Class Notes (807,938)
Canada (492,936)
Commerce (1,848)
Lecture 6

Class Notes - WEEK 6 (Oct 15, 16, 21); Chapter 7 - COMM 2AA3

5 Pages
Unlock Document

McMaster University
Aadil Merali Juma

WEEK 6 COMM 2AA3 Chapter 7: Reporting and Interpreting Sales Revenue, Receivables and Cash October 15, 17, 2013 Sales Revenue  Many companies try to overstate revenue – accounting income is not taxable income; overstate to maximize return to shareholders; more revenues, more support from shareholders, which reflect in stock prices  Revenue Recognition Principle – recognize revenues when 1. The earnings process is complete or nearly complete (service performed)  Transfer of ownership – reasonable assumption that service has been performed  Shipping term – (F.O.B = free on board; freight on board)  F.O.B Shipping Point – the title of goods passes from the seller to the buyer at the sellers point of sale o If damaged in transit; buyer is responsible o Auditors want to see that goods have been received; other wise revenue is overstated  F.O.B Destinations – the title of goods passes from the selling to the buyer when the goods are delivered to the buyer o Property of seller until reaches buyer; insurance/liability is sellers responsibility  Eg/ Dec 21 end of fiscal year; FOB Shipping Point; in transit; inventory recognized on buyer balance sheet; revenue recognized by seller  Risk transfer may be a better method than title transfer, to determine reasonable assurance of collection – title transfer is sufficient  Sales revenue is reduced by (contra-revenues accounts); debit balance because revenues are usually credited 1. Credit card discounts – credit card companies charge a fee o Eg/ customer pays $20, credit card company takes $1 (credit card discount), business receives $19 o Companies accept credit cards for several reasons (even though revenue is lost to credit card companies):  To increase sales  To avoid providing credit directly to customers  To avoid losses due to bad checks – hurt credit history and incur huge charges  To receive payment more quickly – checks can be post-dated, credit is instantaneous  Default on credit card payments are not incurred by business, but by credit card company  Credit card collections are liquid – cash 2. Sales returns and allowances o When customers are sold damaged merchandise, they can either  Return the merchandise and receive a full refund  sales returns  Keep the merchandise but receive some credit (either reduction in A/R, store credit, or cash)  sales allowance  Credit  Cash return – reduces cash  Can reduce A/R  Credit note; can use it to purchase more goods (credit like a liability, similar to owing them money)  Debit losses (if thrown away) or inventory (if took merchandise back) o Refer to Accounting for Bad Debt (below) 3. Sales discounts (cash discounts) – discounts given to customers to encourage early payment; most common o When companies allow customers to purchase merchandise on an open account, the customer promises to pay the company in the future for the purchase o When customers purchase on open account, they may be offered a sales discount to encourage early payment o Discount terms are expressed as follows:  2/10, n/30  n = net 1 WEEK 6 COMM 2AA3 o Savings:  With discount terms of 2/10, n/30, a customer saves $2 on a $100 purchase by paying on the 10 day instead of the 30 day  To save $2, have to pay $98 20 days earlier; opportunity cost  Interest rate for 20 days = amount saved/amount paid = $2/$98 = 2.04% o Saving $2 by sacrificing $98, 20 days earlier  Annual Interest Rate = 365 days / 20 days x 2.04% = 37.23% o Savings per year  The buyer should take the discount unless  Interest rate on their borrowed money is greater than 37.23%  Return on their investment opportunities is greater than 37.23%  Companies may not take advantage of discount:  Company does not have the cash  Can make a better investment o Eg/ 3/20, n/45  Interest rate for 25 days = $3/$97  Annual Interest Rate = 365/25 x $3/$97 o Accounting for Sales Discount  Sales and receivables are recorded at the gross amount; gross amount recording means that business assumes that the discount will not be taken, when discount is taken, record contra-revenue account  Alternative; net method – assume that discount will be taken; if discount is not taken, then reverse discount with “additional other revenue” (not taught in this course)  more conservative  Sales discounts taken by customers are debited to the Sales Discounts account, only when the customer pays within the discount period o Eg/  On June 24, 2007, XYZ Inc. sold to ABC Inc. goods for $20,000 on credit with the following terms (2/10, n/30)  On July 2, 2007, ABC paid 60% of the June 24 invoice to XYZ Inc. (in discount period)  On July 23, 2007, ABC paid the balance of their account to XYZ Inc. (outside discount period)  Entries:  On the income statement Sales revenue Less: Credit card discounts Sales discounts Sales returns and allowances Net sales 2. An exchange transaction takes place  Payment has ben made, or on credit 3. Collection is reasonably assured  Debt amount is collectible; goods will not be returned  Recognize revenue, even though debt collection is not reasonably assured o Eg/ Blackberry wrote off $946 million of recognized revenue; recognized revenue when units were shipped to service provided, who were to ship items to customers –service providers returned 2 WEEK 6 COMM 2AA3 devices to blackberry; take them back or don’t take them back (service providers will no longer sell blackberry products); overstated nearly $1 billion of revenue  collection is not reasonably assured Accounting for Bad Debt  Bad debts result from credit customers who will not pay the business the amounts they owe, regardless of collection efforts o Certain that customer will not pay o Can sell A/R factor to credit collection agency  Direct Write-Off Method o Assumes all A/R are collectible o Recognizes bad debt expense when A/R are determined to be uncollectible (i.e. when A/R are written off)
More Less

Related notes for COMMERCE 1BA3

Log In


Don't have an account?

Join OneClass

Access over 10 million pages of study
documents for 1.3 million courses.

Sign up

Join to view


By registering, I agree to the Terms and Privacy Policies
Already have an account?
Just a few more details

So we can recommend you notes for your school.

Reset Password

Please enter below the email address you registered with and we will send you a link to reset your password.

Add your courses

Get notes from the top students in your class.