prelim 2 study guide - Financial Accounting Prelim 2 Review...

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Financial Accounting Prelim 2 Review Reporting and Interpreting Sales Revenue, Receivables, and Cash Accounting for Sales Revenues Revenue Principle : requires that revenues be recorded when they are earned, delivery has occurred or services have been rendered, there is persuasive evidence of an arrangement for customer payment, the price is fixed or determinable, and collection is reasonably assured FOB Shipping point : Free on board, title changes hands at shipment, and the buyer normally pays for shipping FOB destination: title changes hands on delivery, and the seller normally pays for shipping Credit Card Sales to Consumers Reasons to accept o Increasing customer traffic o Avoiding the costs of providing credit directly to consumers, including recordkeeping and bad debt o Lowering losses due to bad checks o Avoiding losses from fraudulent credit card sales. o Receiving money faster Credit Card Discount: percent fee that credit companies charge o Example Sales Revenue $3,000 Less: credit card discounts (.03 x $3,000) 90 Net sales = $2,910 Sales Discounts to Businesses Early Payment Incentive 10 = # of days in accounting period N= net , total sales less returns Discount Percentage 2/10, n/30 Max credit period Benefits of Sales Discount o Prompt receipt of cash from customers reduces the necessity to borrow money to meet operating needs o Since customers tend to pay bills providing discounts first, a sales discount also decreases the chances that the customer will run out of funds Sales Returns and Allowances Retailers and consumers have a right to return unsatisfactory or damaged merchandise and receive a refund or adjustment to bill Deducted from gross sales revenue in determining net sales Example: you are a company and order 40 pairs of shoes for $2,000 however 10 pairs are not right, this is how it is recorded Sales revenue $2000 Less: Sales returns and allowances (.25 x $2,000) 500 Net sales (reported on the income statement) $1,500 Reporting Net Sales Sales Revenue $6,000 Less: Credit Card discounts (a contra revenue) 90 1
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Financial Accounting Prelim 2 Review Sales discounts (a contra revenue) 20 Sales returns and allowances (a contra revenue) 500 Net sales (reported on the income statement) 5,390 Gross profit percentage: Gross profit Net sales How to interpret gross profit percentage: o It measures a company’s ability to charge premium prices and produce goods and services at low cost o Higher gross profit = higher net income o Business strategy as well as competition affect gross profit %age Example questions: Assume that Deckers sold $30,000 worth of footwear to various retailers with terms 1/10, n/30 and half of that amount was paid within the discount period. Gross catalogue and internet sales were $5,000 for the same period, 80% being paid with credit cards with a 3% discount and the rest in cash. Compute net sales for the period. Gross Sales:
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prelim 2 study guide - Financial Accounting Prelim 2 Review...

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