ACG2021 Chapter 6 Notes

ACG2021 Chapter 6 Notes - Chapter 6 Notes Revenue...

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Chapter 6 Notes Revenue Recognition Policies regarding Delivery of Goods: FOB Shipping Point – title changes hands at shipment, therefore, revenue is recognized when shipment of goods occurs FOB Destination/Delivery – title changes hands when the goods reach the customer, and revenue is recognized upon delivery of the goods Sales Discounts, Net Sales, and Gross Profit Sometimes, our suppliers will give us discounts when we purchase inventory from them if we pay in full within a certain amount of days or vice versa. If this is the case, and either we, or the customer pay within that time frame for the discount, we adjust the receivable for the discounted amount if they meet the time frame deadline. Example: Company X sells merchandise to a customer on account with discount terms of 2/10, n/30 (2% if paid within the first 10 days, net amount [full amt] if paid within 30 days) on 1/1/x1 for $1,000. What is the amount of the discount if the customer pays for the goods in full by 1/7/x1? Solution: The customer met the discount terms – he paid within 10 days, therefore: 1,000 x .02 = $20 worth of discount. Net Sales = Gross Sales MINUS any discounts, returns, or allowances. Nothing else is subtracted from gross sales except these 3 things to arrive at Net Sales. Gross Profit = Net Sales MINUS Cost of Goods Sold Gross Profit % = [ Net Sales – COGS ] / Net Sales Gross profit is almost always stated on the income statement. This percentage is very important to investors because typically, COGS is the largest expense of a company, and it is crucial to see what the raw profit percentage is based upon the acquisition and sale of goods. Most of the time, the sale of goods is the largest source of revenue for a company, which is why this concept is important. © Scott Friend, 2007
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Accounting for Bad Debts Often times, companies will sell merchandise on account to its customers who may end up going bankrupt at a later date, or are financially unable to pay for their merchandise in the future. This is the “risk” associated with allowing customers to purchase merchandise on credit (accounts receivable) as opposed to them paying directly in cash. In order to account for this “write-off” expense of accounts that will go
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ACG2021 Chapter 6 Notes - Chapter 6 Notes Revenue...

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