Reporting and Interpreting Sales Revenue,
Receivables, and Cash
ANSWERS TO QUESTIONS
The difference between sales revenue and net sales is the amount of goods
returned by customers because the goods were either unsatisfactory or not
desired and also includes sales allowances given to customers (also refer to the
answers given below to questions 3, 4 and 5).
Gross profit or gross margin on sales is the difference between net sales and
cost of goods sold. It represents the average gross markup realized on the goods
sold during the period. The gross profit ratio is computed by dividing the amount
of gross profit by the amount of net sales. For example, assuming sales of
$100,000, and cost of goods sold of $60,000, the gross profit on sales would be
$40,000. The gross profit ratio would be $40,000/$100,000 =.40. This ratio may
be interpreted to mean that out of each $100 of sales, $40 was realized above
the amount expended to purchase the goods that were sold.
A credit card discount is the fee charged by the credit card company for services.
When a company deposits its credit card receipts in the bank, it only receives
credit for the sales amount less the discount.
The credit card discount account
either decreases net sales (it is a contra revenue) or increases selling expense.
A sales discount is a discount given to customers for payment of accounts within
a specified short period of time.
Sales discounts arise only when goods are sold
on credit and the seller extends credit terms that provide for a cash discount.
example, the credit terms may be 1/10, n/30. These terms mean that if the
customer pays within 10 days, 1% can be deducted from the invoice price of the
goods. Alternatively, if payment is not made within the 10-day period, no discount
is permitted and the total invoice amount is due within 30 days from the
purchase, after which the debt is past due.
To illustrate, assume a $1,000 sale
with these terms. If the customer paid within 10 days, $990 would have been
Thus, a sales discount of $10 was granted for early payment.