Extreme Accy 202 study guide - CHAPTER 6 Multiple-Step...

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CHAPTER 6 Multiple-Step Income Statement: Net Sales - Cost of Goods Sold (COGS) = Gross Profit - Operating Expenses = Operating Income +/- Other Income or Expense = Income Before Taxes - Income Taxes = Net Income = Earnings Per Share Accrual Accounting:  Four Revenue Recognition Criteria 1. Good delivered or service rendered ( earned ) 2. Payment has been made ( realized ) or a formal payment agreement exists ( realizable ) 3. Price can be determined ( measurable ) 4. Collection is reasonably assured ( realizable ) Reporting Sales Revenue Sale of Goods : Sales revenue is recognized  when title passes  from the seller to the  buyer. The delivery contract determines when the title to the shipped goods is  transferred from the seller to the buyer. Two common contractual terms are: o FOB (free on board) Shipping Point     : title passes to buyer when goods are  shipped (i.e. leave seller’s premises). Buyer would pay shipping costs and bear  the risk of loss while goods are in transit. (EX: buying something off TV) o FOB Destination     : title passes to the buyer when goods are delivered to the buyer  (i.e. buyer receives goods). Seller would pay shipping costs and bear the risk of  loss while the goods are in transit (EX: shipping something to a friend) Services Rendered : revenue is recognized when  service is performed Net Sales
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Credit Card Sales     : credit card companies charge a fee for services such as the  collection of cash from customers o EXAMPLE: Assume the credit card company charges 4% of sales. The journal  entry to record a sale of $1000 of inventory would be: Debit Cash (+ A)                                                   960 Debit Credit Card discounts (+XR, -R, -SE)      40 Credit Sales Revenue (+R, +SE)                      1000 o Income statement : Net Sales $960 Sales Discounts     : Offered to customers as an inducement for prompt payment o Payment terms are often in the following form: 2(discount percentage)/10 (# of days in discount period),  n(net sales less returns)/30(maximum credit period) o EXAMPLE: Assume a firm sells $1000 of inventory on 2/10, n/30 credit terms.  The journal entries to record the sale and discount would be: Dr. Accounts receivable (+A)                                1000 Cr. Sales revenue (+R, +SE)                                   1000 Dr. Cash (+A)                                                            980 Dr. Sales discounts (+XR, -R, -SE)                            20
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This test prep was uploaded on 04/13/2008 for the course ACCY 202 taught by Professor Finnegan during the Spring '08 term at University of Illinois at Urbana–Champaign.

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Extreme Accy 202 study guide - CHAPTER 6 Multiple-Step...

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