Chapter_7_Lecture_Notes_4th_edition_Libby_Student_Version

Chapter_7_Lecture_Notes_4th_edition_Libby_Student_Version -...

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Chapter 7 12/29/11 1 Reporting and Interpreting Sales Revenue, Receivables and Cash
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Learning Objectives 1. Revenue: Apply the revenue principle to determine the appropriate timing for revenue recognition Analyze the impact of credit sales, sales discounts and sales return on the amounts reported as net sales 2. Accounts Receivable: Estimate, report and evaluate the effects of uncollectible accounts receivable (bad debts) on the financial statements 2. Accounting for Notes Receivable 12/29/11 2 After studying this chapter, you should be able to:
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The Revenue Recognition Principle “Recognize revenues when . . . The earnings process is complete or substantially complete.” R isk and rewards have been transferred. P erformance is complete and significant acts required have been performed Transaction/consideration can be M easured C ollection is reasonably assured. 12/29/11 3
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Reporting Net Sales Companies record sales discounts, sales returns and allowances, and credit card discounts (contras) separately to allow management to monitor these transactions. Companies record sales discounts, sales returns and allowances, and credit card discounts (contras) separately to allow management to monitor these transactions. 12/29/11 4
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Credit Card Discount Companies accept credit cards for several reasons: To increase sales To avoid providing credit directly to customers To avoid losses due to bad cheques To receive payment quicker When credit card sales are made, the company must pay the credit card company a fee for the service it provides. 12/29/11 5 Credit Card Discounts are reported as a contra-revenue account.
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12/29/11 6 2/10, n/30 2/10, n/30 % of Discount # of Days Discount Available Otherwiset he Full $ Is Due # of Days the Full $ Due When customers purchase on open account, they may be offered a sales discount (CONTRA ACCOUNT TO SALES) to encourage early payment. Given the low cost of borrowing, advisable to always take discount when offered.
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Sales Returns and Allowances 12/29/11 7 Debited for damaged or returned merchandise- significant $ in retailing and book publishing industries Contra revenue account used to inform management of the extent of customer dissatisfaction If returns are material and inestimable- sales revenue cannot be recorded until after the uncertainty is resolved
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The Matching Principle Resources (expenses) consumed to earn revenues in an accounting period should be recorded in that period (matching), regardless of when cash is paid : Cost of goods sold related to revenue should be recognized in the same period as the sales revenue If revenue is deferred, all expenses should also be deferred If revenue is recognized in the current period, but expenses are yet to be incurred, liability must be created. Eg.
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This note was uploaded on 12/29/2011 for the course MANAGEMENT MGTB05 taught by Professor Georgequanfun during the Fall '11 term at University of Toronto- Toronto.

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