{[ promptMessage ]}

Bookmark it

{[ promptMessage ]}

CHAPTER6 - CHAPTER 6 REPORTING AND INTERPRETING SALES...

Info icon This preview shows pages 1–18. Sign up to view the full content.

View Full Document Right Arrow Icon
Image of page 1

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Image of page 2
Image of page 3

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Image of page 4
Image of page 5

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Image of page 6
Image of page 7

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Image of page 8
Image of page 9

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Image of page 10
Image of page 11

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Image of page 12
Image of page 13

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Image of page 14
Image of page 15

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Image of page 16
Image of page 17

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Image of page 18
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: CHAPTER 6: REPORTING AND INTERPRETING SALES REVENUES, RECEIVABLES, AND CASH I. SALES REVENUE Revenue Principle Under lI1E: revenue principle, four criteria or conditions mu 3: normally be met for revenue to be recognized. if all)“ of [he fol iowmg criteria are not met. revenue normally is not mcognizcd and cannot be recomicd. /»/./ 1. Deliver has occurred or services have been rendered. the :ompany has pfiii'bi’li‘ied or sungLantiaily performed the 2mm pmrnised lo the customer by providing goods or services. 2. There is pcrsuasivc evidence of an arrangement for customer payment. in exchange. for Lin: company ‘3 pcrimmamue. [he cummner has pruvidfld cash or a pmmiss to pay cash [a receivable). MSK q» VMAP A-fl. 3. The price is fixed or determinable. There aw no linCEl‘iflinliES 1-15 lo the. amount to be coilected; 1:. Coilecfinn is reasonably axured. .l“0[‘ caqli sales, coilection its not an issue since it is received on the chair: of ms: asxchangc. For sales on credil‘ the: company rcviews ihe cus- tomer’s ahiiily to pay. If [ho customer .3 considered credit» 'Ol'ti’iy. C(viieciing cash from the customer is reap. 0113th ii Italy: These conditions normally occur when the lithe, risks, and rewards: of ownership have. Hans- reri'ed to the customers. For most businesses. these conditions are met at the point of (IBIEVC'I‘Y of goods or services. regarding: of when cash is received- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS . Summary of Significant Accounting Policies -' DECKERS , outdoor corporation Recognition ofRevenue REAL WORLD EXCEFiF’T The Company recognizes revenue when products are shipped and the customer takes title and assumes risk ofloss. oollcciion of relevant receivable is probable. persuasive cvidcncc oFan Annual Report anangemcm exisis. and the sales price is fixed or determinable. ' P6-1 Applying the Revenue Principle L01 At what point should revenue be recognized in each of the following independent cases? Case A. For Christmas presents. a Wendy’s restaurant sells coupon books for $15. Each of the $1 cou- pons may be used in the restaurant any time during the following 12 months. The customer must pay crash when purchasing the coupon book. Case B. Russell Land Development Corporation sold a lot to Upland Builders to construct a new home. The price of the lot was $50,000. Upland made a down payment of S250 and agreed to pay the balance in six months. After making the sale. Russell learned that Upland Builders often entered into these agree- ments but refused