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© McGraw-Hill Ryerson Limited, 2003 McGraw-Hill Ryerson Chapter 6 Reporting and Interpreting Sales Revenue, Receivables, and Cash.

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Presentation on theme: "© McGraw-Hill Ryerson Limited, 2003 McGraw-Hill Ryerson Chapter 6 Reporting and Interpreting Sales Revenue, Receivables, and Cash."— Presentation transcript:

1 © McGraw-Hill Ryerson Limited, 2003 McGraw-Hill Ryerson Chapter 6 Reporting and Interpreting Sales Revenue, Receivables, and Cash

2 © McGraw-Hill Ryerson Limited, 2003 McGraw-Hill Ryerson Accounting for Sales Revenue The revenue principle requires that revenues be recorded when earned: An exchange has taken place. Collection is probable. The earnings process is nearly complete.

3 © McGraw-Hill Ryerson Limited, 2003 McGraw-Hill Ryerson Reporting Net Sales Companies record sales discounts, sales returns and allowances, and credit card discounts separately to allow management to monitor these transactions.

4 © McGraw-Hill Ryerson Limited, 2003 McGraw-Hill Ryerson Credit Card Sales to Consumers Companies accept credit cards for several reasons: To increase sales. To avoid providing credit directly to customers. To avoid losses due to bad cheques. To receive payment quicker.

5 © McGraw-Hill Ryerson Limited, 2003 McGraw-Hill Ryerson When credit card sales are made, the company must pay the credit card company a fee for the service it provides. Credit Card Sales to Consumers

6 © McGraw-Hill Ryerson Limited, 2003 McGraw-Hill Ryerson Credit Card Sales to Consumers On January 2, a store had credit card sales of $3,000. The credit card company charges a 3% service fee. Prepare the journal entry to record these sales.

7 © McGraw-Hill Ryerson Limited, 2003 McGraw-Hill Ryerson Credit Card Sales to Consumers On January 2, a store had credit card sales of $3,000. The credit card company charges a 3% service fee. Prepare the journal entry to record these sales. Credit Card Discounts are reported as a contra-revenue account.

8 © McGraw-Hill Ryerson Limited, 2003 McGraw-Hill Ryerson Sales to Businesses 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 © McGraw-Hill Ryerson Limited, 2003 McGraw-Hill Ryerson 2/10, n/30 When customers purchase on open account, they may be offered a sales discount to encourage early payment. Read as: “Two ten, net thirty” Sales to Businesses on Account

10 © McGraw-Hill Ryerson Limited, 2003 McGraw-Hill Ryerson 2/10, n/30 Percentage of Discount Number of Days Discount Is Available Otherwise, the Full Amount Is Due Number of Days When the Full Amount Is Due Sales to Businesses on Account

11 © McGraw-Hill Ryerson Limited, 2003 McGraw-Hill Ryerson On January 6, Gildan sold $1,000 of merchandise on credit with terms of 2/10, n/30. Prepare the journal entry to record the sale. Sales to Businesses on Account

12 © McGraw-Hill Ryerson Limited, 2003 McGraw-Hill Ryerson On January 6, Gildan sold $1,000 of merchandise on credit with terms of 2/10, n/30. Prepare the journal entry to record the sale. Sales to Businesses on Account

13 © McGraw-Hill Ryerson Limited, 2003 McGraw-Hill Ryerson On January 14, Gildan receives the appropriate payment from the customer for the January 6 sale. Prepare the required journal entry. Sales to Businesses on Account

14 © McGraw-Hill Ryerson Limited, 2003 McGraw-Hill Ryerson $1,000 × 2% = $20 sales discount $1,000 - $20 = $980 cash receipt On January 14, Gildan receives the appropriate payment from the customer for the January 6 sale. Prepare the required journal entry. Sales to Businesses on Account Contra-revenue account

15 © McGraw-Hill Ryerson Limited, 2003 McGraw-Hill Ryerson If the customer remits the appropriate amount on January 20 instead of January 14, what entry would Gildan record? Sales to Businesses on Account

16 © McGraw-Hill Ryerson Limited, 2003 McGraw-Hill Ryerson Since the customer paid after the discount period, a sales discount is not granted. Sales to Businesses on Account If the customer remits the appropriate amount on January 20 instead of January 14, what entry would Gildan record?

