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,Financial Accounting,Robert Libby, Patricia A. Libby, Daniel G. Short, George Kanaan, Maureen Gowing,Second CANADIAN edition,Chapter 7,Reporting and Interpreting Sales Revenue, Receivables, and Cash,Accounting for Sales Revenue,The revenue principle requires that revenues be recorded when earned:,An exchange has taken place.,Collection is probable.,The earnings process is nearly complete.,Reporting Net Sales,Companies record sales discounts, sales returns and allowances, and credit card discounts separately to allow management to monitor these transactions.,Credit Card Sales to Consumers,Companies accept credit cards for several reasons: To increase sales. To avoid providing credit directly to customers. To avoid losses due to bad cheques. To receive payment quicker.,When credit card sales are made, the company must pay the credit card company a fee for the service it provides.,Credit Card Sales to Consumers,Credit Card Sales to Consumers,On January 2, a store had credit card sales of $3,000. The credit card company charges a 3% service fee. Prepare the journal entry to record these sales.,Credit Card Sales to Consumers,On January 2, a store had credit card sales of $3,000. The credit card company charges a 3% service fee. Prepare the journal entry to record these sales.,Credit Card Discounts are reportedas a contra-revenue account.,Sales to Businesses on Account,When companies allow customers to purchase merchandise on an open account, the customer promises to pay the company in the future for the purchase.,2/10, n/30,When customers purchase on open account, they may be offered a sales discount to encourage early payment.,Read as: “Two ten, net thirty”,Sales to Businesses on Account,2/10, n/30,Sales to Businesses on Account,On January 6, Gildan sold $1,000 of merchandise on credit with terms of 2/10, n/30. Prepare the journal entry to record the sale.,Sales to Businesses on Account,On January 6, Gildan sold $1,000 of merchandise on credit with terms of 2/10, n/30. Prepare the journal entry to record the sale.,Sales to Businesses on Account,On January 14, Gildan receives the appropriate payment from the customer for the January 6 sale. Prepare the required journal entry.,Sales to Businesses on Account,$1,000 2% = $20 sales discount $1,000 - $20 = $980 cash receipt,On January 14, Gildan receives the appropriate payment from the customer for the January 6 sale. Prepare the required journal entry.,Sales to Businesses on Account,If the customer remits the appropriate amount on January 20 instead of January 14, what entry would Gildan record?,Sales to Businesses on Account,Since the customer paid after the discount period, a sales discount is not granted.,Sales to Businesses on Account,If the customer remits the appropriate amount on January 20 instead of January 14, what entry would Gildan record?,Sales Returns and Allowances,Debited for damaged merchandise.,Debited for returned merchandise.,Contra revenue account.,Sales Returns and Allowances,On July 8, The T-Shirt Store returns $500 of shirts originally purchased on account from Gildan. Prepare the required journal entry.,Sales Returns and Allowances,On July 8, The T-Shirt Store returns $500 of shirts originally purchased on account from Gildan. Prepare the required journal entry.,Gross Profit Percentage,In 2004, Gildan reported gross profit of $154,671,718 on sales of $533,367,537.,All other things equal, a higher gross profit results in higher net income.,Gross Profit Percentage,Gross ProfitPercentage,$154,671,718 $533,367,537,=,= 29.0%,Gross ProfitPercentage,Gross ProfitNet Sales,=,All other things equal, a higher gross profit results in higher net income.,Measuring and Reporting Receivables,Accounts Receivable,Measuring and Reporting Receivables,Accounting for Bad Debts,Bad debts result from credit customers who will not pay the business the amount they owe, regardless of collection efforts.,Accounting for Bad Debts,Matching Principle,Bad Debt Expense,Sales Revenue,Record in same accounting period.,Accounting for Bad Debts,Most businesses record an estimate of the bad debt expense by an adjusting entry at the end of the accounting period.,Recording Bad Debt Expense Estimates,Assume Gildan estimated bad debt expense for 2005 to be $2,383,000. Prepare the adjusting entry.,Recording Bad Debt Expense Estimates,Bad Debt Expense is normally classified as a selling expense and is closed at year-end.,Assume Gildan estimated bad debt expense for 2005 to be $2,383,000. Prepare the adjusting entry.,Allowance for Doubtful Accounts,Amount the businessexpects to collect.,Balance Sheet Disclosure,Writing Off Uncollectible Accounts,When it is clear that a specific customers account receivable will be uncollectible, the amount should be removed from the Accounts Receivable account and charged to the Allowance for Doubtful Accounts.,Writing Off Uncollectible Accounts,Assume on May 6, Gildan wrote off aspecific account receivable witha balance of $2,500. Prepare the required journal entry.,Writing Off Uncollectible Accounts,Assume on May 6, Gildan wrote off aspecific account receivable witha balance of $2,500. Prepare