Ch 9 - Chapter 9 Revenue Cycle: Sales, Receivables, and...

Info iconThis preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon
Chapter 9 – 1 Chapter 9 Revenue Cycle: Sales, Receivables, and Cash SOLUTIONS 1. The two revenue recognition criteria are: a. the promised work has been substantially completed (i.e., the company has done something), and b. cash, or a valid promise of future payment, has been received (i.e., the company has received something of value in return). If a company has not met the first criterion, then the company has not actually performed the economic activity. If the second criterion is not met, then the company is not sure that its economic efforts will be rewarded with an increase in company assets. 2. Revenue would be recognized by the seller as follows: a. McDonald’s sells you a Big Mac and some fries—at the time of sale because the goods and services have been provided and McDonald’s has collected the cash. b. A bank loans you money to buy a house—as time passes and the interest on the loan accrues. The bank does its work by allowing the borrower to use the bank’s money. Of course, the bank would only recognize the accrued interest if it were reasonably sure that the borrower would pay. c. A health club signs you to a twelve-month membership—evenly over the twelve-month membership period as the health club provides membership services. Again, this is true only if the health club collects the cash in advance or is reasonably sure it can collect the cash. d. Wal-Mart sells you goods and you pay for them with your MasterCard—at the time of sale because Wal-Mart has provided the goods and has also received its cash instantly from MasterCard. e. A college accepts you as a student for the upcoming semester—as the college provides education services and as the college becomes convinced that it will collect the tuition fee from you in cash. 3. A cash sale increases the amount of cash on the seller’s balance sheet and also increases the retained earnings portion of the seller’s stockholders’ equity. A cash sale also increases the sales revenue reported on the seller’s income statement. Overall, the accounting equation is kept in balance because the increase in the asset cash is matched by an increase in the retained earnings portion of equity. A credit sale would have the same impact on the financial statements as a cash sale, except that the asset increased would be accounts receivable instead of cash. 4. With a credit policy that is so loose that everyone can obtain credit, a company runs the risk of having more bad debts, bookkeeping costs, and implicit interest carrying charges than can be paid for from the increased revenue generated by the loose credit policy. With a credit policy that is too restrictive, a company runs the risk of turning away potentially profitable credit customers.
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 2
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 06/23/2008 for the course ACCT 410x taught by Professor Bonner during the Spring '06 term at USC.

Page1 / 31

Ch 9 - Chapter 9 Revenue Cycle: Sales, Receivables, and...

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online