AEM2100 Prelim II, - Michael Kazley Fin acct Notes on 6,7,8 Prelim II CHAPTER 6 Revenue Principle requires that revenues be recorded when they are

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Unformatted text preview: Michael Kazley Fin acct Notes on 6,7,8 Prelim II CHAPTER 6 Revenue Principle: requires that revenues be recorded when they are earned (delivery has occurred, services have been rendered, there is persuasive evidence of and arrangement for customer payment, the price is fixed or determinable, and collection is reasonably assured.) For sellers of goods, the above criteria is met when the title and risks of owner transfer to the buyer When goods are shipped FOB (free on board) Shipping Point, title changes hand at shipment, and the buyer normally pays for shipping When goods are shipped FOB (free on board) Destination, title changes hands at delivery, and the seller normally pays for shipping Revenue recognition is a footnote to the financial statement known as Summary of Significant Accounting Principles Cash equivalent Sales Price: is equal to the appropriate amount of revenue to record How retailers motivate customers to make purchases: (1) Allowing customers to use credit and debit cards (2) Providing business customers direct credit and discounts for early payment (3) Allowing returns from all customers under certain customers-these methods affect the way we compute net sales revenue Retailers accept credit cards for these reasons: (1) Increasing customer traffic (2) Avoiding costs of providing credit directly to consumers (3) Lowering losses due to bad checks (4) avoiding losses from Fraudulent credit card sales (5) Receiving money more quickly Credit card discount: is the fee charged by the credit card company for its services Sales Revenue 3000 Less: Credit card Discounts (3000 x .03) 90 Net Sales 2910 1 Early payment incentive 2/10, n/30 2 discount percentage 10 Number of days in discount period n Net (total sales less returns) 30 Maximum credit period Sales discount: is a cash discount offer to encourage prompt payment of an account receivable-granted to the purchaser in order to encourage early payment Paying more quickly provides two benefits to retailers: (1) Prompt receipt of cash from customers reduces the necessity to borrow money to meet operating needs (2) Since customers tend to pay bills providing discounts first, a sales discount also decreases the chances that the customer will run out before bill is paid Considering 2/10, n/30 the following is true: Consider a $100 sale. $2 would be saved and $98 would be paid, so: Amount Saved------------------- = Interest rate for 20 days Amount Paid 2 / 98 = 2.04% interest rate for 20 days Interest rate for 20 days x 365 = annual interest rate 20 2.04% x 365 = 37.23% annual interest rate 20 Sales returns and allowances: is a reduction of sales revenues for return of or allowances for unsatisfactory goods Distributor purchases 40 pairs of shoes for $2000 on account from wholesaler Before paying, distributor realizes that 10 pairs are damaged and returns them to wholesaler Sales revenue $2000 Less: Sales returns and allowances 500 Net Sales $1500 -cost of goods sold related to the 10 pairs would also be reduced...
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This note was uploaded on 12/03/2010 for the course AEM 2100 taught by Professor Vanes,c. during the Spring '08 term at Cornell University (Engineering School).

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AEM2100 Prelim II, - Michael Kazley Fin acct Notes on 6,7,8 Prelim II CHAPTER 6 Revenue Principle requires that revenues be recorded when they are

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