ch 6 - Chapter 6 Reporting Revenue, Receivables and Cash...

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(c) Mikhail B. Pevzner and George Mason University Chapter 6 Reporting Revenue, Receivables and Cash (c) Mikhail B. Pevzner and George Mason University Revenue recognition principles Revenue is recognized when: 1) selling process is complete or virtually complete, i.e. title for goods sold has passed from seller to buyer; 2) Price is fixed; 3) persuasive evidence of arrangement exists (i.e. there is a binding sales contract between seller and buyer); 4) realization (i.e. cash collection) is probable; (c) Mikhail B. Pevzner and George Mason University What amount of sales revenue should we recognize? The appropriate amount of revenue is the cash equivalent sales price, net of any discounts, sales returns and allowances.
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(c) Mikhail B. Pevzner and George Mason University Applying Revenue Recognition Principles: Illustration Problem P6-1 in your textbook (page 322) (c) Mikhail B. Pevzner and George Mason University Sales Discounts • As we already know, companies allow their customers to pay for goods purchased later in time. This leads to a creation of accounts receivable on the sellers' books, and to accounts payable on the buyers' books. • However, firms also seek to encourage its customers to pay faster to make sure that accounts receivables are collected and they have cash needed to run their business. (c) Mikhail B. Pevzner and George Mason University Sales Discounts (continued) • Thus, companies offer sales discounts to encourage early payments. For example, suppose PJ sold pizzas worth $1,000 to a local school on the following terms: 2/10, n30 • This is read as follows: 2% discount if paid within 10 days, otherwise full amount if paid within 30 days. In other words, PJ will collect $980 on its sale, if the payment is received within 10 days, or otherwise it will collect $1,000.
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Effective interest rate of a sales’ discount Q: Suppose a firm is offered a discount with terms 2/10 n30. It chooses to forgo the discount. How much money does it lose, if a firm forgoes discounts regularly? Effective interest rate of a sales’ discount (continued) A: Suppose that the price of a product without a discount is X. The price with the discount is 0.98X. The amount of “interest” the buyer pays is 0.02X. Hence, the interest rate buyer pays is 0.02X/0.98X=0.02/0.98. If discount is foregone each time, it amounts to a loan every 20 days, i.e. 365/20 times per year. Hence, annual interest paid is
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This note was uploaded on 02/05/2011 for the course ACCT 301 taught by Professor Hasan during the Fall '09 term at George Mason.

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ch 6 - Chapter 6 Reporting Revenue, Receivables and Cash...

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