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Chapter 6 - Outline.doc

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ACCT 1201
Osborne Jackson

ACCT1201 FALL 2013 Chapter 6: Reporting and Interpreting Sales Revenue, Receivables and Cash A. Recognition of Revenue for Merchandising Companies FOB Shipping Point: title switch at shipping point Once you get it to a point of shipment, the responsibility is of the buyer (i.e. sellers title is passed onto you after UPS aka buyers responsibility) FOB Destination: title switch at destination Seller owns merchandise until it gets to buyers location/destination (sellers responsibility for shipping charges) B. Accounting for Sales Revenue Example: On May 4, Sally Distribution sold answering machines to Harry Electronics on account for $2,200, using credit term 2/10, n/30. Sally Distribution also sold answering machines to individual customers for $1,600 on credit card. The answering machines sold cost Sally Distribution $2,400. Record sales revenue and cost of goods sold for Sally Discounter. Sales discount: 2/10, net30 (if customer makes payment within 10 days, customer will get 2% off of what they owe) Initial sale: A/R 2200 Sales Revenue 2200 Credit card sale: A/R credit card/ cash 1600 Sales Revenue 1600 ***Assume Perpetual inventory system– every time they make a sale, COGS increases and inventory decreases Cost of goods sold 2400 Inventory 2400 Recognize sales revenue ACCT1201 FALL 2013 Recognize COGS The credit card companies charge a fee for the service they provide. Sally Distribution was charged an average of 3% fee for its credit card sales. Record the credit card discount for Sally Distribution. Credit Card Company will only pay Sally 97% of what was owed: Cash 1552 Credit card Discount 48 A/R credit card 1600 **Credit card discount account is a contra-revenue account (decreases revenues therefore DR balance) Harry Electronics returned some unsatisfactory answering machines to Sally Distribution on May 8. These machines were sold to Harry for $200. The cost of these defective machines to Sally is $140. Sales, returns, and allowance – minor damage to item so item is slightly reduced (allowance i.e. $20 off) or customer returns item (returns)  contra-revenue account (DR balance) Sales Returns and Allowances 200 A/R 200 Inventory 140 Cost of Goods Sold 140 Harry Electronics paid Sally Distribution the balance due on May 12. Record the sales discount for Sally Distribution. Sales discount  paid within 10 days (2% off); always take total amount for A/R: Cash 1960 Sales Discount 40 A/R 2000 C. Reporting Net Sales and Gross Profit Percentage 1. Net Sales = Sales Revenue – Credit Card Discounts - Sales Returns and Allowances - Sales Discounts Calculate Sally Distribution’s Net Sales in May: Net Sales = 3800 – 48 – 200 – 40 = 3512 ACCT1201 FALL 2013 2. Gross Profit Percentage=Gross Profit ÷ Net Sales Tells you what % of each sales dollar can go toward paying for other expenses (or is profit) Calculate Sally Distribution’s Gross Profit Percentage in May: GP = Net Sales – COGS GP = 3512 – (2400 + 140) = 1252 GP % = 1252/3512 = 35.6% **Must compare to industry or other company Exercise: Calculate the gross profit percentage for Slate Co. for the year ended March 31, 2012 Sales of merchandise for cash 220000 Sales of merchandise on credit 32000 Cost of Goods Sold 147000 Selling expense 40200 Administrative expense 19000 Sales returns and allowances 7000 GP = D. Receivables and Accounting for Bad Debts 1. Receivables: Amounts due from individuals and companies; - Expected to be collected in cash. - Types of receivables: accounts receivable, notes receivable, and other receivables (e.g. interest receivable). 2. Accounting for Bad Debts -A credit loss will be incurred when an accounts receivable becomes uncollectible. - Bad debt expense (uncollectible accounts expense): an operating expense that reflects the cost of uncollectible receivables. - GAAP requires the allowance method to measure bad debt expense ACCT1201 FALL 2013 Bad Debt Expense (IS) Allowance for Doubtful Accounts (BS) Allowance Method Accounts Receivalbe Less: Allowance for Doubtful Accounts Net Realizable Value Accounts Receivable Step 1: Estimate bad debt expense at the end of each accounting period Example: At the end of the March, Jerry Co. estimated that of its credit sales of $65,000 in the quarter, $1300 may become uncollectible. ESTIMATION IS ALWAYS GOING TO BE THIS ENTRY: Bad debt expense 1300 Allowance for doubtful accounts (AFDA) 1300 *** AFDA is a contra-asset Q1: What effect did recording bad debt expense have on net income and total asset? Estimation of bad debt decreases NI (expense increases) Step 2: Write off specific accounts determined to be uncollectible during the period In April, Jerry Co. determined that its credit sales to customer B in February, amounts $580, is uncollectible. WHEN YOU HAVE A WRITE-OFF: AFDA 580 Accounts Receivable 580 Q2: What effect did the write-off have on the amount of net income and total assets? ***A write-off will have NO impact*** A/R = 5580 5000 AFDA= 1200 620 Net A/R= 4380 4380 Estimating Bad Debts: a) Percentage of credit sales ACCT1201 FALL 2013 b) Aging of accounts receivable Example: a) Percentage of sales: In March 2012, Richard Wholesale Company expected bad debt losses of 1% of credit sales and its credit sales were $65,000 Calculate Bad debt expense for March 2012: 65000*0.01 = 650 Adjusting entry at the end of March 2012: March 31 Bad debt expense 650 AFDA 650 Assuming the beginning balance in Allowance for Doubtful account was $350 before adjustment, show the ending balance in Allowance for Doubtful account after the adjusting entry. Ending balance of AFDA = 350 + 650 = 1000 (credit balance) therefore A/R will now be brought down by 1000 in total. b) Aging of accounts receivable: The older an A/R is, the more likely it is