ch 7 LN Receivables final version

ch 7 LN Receivables final version - 7-1Ch 7 The...

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Unformatted text preview: 7-1Ch 7 The Revenue/Receivable/Cash CycleLearning Objectives1.Prepare journal entries to record sales revenue, including the accounting for bad debts, and warranties for service or replacement.2.Analyze accounts receivable to measure how efficiently a firm is using this operating asset.3.Explain how receivables may be used as a source of cash through secured borrowing or sale.4.Understand the impact of uncollectible accounts on the statement of cash flows.7-2Types of ReceivablesTrade receivablesmost significant category resulting from everyday credit sales of goods/services to customers.Notes receivablestrade receivables with a formal written promise to pay.Nontrade receivables include all other types of receivables. They arise from a variety of transactions, such as:1.The sale of securities or property other than inventory2.Deposits to guarantee contract performance or expense payment3.Claims for rebates and tax refunds4.Dividends and interest receivable5.Loans7-3Prepare journal entries to record sales revenue, including the accounting for bad debts and warranties for service or replacement.OBJECTIVE 1Accounting for Sales RevenueDiscountsoffered at the time of sale or the time of payment.Sales Returns and Allowancesoccur subsequent to the sale and can occur before or after payment has been made.Bad Debtsmust be estimated in the period when credit sales are made or accounts receivable are outstanding.Warranties for Service or Replacementlong after a sale is made, the warranty period may still be in place.7-4DiscountsA cash (sales) discount can only be taken if the customer makes the payment within a specified time period. There are two methods to account for this:Gross method: Sale is recorded at gross amount.Discount taken is a contra sale account.Net method:Sale is recorded at net of discount amount.Discount not taken is an interest revenue.7-5Cash DiscountGross MethodThe gross method is illustrated as follows with credit terms of 2/10, n/30.7-6Cash DiscountNet MethodThe net method records the sale and the receivable net of the discount.7-7Sales Returns and AllowancesExample: Red sweaters costing $600 are sold to a customer for $1,000. The customer calls and states that green sweaters were ordered and should have been shipped. Rather than return the sweaters, the customer agrees to keep the sweaters for a reduction in pricean allowance of $200. The perpetual inventory system is used. The return is recorded as follows:Sales Returns and Allowances 200Accounts Receivable 2007-8Suppose that instead of an allowance, the customer elects to return the sweaters. The return requires two entries. the sweaters....
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ch 7 LN Receivables final version - 7-1Ch 7 The...

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