ACC 201 - Unit 4 Revenues, Receivables, and Cash

LO 4.1: Proper reporting of revenue in financial statements; LO 4.2: apply discounts and returns to calculating net sales; LO 4.3: use allowance method to account for bad debts estimation and receivables; LO 4.4: properly reporting cash on financial statement

What is the revenue recognition principle?

Revenue recognized when they are earned: obligations satisfied

What is the process of the Sales Cycle?

Shipping terms: What is FOB shipping point?

Free on Board Shipping Point; recognize revenue at once shipped to buyer. Buyer pays freight cost

Shipping terms: What is FOB destination?

Free on Board destination: recognize revenue once buyer receives. Seller pays freight cost

What account is variable pricing for Credit Card Discounts? What’s its normal balance?

Contra revenue (XR), debit (-R)

What account do all variable pricing circumstances (Credit Card/Cash discounts, sales allowance/returns) credit?

Accounts Receivable (-A)

How are cash discount agreement terms formatted?

How do you make a journal entry for Cash discounts?

Debit cash (order-discount), Debit Cash Discount (+XR), Credit A/R

What accounts do you credit and debit for Sales Returns and Allowances?

Debit Sales Returns (+XR), Credit A/R (-A)

What is the difference between gross and net sales?

Gross: sum of all revenue booked; Net: all revenue booked minus expenses and adjustments

How do you calculate Net Sales Revenue?

Gross Sales Revenue - (Less: all discounts and returns) = Net Sales Revenue

Are Trade and Volume Discounts Contra Revenue (XR) accounts? Are they included in Net Sales?

No because customers do not see this; these discounted numbers included in Gross Revenue

T/F: We collect cash when we recognize a Sales Revenue.

False; we only recognize A/R and adjust based on discounts and if they are paid after the sale

How do companies account for Uncollectible Accounts/Bad Debts after a sale?

Create an Allowance for Doubtful Accounts AFDA (XA), money set aside to account for A/R that won’t be collected

What is the normal balance for AFDA?

Contra Assets are credited

How does management estimate AFDA to account Bad Debts?

Percentage of Accounts Receivable Method

A/R EB * BDER = AFDA EB

How are accounts that won’t be paid written off? Do write-offs have an effect on Financial Statements?

Debit AFDA (-XA), Credit (A/R), no effect because company made allowance (AFDA)

How do you calculate Net Realizable Value of A/R (Net A/R)?

Net A/R = A/R EB - AFDA EB

What are the steps to calculate and report net A/R?

1. Record Monthly Transactions

2. Book BDE

3. Calculate/Report Net A/R

Course Pack p.83: Practice Problem for 4.3 Tips

Utilize A/R T-Account (gross A/R) and AFDA T-Account (amount for BD credited to get EB of AFDA)

How do you calculate A/R Turnover? How do you calculate Days to Collect A/R?

Average Net A/R = (Net A/R: EB + BB)/2

What do the metrics A/R Turnover and Days to Collect A/R help analyze? How do you use these metrics?

• How quickly companies collect credit sales

• if terms re being met: are days to collect more/less than term days?

What current asset is the most liquid?

Cash

What are cash equivalents?

• Checking/Savings Accounts

• Checks

• Investments

• Certifications of Deposit

• Treasury Bills

How do companies safeguard cash to avoid theft/fraud?

Internal controls: auditors check valid activity

What are examples of internal controls?

• Separation of Duties

• Daily Deposits

• Check Signatures

• Mandatory Vacations

• Bank Reconciliation

What are some consequences of not safeguarding cash?

Legal Issue: Prison…. EX: Dane Cook + half-brother Darryl McCauley