to pay the balance if it did not find a customer who wanted a house built on the lot. Case C. Davis Corporation has always recorded revenue at the point of sale of its refrigerators. Recently, it has extended its warranties to cover all repairs for a period of seven years. One young accountant with the company now questions whether Davis has completed its earning process when it sells the refrigera- tors. She suggests that the wan-ant)i obligation for seven years means that a significant amount of addi- tional work must be performed in the future. a. I- CAN Mama’s VnoK Murmur, NHrJN THEY gwo 0mm: Mom at Nit-ENE wan? Not mMe Tum Hmte Nor DEM-dew} ’lvte FWD Emrtni 0A4“ if uNLAtLNED Kevenue t? Noam To Mutt/wipe. “Marque? .wvtEN wnowrélk user (MANN s MN SE» The Hub .wvtem mtoN EthMs AT ’fue EN) 0: h. mama} 9N R. NeTEu‘JhNN PMMESNT mt ‘f'LSo Is. A WM Smm VEKWNTML of ’fom (Ru/é . “mm .mn’neab :5 gm? uuwkmwfi “MAT ‘rrw msnMEK Wm, Hr“! Tm: Min-NW. MN'T Noeamtuz, Lbyéfilut’, 0N W Ksmfile MVVI’Nua Pr: mu m Lcwwep c" WWW WWW” ~— STwwb fflmTw€ ‘Nwhmw flew/NM; Maw 3mg; 0W“) ' WML ma hfxukrw wfiwfi magma on! wum CALI). RMK HMHLANN {Marxist J: INU‘EW WWW MABMT‘! u'NTM: ML M 3m; MK C 006.; “ INWNTOH ’0‘ NW“ WWW N #113 NM._T-( «LIMLLLIN XKQ— M; KIAVXH P—2: P6-2 Reporting Net Sales and Expenses with Discounts, Returns, and Bad Debts (AP6-1) L02! 4 The following data were selected from the records ofSykes Company for the year ended December 31.20”. Balances January |,20|l Accounts receivable (various customers) $115,000 Allowance for doubtful accounts 7,000 In the following order, except for cash sales. the company sold merchandise and made collections on credit terms 2/l0, n/30 (assume a unit sales price of $500 in all transactions and use the gross method to record sales revenue). Transactions during 2011 (1. Sold merchandise for cash, $234,000. b. Sold merchandise to R. Smith; invoice price, $l l,500. 6. Sold merchandise to K. Miller; invoice price. $25,000. a’. Two days after purchase date. R. Smith returned one of the units purchased in (b) and received account credit. e. Sold merchandise to B. Sears; invoice price. $26,000. f. R. Smith paid his account in full withinJhe discount period. g. Collected $98,000 cash from customer sales on credit in prior year, all within the discount periods. h. K. Miller paid the invoice in (6) within the discount period. 1'. Sold merchandise to R. Roy; invoice price, $17,500. j. Three days after paying the account in full, K. Miller returned seven defective units and received a cash refund. k. After the discount period. collected $6.000 cash on an account receivable on sales in a prior year. W\W>*Pm-OK TmerH-r €NT¥~x~£5 ot— man me §M$ Lama-W Jr 00% Xx lNWZMWiW '9. RN— KLMt‘m “.370 W9 ”.5” M M..- K MtwoiL Vim XR .m- &- $MES Mwums 1L hummus Su-o 7 4’ . Mb- (LLMM MW \Nvm'row xxx 0.0015 xxx 0‘th Qwu Murat 9» AR; BSEMxS WW0 ‘t tow. xx 4— EMS. Mom \NuéNToq xx g. 1'10 , KIM M ”—4 1°!» N PM!) \——-> Hwe’lo M Y“) Nvmm \ng IN WW IN 30 MVU Swag. - Mum ; 9mm ‘Dumvw'r: 2']. 2a “.0111 3 no Wu mm?!) 9M3 Msuuwxs'r LW M- - KsMx-m mm 3. Ewe H (I3) 1“. WM WSW W5» NWT 5“ kk- KHHMLK wm-e-o Q5) 34MB g) Ws M'mmc ac MWMUES 350-0 W5 ‘b\ amuNT (35W x- In.) CHM K W“ 61m Mums MwNM bm II. ACCOUNTS RECEIVABLE 1. Basics: When companies sell on credit they create an asset, Accounts receivable, which is the amount owed by customers. amass. rrtv Wumrs Mozwmtu; 3“;ng ms MW Accounts Receivable 1s reported on the balance sheet of the seller at the Net Realizable Value g 3R VYl which IS the net amount the seller expects to collect. Cisco reports $3.82l million of accounts receivable in the current asset section of its fiscal year- cnd 2008 balance sheet. Willing " 7 f. H ' H " k ' July26,2008 Cash and cash equivalents ...... - .................................... $ 5.191 InVestments ...................................................... 