Reporting and Interpreting Sales Revenue, Receivables, and Cash

1
Chapter 6

• Reporting and Interpreting Sales
  Revenue,Receivables, and Cash

2
Accounting for Sales Revenue

• The revenue principle requires thatrevenues be
  recorded when earned

An exchange hastaken place.
The earnings processis nearly complete.
Collection isprobable.
3
Reporting Net Sales

• Companies record sales discounts,sales returns
  and allowances, and creditcard discounts
  separately to allowmanagement to monitor these
  transactions.

4
Sales Discounts to Businesses
2/10, n/30
Read as Two ten, net thirty

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

5
Sales Discounts to Businesses
2/10, n/30
6
To Take or Not Takethe 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.
7
Sales Returns and Allowances
Debited for damaged merchandise.
Debited for returned merchandise.
Contra revenue account.
8
Gross Profit Percentage
All other things equal, a higher gross profit
results in higher net income.
9
Measuring and Reporting Receivables Notes
Receivable
10
Accounting for Bad Debts
Bad Debt Expense
Record in same accounting period.
Matching Principle
Sales Revenue
11
Allowance for Doubtful Accounts
Balance Sheet Disclosure
12
Writing Off Uncollectible Accounts

• When it is clear that a specific customers
  account receivable will be uncollectible, the
  amount should be removed from the Accounts
  Receivable account and charged to the Allowance
  for Doubtful Accounts.

13
Percentage of Credit Sales Method
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.
14
Percentage of Credit Sales Method
15
Aging of Accounts Receivable Method
Focus is on determining the desired balance in
the Allowance for Doubtful Accounts on the
balance sheet.
16
Aging of Accounts Receivable Method
Accounts Receivable X Estimated
uncollectible Desired balance in allowance account
17
Receivable Turnover
This ratio measures how many times average
receivables are recorded and collected for the
year.
18
Focus on Cash Flows
Sales Revenue
19
Cash and Cash Equivalents
Checks
Money Orders
Bank Drafts
Certificates of Deposit
T-Bills
20
Internal Control of Cash
Internal control refers to policies and
procedures that are designed to
Cash is the asset most susceptible to theft and
fraud.
21
Internal Control of Cash
22
Internal Control of Cash
Bank Reconciliations
Daily Deposits
Purchase Approval
Payment Approval
Check Signatures
Prenumbered Checks
Positive pay accounts
23
Bank Reconciliation
Explains the difference between cash reported on
bank statement and cash balance on companys
books.
24
Bank Reconciliation
Balance per Bank
Balance per Book
Deposits by Bank (credit memos)
Deposits in Transit
- Outstanding Checks
- Service Charge - NSF Checks
Bank Errors
Book Errors
Adjusted Balance
Adjusted Balance
Require adjusting entries