17 © McGraw-Hill Ryerson Limited, 2003 McGraw-Hill Ryerson Sales Returns and Allowances Debited for damaged merchandise. Debited for returned merchandise. Contra revenue account.

18 © McGraw-Hill Ryerson Limited, 2003 McGraw-Hill Ryerson Sales Returns and Allowances On July 8, The T-Shirt Store returns $500 of shirts originally purchased on account from Gildan. Prepare the required journal entry.

19 © McGraw-Hill Ryerson Limited, 2003 McGraw-Hill Ryerson Sales Returns and Allowances On July 8, The T-Shirt Store returns $500 of shirts originally purchased on account from Gildan. Prepare the required journal entry.

20 © McGraw-Hill Ryerson Limited, 2003 McGraw-Hill Ryerson Gross Profit Percentage In 2000, Gildan reported gross profit of $131,017 on sales of $459,208. Gross Profit Percentage Gross Profit Net Sales = All other things equal, a higher gross profit results in higher net income.

21 © McGraw-Hill Ryerson Limited, 2003 McGraw-Hill Ryerson Gross Profit Percentage $131,017 $459,208 == 28.5% Gross Profit Percentage Gross Profit Net Sales = All other things equal, a higher gross profit results in higher net income.

22 © McGraw-Hill Ryerson Limited, 2003 McGraw-Hill Ryerson Measuring and Reporting Receivables Amounts owed by other companies or persons for cash, goods, or services. Open accounts owed to the business by trade customers. Accounts Receivable

23 © McGraw-Hill Ryerson Limited, 2003 McGraw-Hill Ryerson $1,200 Montreal, Quebec January 5, 2000 Sixty days after date I promise to pay to the order of First Canadian Bank One thousand two hundred ---------------------------------Dollars Payable at First City Bank Value received with interest at per annum No. Due Gildan Activewear 10242March 6, 2000 12% Pat Rogers Measuring and Reporting Receivables Due Date Maker Interest Rate Principal Term Payee

24 © McGraw-Hill Ryerson Limited, 2003 McGraw-Hill Ryerson Accounting for Bad Debts Bad debts result from credit customers who will not pay the business the amount they owe, regardless of collection efforts.

25 © McGraw-Hill Ryerson Limited, 2003 McGraw-Hill Ryerson Accounting for Bad Debts Matching Principle Bad Debt Expense Sales Revenue Record in same accounting period.

26 © McGraw-Hill Ryerson Limited, 2003 McGraw-Hill Ryerson Accounting for Bad Debts Most businesses record an estimate of the bad debt expense by an adjusting entry at the end of the accounting period.

27 © McGraw-Hill Ryerson Limited, 2003 McGraw-Hill Ryerson Recording Bad Debt Expense Estimates Assume Gildan estimated bad debt expense for 2000 to be $2,383,000. Prepare the adjusting entry.

28 © McGraw-Hill Ryerson Limited, 2003 McGraw-Hill Ryerson Recording Bad Debt Expense Estimates Bad Debt Expense is normally classified as a selling expense and is closed at year-end. Assume Gildan estimated bad debt expense for 2000 to be $2,383,000. Prepare the adjusting entry. Contra-asset account

29 © McGraw-Hill Ryerson Limited, 2003 McGraw-Hill Ryerson Allowance for Doubtful Accounts Amount the business expects to collect. Balance Sheet Disclosure

30 © McGraw-Hill Ryerson Limited, 2003 McGraw-Hill Ryerson Writing Off 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.

31 © McGraw-Hill Ryerson Limited, 2003 McGraw-Hill Ryerson Writing Off Uncollectible Accounts Assume on May 6, Gildan wrote off a specific account receivable with a balance of $2,500. Prepare the required journal entry.

