Chapter 6 Reporting Sales Revenue, Receivables, Cash
Learning Objectives
6-1 Analyze impact of sales practices
Analyzing how credit card sales, discounts, returns, and bundled items affect net sales.
6-2 Estimate and report uncollectible accounts
Estimating and evaluating the impact of bad debts on financial statements.
6-3 Analyze receivables turnover ratio
Interpreting the receivables turnover ratio and its effect on cash flows.
6-4 Safeguard cash
Reporting, controlling, and safeguarding cash effectively.
Overview of Skechers U.S.A., Inc.
Founded in 1992, Skechers is a key player in the footwear market.
Reported over $4.1 billion in sales in 2017.
Focuses on brand recognition through innovative products and advertising strategies.
Employs a multichannel distribution system including retail and online.
Significant international growth through subsidiaries and joint ventures.
Accounting for Net Sales Revenue
Revenue Recognition Principle: Recognizes revenue when control of goods/services is transferred.
FOB Shipping Point vs. FOB Destination:
FOB Shipping Point: Title transfers at shipment (Skechers employs this method).
FOB Destination: Title transfers at delivery.
Components Affecting Net Sales
Credit Card Sales to Consumers
Accepting credit cards increases customer traffic and reduces credit risk.
Credit card discounts affect reported net sales due to processing fees.
Sales Discounts to Businesses
Sales Discounts: Incentives for early payment (e.g., terms 2/10, n/30).
Providing a 2% discount if paid within 10 days, or net due in 30 days.
Encourages prompt payments, improving cash flow.
Sales Returns and Allowances
Necessary to account for returned goods in a Sales Returns and Allowances account.
Reduces gross sales revenue to derive net sales.
Example: If $2,000 was collected and $500 returned, net sales would be $1,500.
Reporting Net Sales
Calculation of net sales:Net Sales = Gross Sales - (Sales Discounts + Sales Returns + Credit Card Discounts)
Example:
Gross Sales: $6,000
Less Credit Card Discounts: $90
Less Sales Discounts: $20
Less Sales Returns: $500
Net Sales Reported: $5,390
Measuring and Reporting Receivables
Classifying Receivables
Accounts Receivable: Open accounts owed by trade customers.
Notes Receivable: Formal promises involving specified payment terms.
Trade vs. Nontrade Receivables: Norm of business transactions vs. irregular transactions.
Accounting for Bad Debts
Allowance Method: Estimates bad debts and adjust as necessary.
Key entries made to estimate and record bad debts.
Allows separate tracking of receivables and adjustments.
Example adjustment:
Bad Debt Expense: $18,398 recorded to Allowance for Doubtful Accounts.
Reporting Accounts Receivable
Reported on balance sheets as net accounts receivable:Accounts Receivable (Gross) - Allowance for Doubtful Accounts.
Example for 2017:
Gross: $457,101; Allowance: $51,180; Net: $405,921.
Receivables Turnover Ratio
Calculates effectiveness of credit-granting and collection:Receivables Turnover = Net Sales / Average Accounts Receivable.
For 2017: Turnover ratio of 11.4, increased from 10.2 in 2015.
Cash Management and Internal Controls
Cash Management: Involves safeguarding cash and ensuring sufficient cash availability.
Key controls:
Separation of Duties: Different personnel for cash receipts and disbursements.
Monthly Bank Reconciliation: Essential to ensure accuracy.
Bank Reconciliation Process
Involves comparing the bank's cash record to the company's cash record, ensuring proper cash management and identification of errors.
Key Definitions
Net Sales: Total revenue reported after discounts, returns, allowances.
Sales Returns and Allowances: Contra-revenue accounts to reduce sales.
Bad Debt Expense: Estimated uncollectible accounts expense recorded.
Allowance for Doubtful Accounts: Contra-asset account estimating bad debts.
Receivables Turnover Ratio: Measure of how efficiently a company collects receivables.