AFM101 Chapter 7: AFM 101 Chapter 7.3
10 Jun 2018
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- Good relation with customer prompt delivery of exactly what the customer ordered.
- Delivery of incorrect or damaged merchandise may cost the customer sales and can
destroy these relationships. Customer has the right to return and receive refund.
- Sales Returns & Allowances = Reduction of gross sales revenues for return of or
allowances for unsatisfactory goods.
o These returns are accumulated in a separate account called Sales Returns and
Allowances and must be DEDUCTED FROM GROSS SALES in determining
net sales.
o This is a measure of customer service.
Net Sales = Sales Revenue – Sales Returns
LO3 Compute and interpret the gross profit percentage.
REPORTING NET SALES:
- In company’s books: credit card discounts, sales discounts and sales returns &
allowances are accounted for SEPARATELY to allow managers to monitor the cost of
credit card use, sales discounts and returns.
- Net Sales = Sales Revenue – (Credit Care Discounts + Sales Discounts + Sales
returns & Allowances) note: the latter three are called contra revenue.
o The amount of Net Sales reported on the Statement Earnings is computed in the
following manner.
- Remember from previous chapters: Gross Profit/Margin = Net Sales – Cost of Sales
- Analysts often examine gross profit as a percentage of net sales, called gross
profit/margin percentage %.
GROSS PROFIT PERCENTAGE %:
- How effective is management at selling goods and services for MORE than the costs to
purchase or produce them?
Managers, analysts and creditors use this ratio to assess the effectiveness of the company’s
product development, marketing & production safety.
- Gross Profit Percentage = Gross Profit / Net Sales
- Measures how much gross profit is generated from every sales dollar.
- Reflects ability to charge premium prices and produce goods & services at low cost.
- Higher gross profit results in higher net earnings.
- Business strategy + competition affect gross profit percentage.
o Product-differentiation strategy:
Use R&D and product promotion activities.
Convince customers of the superiority and distinctiveness of the
company.
Charge premium prices higher gross profit %.
o Low-cost strategy:
Rely on efficient management of productions to reduce costs.
Increase gross profit %.
- A Few Cautions:
o To asses company’s ability to sustain its gross margins, you must understand
sources of any change in its gross profit %.
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Document Summary
Good relation with customer prompt delivery of exactly what the customer ordered. Delivery of incorrect or damaged merchandise may cost the customer sales and can destroy these relationships. Customer has the right to return and receive refund. Sales returns & allowances = reduction of gross sales revenues for return of or allowances for unsatisfactory goods: these returns are accumulated in a separate account called sales returns and. Allowances and must be deducted from gross sales in determining net sales: this is a measure of customer service. Net sales = sales revenue sales returns. Lo3 compute and interpret the gross profit percentage. In company"s books: credit card discounts, sales discounts and sales returns & allowances are accounted for separately to allow managers to monitor the cost of credit card use, sales discounts and returns. Remember from previous chapters: gross profit/margin = net sales cost of sales.
