Chapter 10 Marketing/Sales/ Collection/ Customer Support Process: Recording and Evaluating Revenue Process Activities

When are Revenues Recognized? When earned, regardless of when cash is received. Assume a December 31 year-end for the following examples. Example #1—provided services in November and sent a bill to the customer in December, recognize revenue in November Example #2—received payment in November for services to be provided in December, recognize revenue in December when services are provided to the customer Example #3—provided services and received payment in November, recognize revenue in November

What are the Accounts Used in the Revenue Process? Sales—gross amount of revenue earned Sales returns and allowances (contra revenue)—gross amount of allowance given to customer for a return or sales allowance Sales discount (contra revenue)—discount granted to customers who pay within the discount period

Example Sell $800 of inventory to a customer on account for $1,200 (terms: 2/10, n/30). Customer subsequently returns $200 of inventory for a $300 credit. Customer pays their bill within the discount period. A perpetual inventory system (Chapter 8) is used.

Answer Sale Return Increase (debit) accounts receivable by $1,200 Increase (credit) sales by $1,200 Increase (debit) cost of goods sold by $800 Decrease (credit) inventory by $800 Return Recognize (debit) sales returns & allowances for $300 Decrease (credit) accounts receivable by $300 Increase (debit) inventory by $200 Decrease (credit) cost of goods sold by $200

Answer Continued Payment received within the discount period Increase (debit) cash by $882 ($900 * 0.98) Recognize (debit) sales discount for $18 ($900 * 0.02) Decrease (credit) A/R by $900 ($1,200 - $300)

What if Payment is Received After the Discount Period has Expired? Payment after discount period Increase (debit) cash by $900 Decrease (credit) A/R by $900 ($1,200 - $300)

Thought Questions Why not simply credit sales for the return? Management needs a record of returns to evaluate quality and customer service Why not simply credit sales for the discount or record sales net-of-the discount? Management needs a record of discounts taken to evaluate credit policies and customer service.

What is a Cost Flow Assumption? A method used to assign a cost to a product when it is not specifically identified with a cost. FIFO—first-in, first-out Assumes that the first costs recorded are the first costs expensed LIFO—last-in, first-out Assumes that the last costs recorded are the first costs expensed

Example March 1, beginning inventory 10 units with a cost of $5 each March 3, purchase 12 units with a cost of $6 each March 5, sell 15 units What is the cost of goods sold using FIFO? (10 * $5) + (5 * $6) = $80 What is the cost of goods sold using LIFO? (12 * $6) + (3 * $5) = $87

So FIFO is good because it Reduces Costs? No, for 2 reasons First, the difference in cost of goods sold between FIFO and LIFO ($7) results in a difference in ending inventory, not a permanent difference in cost. Ending inventory under FIFO is $42 (7 * $6) while ending inventory under LIFO is $35 (7 * $5) Second, in a period of rising prices (as this example shows) a company using LIFO will incur less tax expense because costs are higher

Why is it Necessary to Estimate Uncollectible Accounts? Proper matching of revenue and expense—the cost incurred in an attempt to generate revenue is the possibility of not collecting the monies due from customers Asset definition—accounts receivable should reflect the amount we believe we can collect, amounts which are deemed uncollectible have no future benefit

How are Revenue Process Activities Communicated to Users? Income statement Net sales, uncollectible accounts expense, miscellaneous revenues Balance sheet Accounts receivable (net), related liabilities (unearned revenue), related assets (inventory) Statement of cash flows Cash received from customers

How can we Estimate Cash Received from Customers? Beginning accounts receivable (balance sheet) + Net sales on account (income statement) = Maximum amount owed by customers - Cash received from customers (calculated) - Write-offs (if known) = Ending accounts receivable (balance sheet)

What are Revenue Variances? Actual revenues less planned (budgeted) revenues Sales price variance (ASP – BSP) * AQ Tells us whether our selling price is greater than or less than expected Sales quantity variance (AQ – BQ) * BSP Tells us whether we sold more or fewer products than anticipated (budgeted)