21.044 Accounts receivable. net of allowance for doubtful accounts of $177 ......... 3.821 Inventories ....................................................... 1 .235 Deferred tax assets ................................................ 2.075 Prepaid expenses and other current assets .............................. 2,333 PD 5 _ Total current assets ............................. . .................. $35 ARI 3“”(9 1W , comma. M 39'“ In the above example, Cisco estimates that as of Dec 31, 2008, $177 million are uncollectible and reports on its balance sheet only the amount expected to be collected — $3,821 million. CANTM-MT WMNT— Mount 0F ML 01:00 MES NOT amour To 0/“.on 5 2. Allowance for Uncollectible Accounts/Allowance for Doubtful Accounts When Cisco makes a credit sale, it knows that some of these customers will not pay their debts, The matching principle reguires recording of an expense related to the uncollectibles (Bad Debt Expense} in the same accounting period in which the related sales occurs, However, Cisco may not learn which customers will not play till much later. Cisco resolves this problem by using the Allowance method. The Allowance method is based on estimates of the expected amount of bad debts. The ending balance in the Allowance for Uncollectible accounts — which is really an estimate of the amount of AR that the company believes it will not collect — is computed (estimated), using an aging anal sis Aging Analysis 1' To illustrate, Exhibit 6.| shows an aging analysis for a seller with $100,000 of gross accounts receivable at period-end. The current accounts are those that are still within their original credit period. As an example. if a seller's credit temts are 2/10, net 30, all invoices that have been outstanding for 30 days or fewer are current. Accounts listed as I—60 days past due are those 1 to 60 days past their due date. This would include an account that is 45 days outstanding for a net 30-day invoice. This same logic applies to all categories. "“l‘ W \"m " Mt Hut v;- etha'tT- 5".1 :Aging‘of Ac: leyv“ m.- --.: .... .-i,,.,..-. apunt5. Receivable“ ‘9'- tr"” '1” Age of Accounts 1 'fi'Uncollectlble .r“'.."{{4 “cf-'if‘t' int. .i'k-l 'Ll“ \ $1. - ’ ' 'k ..' 1.. .L-I,-.V'....r.-' 'cyficggyflEAL_i . . Current .................. $ 50. 000 2% $1.000 1— 60 days past due ........ 30 000 3 900 61-90 days past due ....... 15,000 4 600 Over 90 days past due ...... 5,000 8 400 Total .................... $100,000 $2.900 mom-r 1m: l-HKM Docs NOT 1mm 10 uweor alumina» mum. {31+wa w MWWM” “To - was W INQEN‘th‘i ‘N ' Mb mgr sums; «M e— ESTiMk’I‘Efi 2’? kw Hm Me; “Me. Hm EgfiHkTfi. “m” 3 WwANLXL MG’I'Ko) 4.1%? i ‘- Twe HM ESTMMES TM. Ramwlfib €141»th Wu: I IN Tvu: ‘mmwmw km M$TFML brcwas WW9 "Mama. 9F MK" Memo) SM '1. 414: film BMKS Tm: 3m. MM Enema {mm To GET ’W Tue Naming) Emma WNW; \N lMNMleL ML thTf-Mv Mwwu'rs‘ Mb WET Wcmse m WWANUI} MR WNW».