Chapter 10 Marketing/Sales/ Collection/ Customer Support Process: Recording and Evaluating Revenue Process Activities McGraw-Hill/Irwin Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.

What are the Primary Activities in the Revenue Process? Determine marketing and distribution channels Receive and accept orders Deliver goods/services Receive payment from customers Provide customer support

Which of the Revenue Process Activities are Accounting Events? Deliver goods/services Increase sales revenue Increase accounts receivable Increase cost of goods sold Decrease inventory Receive payment from customers Increase cash Decrease accounts receivable Provide customer support Various effects, depending on the support provided, see Chapter 8 for employee events

What is the Basic Flow of Information in the Revenue Process? Customer places an order and credit manager approves credit Warehouse releases goods and notifies shipping Shipping prepares shipping documents and ships the goods to the customer Billing prepares the sales invoice based on the sales order and the shipping notice Inventory, accounts receivable, and sales records are updated

Information Flow Continued The mail room receives payment and remittance advice from customers and prepares a remittance list Remittance list is used to update cash receipts and accounts receivable records The checks are deposited in the bank.

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, send out bills in December, recognize revenue in ? November Example #2—received payment in November for services to be provided in December, recognize revenue in ? December, if services are provided Example #3—provided services and received payment in November, recognize revenue in ?

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

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

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 – SSP) * AQ Tells us whether our selling price is greater than or less than expected Sales quantity variance (AQ – SQ) * SSP Tells us whether we sold more or fewer products than anticipated (budgeted)