Download Chapter 6: Reporting and Interpreting Sales Revenue, Receivables

Chapter 6: Reporting and Interpreting Sales Revenue, Receivables, and Cash
Accounting for Sales Revenue
1. Review: What are the three criteria for recording revenue?
2. Use the revenue recognition criteria to answer the following questions:
a.
On March 31 Best Buy sells a TV to a customer for $500. At the time of the sale
the customer pays $100 cash and promises to pay the remainder at a later date.
Best Buy sends the customer a bill on April 15th. The customer then sends a
check in the amount of $400 on April 28th and Best Buy receives the payment on
May 5th. When should Best Buy record the revenue assuming Best Buy has
followed the appropriate credit policy at the time of the sale?
b. Smith Company ordered 100 dolls from Tyco on May 1, 2000. Smith Company
paid for them on May 20th at a cost of $5 each. Smith Company sold 80 of them
on June 2, 2000 for $7 each to Jones Company. Jones Company paid Smith
Company on June 10th. On what date should Smith Company recognize revenue
and how much revenue should they recognize?
3. What are net sales?
4. Total gross sales for the period include the following:
Credit card sales (discount 5%) 10,000
Sales on account (2/15, n/60)
8,000
Sales returns related to sales on account were $500. All returns were made before
payment. One-half of the remaining sales on account were paid within the discount
period. What amount will be reported on the income statement as net sales?
5. What does 2/10 n/30 mean?
6. Companies must make the decision of whether they should pay an accounts payable
within the discount period. In order to do this they determine the annualized savings of
paying within the discount period. The company then compares this to the rate that they
would have to pay on a loan in order to pay within the discount period. What is the
equation to determine the annualized savings is?
7. A company purchased goods on credit with the terms 2/10, n/30. Although the company
does not have cash available to pay within the discount period, the manager of the
company is considering borrowing money to take advantage of the discount. In order to
make the appropriate decision, the manager computed the annual interest rate associated
with the sales discount. Assuming the company either pays within the discount period or
on the 30th day, this annual rate is approximately?
Gross Profit Percentage
1. What is the equation for the gross profit percentage?
2. What is gross profit?
3. What does the gross profit percentage measure?
4. All other things equal, what does a high gross profit percentage result in?
5. Given the following information compute the gross profit percentage:
Gross Sales
500,000
Credit Card Discounts
3,000
Sales Discounts
25,000
Sales Returns and Allowances
60,000
Cost of Goods Sold
250,000
Measuring and Reporting Receivables
1. What is the difference between accounts receivable and notes receivable?
Recording Bad Debt Expense Estimates
2. What does the matching principle require for the recording of bad debt expense?
3. What is the allowance method?
4. What are the two primary steps in employing the allowance method?
5. What is bad debt expense?
6. What is the account allowance for doubtful accounts?
7. What adjusting entry is written to record bad debt expense?
Writing Off Specific Accounts Determined to be Uncollectible
8. What journal entry would be recorded when a specific account receivable is written off?
9. During 2000, Knechel Company recorded bad debt expense of $20,000 and wrote off an
uncollectible account receivable amounting to $5,000. Assuming a January 1, 2000
balance in allowance for doubtful accounts of $10,000, the December 31, 2000 balance in
the allowance for doubtful accounts would be?
10. What is the journal entry when a previously written off accounts receivable is recovered
(the customer paid the accounts receivable that had been written off as uncollectible)?
There are two entries. First you put the accounts receivable back on the books
and increase the allowance for doubtful accounts for the amount that is recorded.
The second entry is the entry that is normally recorded when money is collected
on an accounts receivable.
Accounts Receivable
XX
Allowance for Doubtful Accounts XX
Cash
XX
Accounts Receivable
XX
Reporting Accounts Receivable and Bad Debts
11. What is the net realizable value (net book value) of accounts receivable
12. Does writing off a specific account affect the net realizable value of accounts receivable?
13. Adams Company had accounts receivable of $500,000 and an allowance for doubtful
accounts of $35,000 just prior to writing off as worthless an account receivable for
$8,000. What is the net realizable value of accounts receivable as shown by the
accounting record before and after the write off? Show the journal entry to write off the
accounts receivable.
Methods for Estimating Bad Debts
14. What are the two methods for estimating bad debt expense?
Percentage of Credit Sales
15. What is the percentage of credit sales method?
16. What is the percentage of credit sales method also called?
17. How do you compute bad debt expense under the percentage of credit sales method?
18. The books of Thomas company provided the following information:
Beginning Balances:
Accounts Receivable
$33,000
Allowance for doubtful accounts (a credit) $5,000
Transactions during the year:
Sales Revenue (of which 1/2 were on credit) $1,800,000
Collections on accounts receivable
$590,000
Accounts written off as uncollectible
$2500
Past collection experience has indicated that 1% of credit sales normally is not collected.
Therefore an adjusting entry for bad debt expense should be made in the amount of?
Aging of Accounts Receivable
19. What is the aging of accounts receivable method?
20. What is the aging of accounts receivable method also called?
21. What is computed under the aging method?
22. How is bad debt expense computed under the aging method?
23. As of December 31, Mesa Company has a balance of $5,000 in accounts receivable of
which $500 is more than 30 days overdue. Mesa has a credit balance of $45 in the
allowance for doubtful accounts. Mesa estimates its bad debt losses at 1% of current
accounts and 10% of accounts over thirty days. What adjustment should Mesa make to
the allowance for doubtful accounts?
Receivables Turnover Ratio
1. What is the receivables turnover ratio?
2. What does the receivables turnover ratio measure?
3. What does a higher receivables turnover ratio indicate?
Reporting and Safeguarding Cash
1. What are cash equivalents?
2. What are internal controls?
Reconciliation of the Cash Accounts and the Bank Statement
3. What is a bank reconciliation?
4. What items are commonly included in a bank reconciliation?
5. Apple Company’s bank statement showed an ending balance of $5,000. Items appearing
in the bank reconciliation included: outstanding checks $500, deposits in transit $1,000,
bank service charges $10, and Orange Company’s check erroneously charged to Apple’s
bank account by the bank $110. The correct cash balance at the end of the month should
be reported as?