- WwNTS m 7 Exmwa‘ ,( ‘ - rs“. gnu—mm, IN "MWWA-Nw Lem ‘bewwpm. ‘7. a $7.1“) cox; ‘ WNW! WWW \N 'Mwwww Fol. WNW» AmuNTS" = $5“) Ck Lawns!) . Hm he? 1'- uammb ammo! Wu: w “wwww PM. Muerwu AmuNTs" = $1.0m) uL . MM SM 1. : l'LNb-oF- YORK-Bk) Dem. 5mm Mb MIL-r ENENLE L‘btr‘o —-) JrI/S How bx» Tvu': mm W» w W‘m A wmw‘r WNW? at Iggw Ck, \N Mwwmw Hm. MuMFxAL Muumfi NMTE «NP; Mkwo‘ ”(rm YM .NucN A (Em-17m“ Kmows FOL Sum, A-N ML. .4 uNwLueu1\lLb€-, Tm: A-K \9 wuch-orp GNTLW buNNq Tue \(ERL‘. Wowmw; FOL MMTML A19 WU‘O A-R/Umwno 1’:ch lbw So, ENTHKE S'NPH (N QwuéNLEa wavxbww LON MWKFML. Mums EsTmm- Let—1' To memcm wlswrfiou 44’ use) 1’0 Hmmum‘re INUOMG 3. Income Shifting with Bad Debt Expense . Warm N11 is Mimic-m Tum BKPBM’ATWNS TM» MM“ uremia _, ’i‘mowmce est/LEMON et- tmmcjmc msame “MoNHBN NET boss is Remus HuhE TM) we? BKVENSE a ’l‘mwmua all”... MM =HHKKVT remotes W9 to.“ M cue—Tune were? INN/N imam; \S h News To T N1 To Hear are LTM’WNS szeb MM €109»?an —> J, Wowmw (union mks-Too HMK i-MM I 4 I ~ , __;.,’-,s, ,v ' _.. .51.. .Ip'..~.u'..-. Buh-JJWnl—«u'v‘dk-fi 'AZ-duw-EJ A column several years ago in The Wall Street Journal reported on an equity analyst that asserted Sears” earnings growth was aided by a balance sheet maneuver of three years earlier that softened the impact of soaring levels of bad credit card debt. Namely, despite soaring credit losses, Sears had reported an earnings increase. How so? The analyst explained that Sears had markedly increased its allowance for uncoilectible accounts in that earlier year (to a level twice that of similar companies) and had reported the related bad debts expense in that year when its earnings were high. The resul - ing reserve was much higher than needed. Then, when earnings were low, Sears charged its credit * losses to the allowance for uncollectible accounts. However. since the balance of the allowance for uncollectible accounts was so large, no increase in that account was necessary and little or no bad debts expense was reported. Why is this a concern? The overstated reserve allowed Sears to prop up its earnings at a time when losses in its credit card unit were soaring. The analyst concluded that the increase in Sears” year-to—date earnings has depended entirely on its over-reserved allowance. How to detect Income Shifting using Bad Debt Expense entry? 10 III. CASH Bank Reconciliation Statement ( Mn “19 A bank reconciliation is the process of campanngfiec oncfling) {he ending cash balance in the campiqz‘ s record-s and the ending 1:351! balance rapgned by the ban 9n the manthlv bank Statement. A bank .mcanciliation shnulcl be completed at the and of each month mm mrma nu. ma“.- 5963:1311 WW? mmwmafim Manama-WM dwd mm MTDEWWI mm __ L .AM-vv— n... . 06-01-11 1i 135-112 mm EFT 1101:0113 05-92-11 10,252.11!) 5 05-113 1112 55.0: 06-93-11 10,307.40 1 05-09 11111.00 EFT 5mm mam-11 111.901» 3 26-10 122 no 35-10-11 111599120 :4 (13-11 1921 2.153.130 96-11-11 8.44920 -- 116-123 1215 43,230 2093 INT 05-16-11 8.422.430 1 06-18 127 2115,01: 064941 a 21-1 411 i- 034» 1-21: 53.7.0 93-2-1 23am Ins-34-11 13.93170 3 03-25 1&9!) NSF (36-25-11 E34370 ': (11-25 129 144.49 36-25-11 5.19939 '1 65—25 132 22.52 am 3113.130 03-26-11. £1,476.78 0&2? 1110 awn , 08-2741 3.36am 1 03m 1:; 52m ...- 05.30-11 :. .. s. . . 3m 88 05-30-11 WWI-mm 81mm! HER-No: mmm Emmi mm mm mimic. 1.1mm Wésmcfisrmm I "-*'1":-?:si'.u H? ‘. .. (gas-h (A) Jamel] balance 7,099,110 June checks written r1101]- .}uma 11111311is 5,153.90 Ending balance 25“! '1“. /; NwoNu L1A1’10M 12 T111: 111081 1101111111111 «1111115111 of difiamnaes bamaan Illa ending bank balance and the. ending book balanne of cash are as fallows: 1 Outsmndingehecks. Thasa areh r1111: an 1 1 :1 1111! recorded 1n the: an n - - checks ara iBEntiEE S51 cam—EE— 11g 1:1 ‘e m 1:.» 111111131 It 1 V a; statement. with the 1311:1111 01‘ checks (Such as chank stabs 1:11- a janmfl} mainafinad by 21171319111111.1111 WWW» 4‘ Wk 1: 1111111011. 