1. 7 – Reporting Revenue & Receivables CORPORATE FINANCIAL REPORTING
Revene & Receivables

2. REVENUE CRITERIA FOR ACCRUAL BASIS
In chapter 4, we condensed the 4 SEC criteria into two criteria:
1. The company has received a measurable asset from the customer and
2. The revenue is earned - meaning that the company has done what the customer is paying it to do.
Revenue & Receivables

3. METHODS USED TO RECOGNIZE REVENUES / EXPENSES
Cash basis
Accrual basis
Installment sales method
Cost recovery
Percentage completion
Completed contract
Revenue & Receivables

4. RACTEE STEREO SALES COMPANY
You are the CFO of Ractee Stereo Sales Company. You sell me a stereo system for $10,000. The system cost you $6,000; you paid for the system this year. I promise to pay you:
in 2011: 2,000
in 2012: 3,000
in 2013: 5,000
total ,000 (plus interest, of course, but
we will ignore that interest)
Revenue & Receivables

5. RACTEE CONSTRUCTION COMPANY
Our construction company gets a contract to build a tunnel to Winter Park, Colorado.
The contract price is $18,000; our engineers estimate it will cost us $12,000 over 3 years to build
Results: Year We Collect We Spend
, ,000
, ,000
, ,000
Revenue & Receivables

6. RECEIVABLES Hard core stuff – “revenue adjustments” bad debts
sales returns
sales discounts
Revenue & Receivables

7. RECEIVABLES - BAD DEBTS
Primarily two ways to account for bad debts:
- the direct write-off method
- the “allowance”
- percentage of credit sales method
- aging method
Revenue & Receivables

8. BAD DEBTS - THE DIRECT METHOD
What will appear in F/S?
2011: Sales on account: $100,000 Collect from customers: $80,000
2012: Sales on account: 150,000 Collect from customers: $110,000
Customer owing us $5,000 from calls and says “Sorry - bye, bye.”
Revenue & Receivables

9. BAD DEBTS - THE ALLOWANCE METHOD - What will appear in F/S?
2011: Sales on account: $100,000 Collect from customers: $80,000
2012: Sales on account: 150,000 Collect from customers: $110,000
Customer owing us $5,000 from calls and says “Sorry - bye, bye.”
Revenue & Receivables

10. RECEIVABLES - SALES RETURNS
What will appear in F/S?
Our company makes sales on account of $100,000 in December 2011.
Our past experience is that .2% of sales are returned the next month.
Revenue & Receivables

11. ACCELERATING COLLECTIONS OF RECEIVABLES (Monetizing)
Factoring
Borrow
Securitize
Revenue & Receivables

12. QUESTIONS ?
Revenue & Receivables