32 © McGraw-Hill Ryerson Limited, 2003 McGraw-Hill Ryerson Writing Off Uncollectible Accounts Assume on May 6, Gildan wrote off a specific account receivable with a balance of $2,500. Prepare the required journal entry.

33 © McGraw-Hill Ryerson Limited, 2003 McGraw-Hill Ryerson Writing Off Uncollectible Accounts Assume that before the write-off entry, Gildan’s Accounts Receivable balance was $81,000,000 and the Allowance for Doubtful Accounts balance was $2,000,000. Let’s see what effect the write-off had on these accounts. Assume that before the write-off entry, Gildan’s Accounts Receivable balance was $81,000,000 and the Allowance for Doubtful Accounts balance was $2,000,000. Let’s see what effect the write-off had on these accounts.

34 © McGraw-Hill Ryerson Limited, 2003 McGraw-Hill Ryerson Writing Off Uncollectible Accounts Notice that the write-off did not change the net realizable value nor did it affect any income statement accounts.

35 © McGraw-Hill Ryerson Limited, 2003 McGraw-Hill Ryerson Methods for Estimating Bad Debts Percentage of credit sales or Aging of accounts receivable ????

36 © McGraw-Hill Ryerson Limited, 2003 McGraw-Hill Ryerson Percentage of Credit Sales Bad debt percentage is based on actual uncollectible accounts from prior years’ credit sales. The focus is on determining the amount to record on the income statement as Bad Debt Expense.

37 © McGraw-Hill Ryerson Limited, 2003 McGraw-Hill Ryerson Percentage of Credit Sales

38 © McGraw-Hill Ryerson Limited, 2003 McGraw-Hill Ryerson Percentage of Credit Sales In 2002, Kid’s Clothes had credit sales of $60,000. Past experience indicates that bad debts are one percent of sales. What is the estimate of bad debts expense for 2002?

39 © McGraw-Hill Ryerson Limited, 2003 McGraw-Hill Ryerson Percentage of Credit Sales In 2002, Kid’s Clothes had credit sales of $60,000. Past experience indicates that bad debts are one percent of sales. What is the estimate of bad debts expense for 2002? $60,000 ×.01 = $600 Now, prepare the adjusting entry.

40 © McGraw-Hill Ryerson Limited, 2003 McGraw-Hill Ryerson Percentage of Credit Sales

41 © McGraw-Hill Ryerson Limited, 2003 McGraw-Hill Ryerson Now let’s discuss another method that is used to account for uncollectible accounts.

42 © McGraw-Hill Ryerson Limited, 2003 McGraw-Hill Ryerson Aging of Accounts Receivable The focus is on determining the desired balance in the Allowance for Doubtful Accounts on the balance sheet.

43 © McGraw-Hill Ryerson Limited, 2003 McGraw-Hill Ryerson Aging of Accounts Receivable

44 © McGraw-Hill Ryerson Limited, 2003 McGraw-Hill Ryerson Aging Schedule 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 2002 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 2002 might look like this...

45 © McGraw-Hill Ryerson Limited, 2003 McGraw-Hill Ryerson Aging Schedule Based on past experience, the business estimates the percentage of uncollectible accounts in each time category.

46 © McGraw-Hill Ryerson Limited, 2003 McGraw-Hill Ryerson Aging Schedule These percentages are then multiplied by the appropriate column totals.

47 © McGraw-Hill Ryerson Limited, 2003 McGraw-Hill Ryerson Aging Schedule The column totals are then added to arrive at the total estimate of uncollectible accounts of $1,201.

48 © McGraw-Hill Ryerson Limited, 2003 McGraw-Hill Ryerson Aging of Accounts Receivable Record the Dec. 31, 2000 adjusting entry assuming that the Allowance for Doubtful Accounts currently has a $50 credit balance.

49 © McGraw-Hill Ryerson Limited, 2003 McGraw-Hill Ryerson Aging of Accounts Receivable After posting, the Allowance account would look like this...

50 © McGraw-Hill Ryerson Limited, 2003 McGraw-Hill Ryerson 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.

