Prelim Two Study Guide

Prelim Two Study Guide - Financial Accounting Prelim Two...

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Financial Accounting Prelim Two Study Guide CHAPTER 6: Revenue Principle: revenues should be recorded when… -goods or services have been delivered -amount of customer payment is known -collection is reasonably assured Point at which title (ownership) changes hands is determined by the shipping terms of the contract - FOB (free on board) shipping point = title changes hands at shipment, buyer normally pays for the shipping (revenue recognized at shipment) - FOB destination= title changes hands on delivery, the seller normally pays for shipping (revenue recognized at delivery) Credit Card Sales -Increase sales -Avoid providing credit directly to customers -Avoid losses due to bad checks -Avoid losses due to fraudulent credit card sales -Receive payment quicker Credit card fee=Sales revenue*fee=net sales 2/10, n/30 2=discount percentage 10=# of days in discount period n=otherwise, the full amount is due 30=maximum days in credit period Sales Returns and Allowances -must be deducted from gross sales revenue in determining net sales Gross Profit Percentage: measures how much of every sales dollar is gross profit, higher gross profit=higher net income Gross Profit Percentage= Gross Profit/Net sales Trade/Non-trade receivable - Trade receivable: amounts owed to the business for credit of sales of goods, or services - Non-trade receivable: amounts owed to the business for other than business transactions ( ex: loaning money to the new VP to help finance his home) Always record bad debt expense in the same accounting period in which related sales are made Accounts receivable less allowance for doubtful accounts=net realizable value of accounts receivable Write offs= specific uncollectible amount has been identified does not change the net book value of accounts receivable or net income Estimating Bad Debts
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percentage of credit sales method -- based on historical percentage of credit sales that result in bad debts **income statement * Net credit sales*bad debt loss rate=amount of journal entry aging of accounts receivable -- estimates uncollectible accounts based on the age of each account receivable *Desired balance-credit balance=adjusting entry **balance sheet Receivables Turnover Ratio: Net sales/average net trade receivables measures how many times average receivables are recorded and collected for the year (higher the ratio, faster the collection) average collection period=365/receivables turnover When there is a net decrease in accounts receivable ADD CASH…when there is a net increase in accounts receivable SUBTRACT CASH Internal Control of Cash separation of duties: complete separation of custody, recording, authorization all cash receipts must be deposited in the bank daily monthly reconciliation of bank accounts, purchase approval, daily deposits, check signatures, payment approval, prenumbered checks Bank statement: monthly report from a bank that shows deposits recorded,
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Prelim Two Study Guide - Financial Accounting Prelim Two...

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