the required journal entry.,Writing Off Uncollectible Accounts,Assume that before the write-off entry, Gildans Accounts Receivable balance was $81,000,000 and the Allowance for Doubtful Accounts balance was $2,000,000. Lets see what effect the write-off had on these accounts.,Writing Off Uncollectible Accounts,Notice that the write-off did not change the net realizable value nor did it affect any income statement accounts.,Methods for Estimating Bad Debts,Percentage of credit sales or Aging of accounts receivable,Percentage of Credit Sales,Bad debt percentage is based on actual uncollectible accounts from prior years credit sales.,The focus is on determining the amount to record on the income statement asBad Debt Expense.,Percentage of Credit Sales,Percentage of Credit Sales,In 2005, Kids Clothes had credit sales of $60,000. Past experience indicates that bad debts are one percent of sales. What is the estimate of bad debts expense for 2005?,Percentage of Credit Sales,In 2005, Kids Clothes had credit sales of $60,000. Past experience indicates that bad debts are one percent of sales. What is the estimate of bad debts expense for 2005? $60,000 .01 = $600 Now, prepare the adjusting entry.,Percentage of Credit Sales,Aging of Accounts Receivable,The focus is on determining the desired balance in the Allowance for Doubtful Accounts on the balance sheet.,Aging of Accounts Receivable,Aging Schedule,Each customers account is aged by breaking down the balance by showing the age (in number of days) of each part of the balance. An aging of accounts receivable for Kids Clothes in 2005 might look like this . . .,Aging Schedule,Based on past experience, the business estimates the percentage of uncollectible accounts in each time category.,Aging Schedule,These percentages are then multiplied by the appropriate column totals.,Aging Schedule,The column totals are then added to arrive at the total estimate of uncollectible accounts of $1,201.,Aging of Accounts Receivable,Record the Dec. 31, 2005 adjusting entry assuming that the Allowance for Doubtful Accounts currently has a $50 credit balance.,Aging of Accounts Receivable,After posting, the Allowance account would look like this . . .,Aging of Accounts Receivable,Allowance for Doubtful Accounts,Notice that the balance after adjustment is equal to the estimate of $1,201 based on the aging analysis performed earlier.,Receivable Turnover,This ratio measures how quickly a companycollects its accounts receivable.,Gildan reported 2004 net sales of $533,367. The receivables were $64,260 at September 29, 2003 (beg. of year) and $85,317 at October 5, 2004 (end of year). (All amounts in thousands.),Receivable Turnover,This ratio measures how quickly a companycollects its accounts receivable.,Focus on Cash Flows,Sales Revenue,Cash Collected from Customers,Internal Controls,Internal Controls are the processes by which the companys board of directors, management, and other personnel provide reasonable assurance regarding the reliability of the companys financial reporting, the effectiveness and efficiency of its operations, and its compliance with applicable laws and regulations.,Controls Over Accounts Receivable,To guard against the extending credit to non-worthy customers, the following practices can help minimize bad debts: Require approval of customers credit history by a person independent of the sales and collection functions. Monitor the age of accounts receivable periodically and contact customers with overdue payments. Reward both sales and collection personnel for speedy collections so that they work as a team.,Now lets start our discussion of cash.,Cash and Cash Equivalents,Cheques,Money Orders,Bank Drafts,Certificates of Deposit,T-Bills,Internal Control of Cash,Cash is the asset most susceptible to theft and fraud.,Internal control refers to policies and procedures that are designed to:,Internal Control of Cash,Internal Control of Cash,Daily Deposits,Purchase Approval,Prenumbered Cheques,Payment Approval,Verify Signatures,Bank Reconciliations,Bank Reconciliation,Explains the difference between cash reported on bank statement and cash balance on companys books.,Bank Reconciliation,Bank Reconciliation,Bank Reconciliation,Prepare a July 31 bank reconciliation statement and the resulting journal entries for the Simmons Company. The July 31 bank statement indicated a cash balance of $9,610, while the cash ledger account on that date shows a balance of $7,430. Additional information necessary for the reconciliation is shown on the next page.,Bank Reconciliation,Outstanding cheques totaled $2,417. A $500 cheque mailed to the bank for deposit had not reached the bank at the statement date. The bank returned a customers NSF cheque for $225 received as payment of an account receivable. The bank statement showed $30 interest earned on the bank balance for the month of July. Cheque 781 for supplies cleared the bank for $268 but was erroneously recorded in our books as $240. A $486 deposit by Acme Company was erroneously credited to our account by the bank.,Bank Reconciliation,Bank Reconciliation,Bank Reconciliation,End of Chapter 7,
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