51 © McGraw-Hill Ryerson Limited, 2003 McGraw-Hill Ryerson Receivable Turnover This ratio measures how quickly a company collects its accounts receivable. Gildan reported 2000 net sales of $459,208. The receivables were $105,260 at October 3, 1999 (beg. of year) and $111,468 at October 1, 2000 (end of year). (All amounts in thousands.) Net Sales Average Net Trade Receivables Receivable Turnover =

52 © McGraw-Hill Ryerson Limited, 2003 McGraw-Hill Ryerson Receivable Turnover Net Sales Average Net Trade Receivables Receivable Turnover = $459,208 ($105,260+111,468) ÷ 2 = 4.23 times Receivable Turnover = This ratio measures how quickly a company collects its accounts receivable.

53 © McGraw-Hill Ryerson Limited, 2003 McGraw-Hill Ryerson Focus on Cash Flows Sales Revenue Add Decrease in Accounts Receivable Subtract Increase in Accounts Receivable Cash Collected from Customers

54 © McGraw-Hill Ryerson Limited, 2003 McGraw-Hill Ryerson Now let’s start our discussion of cash.

55 © McGraw-Hill Ryerson Limited, 2003 McGraw-Hill Ryerson Cash and Cash Equivalents Cheques Money Orders Bank DraftsCertificates of Deposit T-Bills

56 © McGraw-Hill Ryerson Limited, 2003 McGraw-Hill Ryerson Internal Control of Cash Cash is the asset most susceptible to theft and fraud. properly account for assets. safeguard assets. ensure the accuracy of financial records. Internal control refers to policies and procedures that are designed to:

57 © McGraw-Hill Ryerson Limited, 2003 McGraw-Hill Ryerson Internal Control of Cash Separation of Duties Custody Recording Authorization

58 © McGraw-Hill Ryerson Limited, 2003 McGraw-Hill Ryerson Internal Control of Cash Daily Deposits Purchase Approval Prenumbered Cheques Payment Approval Cash Controls Verify Signatures Bank Reconciliations

59 © McGraw-Hill Ryerson Limited, 2003 McGraw-Hill Ryerson Bank Reconciliation Provides information for reconciling journal entries. Explains the difference between cash reported on bank statement and cash balance on company’s books.

60 © McGraw-Hill Ryerson Limited, 2003 McGraw-Hill Ryerson Bank Reconciliation Balance per Bank + Deposits in Transit - Outstanding Cheques ± Bank Errors = Adjusted Balance Balance per Book + Deposits by Bank (credit memos) - Service Charge - NSF Cheques ± Book Errors = Adjusted Balance

61 © McGraw-Hill Ryerson Limited, 2003 McGraw-Hill Ryerson Bank Reconciliation Balance per Book + Deposits by Bank (credit memos) - Service Charge - NSF Cheques ± Book Errors = Adjusted Balance Balance per Bank + Deposits in Transit - Outstanding Cheques ± Bank Errors = Adjusted Balance All reconciling items on the book side require an adjusting entry to the cash account.

62 © McGraw-Hill Ryerson Limited, 2003 McGraw-Hill Ryerson Bank Reconciliation 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.

63 © McGraw-Hill Ryerson Limited, 2003 McGraw-Hill Ryerson Bank Reconciliation Outstanding cheques totaled $2,417. A $500 cheque mailed to the bank for deposit had not reached the bank at the statement date. The bank returned a customer’s NSF cheque 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. Cheque 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 cheques totaled $2,417. A $500 cheque mailed to the bank for deposit had not reached the bank at the statement date. The bank returned a customer’s NSF cheque 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. Cheque 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.

64 © McGraw-Hill Ryerson Limited, 2003 McGraw-Hill Ryerson Bank Reconciliation

65 © McGraw-Hill Ryerson Limited, 2003 McGraw-Hill Ryerson Bank Reconciliation

66 © McGraw-Hill Ryerson Limited, 2003 McGraw-Hill Ryerson Bank Reconciliation

67 © McGraw-Hill Ryerson Limited, 2003 McGraw-Hill Ryerson End of Chapter 6

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