1. PowerPoint Authors: Susan Coomer Galbreath, Ph.D., CPA Charles W. Caldwell, D.B.A., CMA Jon A. Booker, Ph.D., CPA, CIA Cynthia J. Rooney, Ph.D., CPA Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Reporting and Interpreting Sales Revenue, Receivables, and Cash Chapter 6

2. 6-2 Accounting for Sales Revenue The revenue principle requires that revenues be recorded when earned. Goods or services have been delivered. Collection is reasonably assured. Price is fixed or determinable. There is persuasive evidence of a customer payment arrangement

3. 6-3 Accounting for Sales Revenue The effect way to compute net sales: 1.Allowing customers to use credit to cards to pay for purchase. 2.Providing business customers direct credit and discounts for early payment. 3.Allowing returns for all customers.

4. 6-4 1- credit cards discount : The fee charged by the credit card company for its services. Example of credit cards Discount : When the company deposits its credit card company in the bank, it might receive credit for only 97 percent of the sales price. The credit card company will charge 3 percent fee for the services.

5. 6-5 2- Sales Discount : Cash discount offered to encourage prompt payment of an account payable. Example of Sales Discount : The company offer terms of 2/10, n/30 means that the customers may reduce 2 percent from the invoice price if cash payment is made within 10 days from the date of sales. If the cash payment is not made within the 10-day discount period, the full sales price is due within a maximum of 30 days.

6. 6-6 3- Sales returns and allowances : A reduction of sales revenues for return of or allowances for unsatisfactory goods. Example of Sales returns and allowances: This account informs the managers of the volume of returns and allowances provide an important measure of the quality of customer service.

7. 6-7 Reporting Net Sales Companies record credit card discounts, sales discounts, and sales returns and allowances separately to allow management to monitor these transactions.

8. 6-8 Accounting for Bad Debts Bad debts result from credit customers who will not pay the amount they owe, regardless of collection efforts. Matching Principle Bad Debt Expense Sales Revenue Record in same accounting period. Most businesses record an estimate of the bad debt expense with an adjusting entry at the end of the accounting period.

9. 6-9 Recording Bad Debt Expense Estimates Deckers estimated bad debt expense for 2008 to be $27,567,000. Prepare the adjusting entry. Bad Debt Expense is normally classified as a selling expense and is closed at year-end. Contra asset account

10. 6-10 Allowance for Doubtful Accounts Amount the business expects to collect. Balance Sheet Disclosure

11. 6-11 Bad debt percentage is based on actual uncollectible accounts from prior years’ credit sales. Focus is on determining the amount to record on the income statement as Bad Debt Expense. Estimating Bad Debts ─ Percentage of Credit Sales Method

12. 6-12 Estimating Bad Debts ─ Percentage of Credit Sales Method Example : If we assume that, during the year 2009, Deckers expected bad debt losses of 1.0 percent of credit sales, and its credit sales were 900,000. it would estimate the current year year’s bad debts as: credit sales 900,000 X Bad debt loss rate(1%) X.01 Bad debt expense9,000

13. 6-13 Focus on Cash Flows Sales Revenue Add Decrease in Accounts Receivable Subtract Increase in Accounts Receivable Cash Collected from Customers

14. 6-14 Cash and Cash Equivalents Cash includes currency, coins, and amounts on deposit in bank accounts, checking accounts, and savings accounts. Cash equivalents are short-term, highly liquid investments that are easily converted into a known amount of cash, are close to maturity, and are not sensitive to interest rate changes.

15. 6-15 Cash and Cash Equivalents Checks Money Orders Bank Drafts Certificates of Deposit T-Bills

16. 6-16 Internal Control of Cash Cash is the asset most susceptible to theft and fraud. Properly account for assets. Ensure the accuracy of financial records. Safeguard assets. Internal control refers to policies and procedures designed to: Separation of Duties Authorization Recording Custody

17. 6-17 Internal Control of Cash In addition to separation of duties, internal controls for cash include: Promptly reconciling bank statements. Proper authorization for purchases. Proper authorization for cash payments. Making all payments using prenumbered checks. Allowing only a limited number of persons authorized to sign checks. Requiring daily deposits of cash receipts.

18. 6-18 Daily Deposits Purchase Approval Prenumbered Checks Payment Approval Cash Controls Check Signatures Bank Reconciliations Internal Control of Cash

19. 6-19 End of Chapter 6