11111111111111.1111 uaall w dapna 111111111 111' 111111 @1131 SO, WK ‘k’ ME 111: alnaa 0f the pa11a11 31111111115 by 11111 1111111 11111111111111 Masha 1:11 11111111111511 11311111111111! by cmnpanng the deposits listad an the bank statement 111111 the. company deposit wards. 3 Bank sawiae charges. Thaaa are at 111113 1011311111: gamma 111111111111 the stammant 111mm recomma co 3-: ,, ' ‘ 1 NS? 1111111151 These are “bad abacks" at “bunncad. aback-a” 11131 have been 11a shad but. 1111151 be 11111111 from the com an ‘3 cash account and maimed as mums. maaivabla. MNK 4,, WM 1) 5‘ mm .- 1 [1111111511 This is 1.1111111111111111 by 11211 bank to the ear-111311111 an 111 1911111: Mama 6. Errors. Bulb. the bank and the cam my may make arr-om, espeaiauy when 111: volume of wit namactianaia Marga. BNKIP’ W“ ¢ I w“ q. LEWNLIM M" 0N Ending cash baianna par banks 8100: Ending cash balance per fl statement + Mares! paid by bank 101 + Deposits in transit - 1385 ahacmawiae; charges xx - Outstanding checks 7!: fiumpany amars xx 2: Bank errors Ending correct cash balance $2001 .,.. _______ 11111 Ending correct cash balance 13 P—3: Computing Outstanding Checks and Deposits in Transit and Preparing a Bank Reconciliation and Journal Entries (PG-8) The December 31, 201 1. bank statement for Rivas Company and the December 201 l ledger accounts for cash follow. BANK. S'i‘A’l‘EM ENT Checks Deposits Balance Dec. 1 $48,000 2 $4100; 300 $17.000 64,300 4 7.000: 90 57,210 6 120; 180; 1.600 55,310 1 l 500; 1.200; 70 28.000 81.540 13 480; 700‘. 1.900 78.460 17 12.000; 3,000 58,460 23 60; 23.500 36.000 70,900 26 900: 2,650 67,350 28 2,200; 5.200 59.950 30 17.000: 1.890; 300* 19,000 59,760 31 1.650; 1,350; 150* 5.250? 61.860 *NSF chock, 1. Left. 11 customer, ‘Bank service charge. tlntererst collected. Cash (A) Dec. 1 Balance 64,100 Checks written during December: Deposits 60 5,000 2,650 Dec. 11 28,000 17.000 5,200 1,650 23 36,000 700 1,890 2,200 30 19.000 3,500 1,600 7,000 31 13,000 1,350 120 300 180 90 480 12,000 23,500 0,110 70 500 1,900 900 1.200 W 101 W0 The November 201 1 bank reconciliation sliowed the following: correct cash balance at November 30, 364.100; deposits in transit on November 30. $17,000; and outstanding checks on Ncwember 30. $400 + $500 = $900. Required: 1. Compute the deposits in transit December 31, 201 l. by comparing the deposits on the bank state- ment to the deposits listed on the cash ledger account and the list of deposits in transit at the end of November. 2. Compute the outstanding checks at December 31, 201 1, by comparing the checks listed on the bank statement with those on the cash lodge: account and the list of outstanding checks at the end of November. 3. Prepare a bank reconciliation at. December 31, 201 l. 4. Give any journal entries that should be made as a result of the bank moonciliation made by the com- pany. Why are they necessary? 5. What total amount of cash should be. reported on the December 31. 201 1, balance sheet? 14 APB-5 L06 l9”I 9me Look AT LMT Pane»; ummwmw- Nam Hrs wmb/ No“! We.) Damn; (N TMNSIT - fiH-m mm) Mfsrmmmh weeks -— f :rw No-r uemxc) 2‘3C-rar. 1 MFOLITS m TMNsxT Wick CMMULNT Rho) Yawn; Oufsrmmm, bum/KS Lu, UAWNT remap W'Sm , Alain-o HW‘szP: CTN MrNK Let/OchLMTmN — WWW M M WK STM’SNE‘NT 15 W RBWNMLIRTION, Wo-Zlflnn Wm M fax, 2er gmrmwr Mbrfiom: “905113 \N TMNm-r Damn/(mm = WTSTRNMNO‘ Macks Sn +S'w0 r Ego-0 CAMEWb mu Mww: WWW M» PEK WK Mum-r kbbrnqus; (NT‘ZWW LAVLEVTfi> WWI/“0N5: NSF-weak 3W MM. Lemme “M9 1x0 16 (mm/o ...
View Full Document

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern