Chapter 5 - ACC210 Spring 2011 Sales & Accounts...

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ACC210 – Spring 2011 Chapter 5 Christopher T. McKittrick CPA, MBA, CFE
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• Explain business approaches to increase sales • Describe the sales and cash collection process – Explain business approaches to accelerate cash collections • Explain the revenue recognition principle • Explain and record the sale of products/services • Explain and record Sales Discounts • Explain and record Sales Returns and Allowances • Explain and apply the methods used to account for Bad Debts -- % of Sales and Allowance with Aging of receivables • Calculate and interpret the Gross Margin , Net Margin and Accounts Receivable Turnover ratios
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Approaches to Generating Sales • Marketing to create product recognition – Brand awareness – Special offers – Credit sales – Return policy – Warranty policy
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Approaches to Speeding Cash Collections • Credit/Debit cards • Advance cash payment • Cash sales discounts (not special offers) • Sell or “Factor” Accounts Receivable • Securitization of Accounts Receivable
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Factoring Accounts Receivable • Main principle of cash management is to … – increase speed of cash collection! • Common practice is to sell or “factor” or sell A/R – Seller receives immediate cash payment – Total receivable less factor’s fees – Buyer assumes right to collect and risk of uncertainty • Securitization – Large businesses and financial institutions package factored receivables as financial instruments – Sold to investors 5
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Credit and Debit Cards • Credit cards – Visa, MasterCard, Discover, Amex, etc. – Special form of “factoring” – Issuer pays seller total sale less service charge – Advantages to seller: • Receive money immediately • Avoids bad debt • Lower recordkeeping costs • Debit card – Immediate transfer of funds from buyer to seller 6
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Revenue Recognition Accrual-basis accounting recognizes revenue when: 1. Earned When the earnings process is substantially complete At point of sale or “title passes” 2. Realized or “realizable” Non-cash resources have been exchanged for cash or near cash (accounts receivable) Readily convertible to cash 7
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Amount of Revenue Recognized • Amount to recognize: – Cash received – Cash equivalent of Account Receivable • Three changes to Sales Revenues: – Sales Discounts • Offered at time of sale • May be “price”, “quantity”, or “terms” • “Price” or “quantity” effect price so record revenue AFTER these are considered! • “Terms” sales record at price – Sales Returns • After the time of sale – Sales Allowances • After the time of sale 8
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Accounting for Credit Sales • Revenue recognition principle requires reporting receivables at “net realizable value” – Amount of cash expected to collect • This MAY require some “bad debt” reserve!! – Reality is some % of sales will not be collected
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This note was uploaded on 03/10/2011 for the course ACC 210 taught by Professor Staff during the Spring '07 term at N.C. State.

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Chapter 5 - ACC210 Spring 2011 Sales & Accounts...

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