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ACCT Chapter 6 Condensed (Day 3).docx

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ACCT 1201
Ronen Gal-or

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Chapter 6 Condensed (Day 3) I. Revenue Recognition Principle II. Credit Card Discounts, Sales Discounts, and Sales Returns and Allowances III. Gross Profit Percentage IV. Bad Debt Expense and Allowance for Doubtful Accounts V. Receivable Turnover Ratio VI. Report, control, and safeguard cash V. Receivables Turnover Ratio = Net Sales* ÷ Average Net Trade Accounts Receivable * Ideally the numerator would be Net Credit Sales, but companies often do not separate between cash and credit sales How good of a job are you doing at collecting your accounts receivable? Credit sales * percentage is bad calculation; general sales * percentage is even worse. Most of the time, the ratio will be greater than one. Average Net Trade Accounts Receivable ((Beginning A/R + Ending A/R) / 2) Gross A/R – AFDA = Net A/R Trade means only operating A/R The receivables turnover ratio reflects how many times average trade receivables are recorded and collected during the period. The higher the ratio, the faster the collection of receivables. Average Collection Period = 365 ÷ Receivables Turnover Ratio Indicates the average time it takes a customer to pay its accounts. How many days does it take to collect A/R on average? Example from Textbook: Deckers reported 2008 net sales of $689,445,000. December 31, 2007, receivables were $72,209,000 and December 31, 2008, receivables were $108,129,000. Calculate the Receivables Turnover Ratio and the Average Collection Period. Receivables Turnover = 689,445,000 / ((72,209,000 + 108,129,000)/2) = 7.6 2008 Receivables Turnover Comparisons Deckers Skechers Timberland (doing better than Skechers) 7.6 6.7 7.6 Average Collection Period = 365 days / 7.6 = 48 days Fun MC Question: Which of the following transactions may result in a decrease in the receivable turnover ratio? A. The journal entry to record bad debt expense. (increase) B. Writing off an uncollectible account receivable. (no change) C. Making a sale on account. sales increase / accounts receivable increase  increase or decrease D. Collecting an account receivable. Dr. Cash, Cr. A/R (sales stays the same, A/R decrease  increase) VI. Report, control, and safeguard cash A. Cash and Cash Equivalents a. Cash: money or any instrument that banks will accept for deposit and immediate credit to a company’s account, such as a check, money order, or bank draft b. Cash equivalents are investments that meet two criteria: 1.Original maturities of three months or less 2.Readily convertible to cash and whose value is unlikely to change (that is, they are not sensitive to interest rate changes) 3.Typical instruments included as cash equivalents are bank certificates of deposit and treasury bills that the U.S. government issues to finance its activities c. All bank accounts and cash equivalents are combined into one amount, Cash and Equivalents, on the balance sheet B. Cash management responsibilities include: a. Accurate accounting so that reports of cash flows and balances may be prepared b. Controls to ensure that enough cash is available to meet (a) current operating needs, (b) maturing liabilities, and (c) unexpected emergencies c. Prevention of the accumulation of excess amounts of idle cash; idle cash earns no revenue (ex. Apple) C. Internal Control of Cash a. Separation of duties – ex. Cash receipts and cash disbursements b. Require that all cash receipts be deposited in a bank daily; don’t accumulate too much cash on hand c. Keep any cash on hand under strict control d. Require separate approval of the purchases and the actual cash payments e. Use pre-numbered checks so that you can account for checks/keep track of them (make sure employees aren’t writing themselves checks, etc.) f. Take special care with payments by electronic funds transfers since they involve no controlled documents (checks) g. Assign the responsibilities for cash payment approval and check-signing or electronic funds transfer transmittal to different individuals h. Require monthly reconciliation of bank accounts with the cash accounts on the company’s books D. Reconciliation of Cash Accounts and the Bank Statements a. Bank statement – monthly report from a bank that shows deposits recorded, checks
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