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ACCT Chapter 6 Condensed (Day 1).docx

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ACCT 1201
Ronen Gal-or

Chapter 6 Condensed (Day 1) I. Revenue Recognition Principle II. Credit Card Discounts, Sales Discounts, and Sales Returns and Allowances III. Gross Profit Percentage IV. Allowance for Doubtful Accounts V. Receivable Turnover Ratio and Effect of A/R on cash flows VI. Report, control, and safeguard cash I. Revenue Recognition Principle A. The revenue principle requires that revenues be recorded when earned… For most merchandisers and manufacturers, the required revenue recognition point is the time of shipment or delivery of goods. For service companies, it is the time that services are provided. Four Criteria: 1. Delivery has occurred or services have been rendered 2. Persuasive evidence of an arrangement for customer payment 3. The price is fixed or determinable, and collection is reasonably assured 4. For sellers of goods, these criteria are most often met and sales revenue is recorded when title and risks of ownership transfer to the buyer i. FOB (freight on board) Shipping Point – Revenue recorded at point of shipping --- sellers prefer this ii. FOB Destination Point – Revenue Recorded at point of destination --- buyers prefer this FOB MC Question At December 31, 2010, Renfro indicates sales of $1,128,000. Upon further investigation it was determined that this amount included the following:  $16th000 in goods sold by Renfro shipped terms Fnd destination on December 27 , but not due to be received until January 2  $111,000 in goods sold by Renfro with terms FOB shipping on December 29 . th The goods are not expected to reach their destination until January 6 .th What is Renfro’s correct sales balance at December 31, 2010? a. $960,000 b. $1,119,000 c. $849,000 d. $951,000 II. Credit Card Discounts, Sales Discounts, and Sales Returns and Allowances A. Credit Card Discounts - Companies accept credit cards for several reasons: 1. To increase sales. 2. To avoid providing credit directly to customers – outsource A/R, credit card company will pay you no matter what 3. To avoid losses due to bad checks – outsource A/R and risk 4. To avoid losses due to fraudulent credit card sales. 5. To receive payment quicker – usually receive cash within 12 to 24 hours Recognize it as cash immediately because chances are credit card company will pay you and won’t be going out of business in that amount of time Credit Card Discount (Contra Revenue Account) = Sales * Credit Card Fee Rate E.g. Decker made credit card sales of $3,000. The credit card company charges a 3% fee: Credit Card Discount = 0.03*3,000 = 90. Journal Entry to record sale: Dr. Cash 2,910 Dr. Credit card discount 90
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