for you not to collect it (the greater the ‘percentage uncollectible’) In March 2012, the aging schedule of Richard Wholesale Company is as follows Aged Accounts Receivable Estimated Percentage UncollectibleEstimated Amounts Uncollectible Not Yet Due: 25000 x 2% = 500 Up to 90 days past due: 6000 x 8% = 480 Over 90 days past due: 100 x 25% = 25 Total estimated uncollectible amount 1005 $1005 is the final ending balance we would like to have in the Allowance for Doubtful ACCT1201 FALL 2013 Accounts Total A/R = 31,100 (25000+6000+100) – 1005 (ending balance you want in AFDA) Assuming the beginning balance in Allowance for Doubtful account was $350 before adjustment, calculate Bad Debt Expense for March 2012: Adjusting Entry at the end of March 2012: Exercise: Given the following information, determine the bad debt expense and ending balance in the Allowance for Doubtful Accounts under both the percent of credit sales method and aging of accounts receivable method. The percent of credit sales estimated to be uncollectible is ½%. The beginning balance in allowance for doubtful accounts was $10,000 and the company wrote off $6,000 of accounts receivable during the period. 1-30 days 31-60 days Over 60 days Credit Sales Not yet due past due past due past due Total 1,500,000 300,000 28,000 25,000 10,000 Estimated uncollectible 2% 5% 10% 15% Total $6,000 $1,400 $2,500 $1,500 $11,400 D. Ratio Analysis (Financial analysis on receivables): Liquidity Analyses: Receivables Turnover Ratio=Net Sales ÷ Average Net Accounts Receivable Average Collection Period= 365 ÷ Receivables Turnover Ratio Heinz 2012 2011 Net Sales 9,430,422 9,407,949 Net accounts receivable 1,383,550 1,237,804 Class exercise: Compute receivables turnover ratio and average collection period for Heinz 2012 E. Cash Controls and Bank Reconciliation 1. Cash and Cash Equivalent: ACCT1201 FALL 2013 2. Internal Controls of Cash • Segregation of Duties • Use of a bank o minimizes the amount of cash that must be kept on hand (petty cash fund); o provides a double record of all cash transactions (one by the business; one by the bank). 3. Reconciling the Bank Statement with the Cash Account: Company balance and bank balance usually differ because of time lags, bank charges, interest, or errors. For example: a. Deposits in transit: deposits recorded by the depositor that have not been recorded By the bank. (due to time lag) b. Outstanding checks: checks issued and recorded by the company that have not been paid by the bank. (due to time lag) c. NSF checks: a check that is not paid by the bank because of insufficient funds in the check issuer’s bank account. d. Interest: the interest paid by the bank. e. Bank Charges: Fees charged to you by the bank for maintaining the bank account or collecting notes for you, etc. f. Error: Reconciliation procedures: 1) The reconciliation should be prepared by an employee who has no other Responsibilities pertaining to cash ACCT1201 FALL 2013 2) Matching cash balance per bank with cash balance per book (bank reconciliation) •Steps in getting the correct cash balance per bank •Steps in getting the correct cash balance per books 3) Journal entries after the bank reconciliation: --Each reconciling item to the company’s book balance should be journalized and posted in order to show the correct balance in the company’s Cash account --Journal entries should be made for bank service charge, for interest, for NSF checks, and for correcting bookkeeping errors. Example: Richard Wholesale Company received the bank statement with the closing date March 31. The cash balance on the bank statement was $32,500. On March 31, the cash balance in Richard Wholesale’s book was $ 35,910. Comparing the bank statement with the cash account, the company identified the following events: 1. On March 19, Richard Wholesale issued Check No. 125 to Megan Co. for $2,000.Megan Co. had not deposited the check by March 30. 2. The bank statement included $50 for financial service charges. 3. The bank statement included $125 interest earned by Richard Wholesale for the period. 4. On March 27, the company recorded cash sales for $4,000. The deposit was received by the bank on April 5. 5. The bank statement showed $1,000 for an NSF check written by ABG Ltd, a customer. 6. On March 16, the company received $1,283 from a customer and deposited it in the bank. The cash receipts journal entry was incorrectly made for $1,238. The bank did not make any error. 7. The bank incorrectly charged $530 to Richard Wholesale during the period. Bank reconciliation From balance per bank to adjusted cash balance From balance per books to adjusted cash balance ACCT1201 FALL 2013 Journal entries by Richard Wholesale: Chapter 6 Problems Jameson Company has the following accounts at December 31, 2012. Dr. Cr. Net sales 30,000,000 Accounts receivable 8,000,000 Allowance for doubtful accounts 14,500 a) Make the entry at December 31, 2012 to estimate bad debts, assuming that the company has done an aging of receivables that indicates that about $160,000 worth of receivables are probably uncollectible. ACCT1201 FALL 2013 b) In May 2012, Jameson is notified that Lindsey Corporation is in bankruptcy and will not be able to pay a debt of $140,000. Record this write‐off. c) What effect did the write‐off in (b) have on the amount of total assets? (Circle answer) Increased assets Decreased assets Had no effect on assets d) If Jameson Company used the percentage of sales method instead of the aging of receivables method to estimate bad debts, what would have been your bad debts expense in entry a) if they estimated that half of 1% of sales would eventually be uncollectible? Chapter 6 Exercises Merchandise Sales: Credit Card, Sales Returns, and Sales Discounts The following transactions were selected from the records of All You Need Suppli
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