempts, the Company determined on June 15, 2012 that it would not collect $10,000 in accounts receivables from Pendant Publishing. It decided to write-off this account.

Jun. 15

2012


(5) On July 16, Pendant Publishing called to say that they have had financial problems but can afford to pay $7,000 to settle their $10,000 debt in full. Vandolay Industries agreed to these terms, and reversed $7,000 of the prior write-off. It received a $7,000 check from Pendant the next day.

Jul. 16

2012

Jul. 16

2012


Post the above entries to the following T-accounts:+ Accounts Receivable (A) – - Allowance for Doubtful Accounts (xA) +

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HANDOUT 6 – 2

ESTIMATION AND RECORDING OF UNCOLLECTIBLE ACCOUNTS – PERCENTAGE OF CREDIT SALES RECEIVABLE METHOD

Part 1 – During 2012, Vandolay reported $300,000 in sales. The company’s allowance for doubtful accounts has an unadjusted credit balance of $12,000 at December 31, 2012. Based on prior experience, management estimates that 2.5% of sales will result in bad debts. Prepare the required adjusting journal entry.

Dec. 31

2012

Ensure the equation still balances and debits = credits

Assets = Liabilities + Stockholders’ Equity

+ Bad Debt Expense (E) – - Allowance for Doubtful Accounts (xA) +

Part 2 – Assume instead that the company’s allowance for doubtful accounts has an unadjusted debit balance of $400. Prepare the required adjusting journal entry.

Dec. 31

2012



+ Bad Debt Expense (E) – - Allowance for Doubtful Accounts (xA) +

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HANDOUT 6 – 3

ESTIMATION AND RECORDING OF UNCOLLECTIBLE ACCOUNTS – AGING OF ACCOUNTS RECEIVABLE METHOD

Part 1 – During 2012, Vandolay reported $300,000 in sales. The company’s allowance for doubtful accounts has an unadjusted credit balance of $1,200 at December 31, 2012. Vandolay Industries accountants prepared the following Aging of Accounts Receivable:

Customer TotalNumber of days unpaid

0-30 30-60 60-90 Over 90

Alpha Sales $ 700 $ 700

Gamma Manufacturing Co.

1,900 $ 1,900

Delta Shipping Corp. 2,200 $ 2,200

Epsilon Industries 6,000 $ 6,000

Theta Manufacturing 1,800 1,800Zeta Industries 600 600Other customers 136,800 88,100 26,900 9,800 12,000Totals $150,00

0$90,00

0$30,00

0$12,00

0$18,00

0

Vandolay accountants believe that receivables 0-30 days old have a 2% chance of noncollection. Receivables 30-60 days old have a 4% chance of noncollection. Receivables 60-90 days old have an 8% chance of noncollection. Receivables over 90 days old have a 20% chance of noncollection. The company’s allowance for doubtful accounts has an unadjusted credit balance of $12,000. Prepare the required adjusting journal entry.

Dec. 31

2012


+ Bad Debt Expense (E) – – Allowance for Doubtful Accounts (xA) +

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HANDOUT 6 – 3, CONTINUED

Part 2 – Assume instead that the company’s allowance for doubtful accounts has an unadjusted debit balance of $400. Prepare the required adjusting journal entry.

Dec. 31

2012


+ Bad Debt Expense (E) – – Allowance for Doubtful Accounts (xA) +

HANDOUT 6 – 4

BANK RECONCILIATION

Information from the records and bank statement and of Matrix, Inc. as of July 31, 2012 is set forth below

Cash balance per bank, July 31, 2012 $9,610

Cash balance per general ledger, July 31, 2012 7,430Outstanding checks at July 31, 2012 2,417Check mailed to the bank for deposit that had not reached the bank by July 31,

2012 500NSF check (from a customer for a payment on account) returned by bank 281July interest earned per bank statement 30Check no. 781 for supplies expense cleared the bank for $240, but was

erroneously recorded in the books at $268.Deposit by Acme Company erroneously credited by the bank to our account 486

Part A

Prepare the bank reconciliation for Matrix, Inc.

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HANDOUT 6 – 4, continued

Part BPrepare any journal entries that should be made as a result of the bank reconciliation.

Date Accounts Debit Credit

HANDOUT 6 – 5

BANK RECONCILIATIONPrepare the bank reconciliation for Donna’s Day Care using the following information:

Cash balance per bank, June 30, 2012 $5,586

Cash balance per general ledger, June 30, 2012 5,055Outstanding checks, June 30, 2012 1,816Deposit in transit, June30, 2012 750NSF check (from a customer for a payment on account) returned by bank 450June interest earned per bank statement 15Check no. 800 in payment of accounts payable cleared the bank for $1,100, but

was erroneously recorded in the books at $$800.Deposit in amount of $6,000, recorded properly on books, erroneously credited

on bank statement as $5,800

Part A

Prepare the bank reconciliation for Donna’s Day Care.

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HANDOUT 6 – 5, continued

Part BPrepare any journal entries that should be made as a result of the bank reconciliation.

Date Accounts Debit Credit

HANDOUT 6 – 6

SALES JOURNAL ENTRIES

On March 3, Gooddeal.com sold merchandise for $2,500, terms 2/10 n/30. Prepare the journal entry.Debit and credit the accounts affected

Mar. 3


The customer paid for the merchandise on March 6, taking advantage of the permitted discount. Prepare the journal entry.Debit and credit the accounts affected

Mar. 6


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On March 8, the customer returned $1,250 (or one-half) of the merchandise that was purchased back on March 3. Prepare the journal entry.Debit and credit the accounts affected

Mar. 8



chapter 6: reporting and interpreting sales revenue...

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