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ch 7 LN Receivables final version

ch 7 LN Receivables final version - Ch7The...

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7-1 Ch 7  The Revenue/Receivable/ Cash Cycle Learning Objectives 1. 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.
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7-2 Types of Receivables Trade receivables most significant category resulting from  everyday credit sales of goods/services to customers. Notes   receivables trade 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 inventory 2. Deposits to guarantee contract performance or expense payment 3. Claims for rebates and tax refunds 4. Dividends and interest receivable 5. Loans
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7-3 Prepare journal entries to record sales revenue, including the accounting for bad debts and warranties for service or replacement. OBJECTIVE 1 Accounting for Sales Revenue Discounts —offered at the time of sale or the time of payment. Sales Returns and Allowances occur subsequent to the sale and can  occur before or after payment has been made. Bad Debts must be estimated in the period when credit sales are made or  accounts receivable are outstanding. Warranties for Service or Replacement long after a sale is made, the  warranty period may still be in place.
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7-4 Discounts 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.
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7-5 Cash Discount Gross Method The  gross method  is illustrated as follows with  credit terms of 2/10, n/30.
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7-6 Cash Discount Net Method The  net method  records the sale and the  receivable net of the discount.
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7-7 Sales Returns and Allowances Example:  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 price an  allowance  of $200. The perpetual  inventory system is used. The return is recorded as follows: Sales Returns and Allowances 200 Accounts Receivable 200
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