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Chap006

# Financial Accounting

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Chapter 06 - Reporting and Interpreting Sales Revenue, Receivables, and Cash Chapter 06 Reporting and Interpreting Sales Revenue, Receivables, and Cash ANSWERS TO QUESTIONS 1. The difference between sales revenue and net sales is the amount of goods returned by customers because the goods were either unsatisfactory or not desired and also includes sales allowances given to customers (also refer to the answers given below to questions 3, 4 and 5). 2. Gross profit or gross margin on sales is the difference between net sales and cost of goods sold. It represents the average gross markup realized on the goods sold during the period. The gross profit ratio is computed by dividing the amount of gross profit by the amount of net sales. For example, assuming sales of \$100,000, and cost of goods sold of \$60,000, the gross profit on sales would be \$40,000. The gross profit ratio would be \$40,000/\$100,000 =.40. This ratio may be interpreted to mean that out of each \$100 of sales, \$40 was realized above the amount expended to purchase the goods that were sold. 3. A credit card discount is the fee charged by the credit card company for services. When a company deposits its credit card receipts in the bank, it only receives credit for the sales amount less the discount. The credit card discount account either decreases net sales (it is a contra revenue) or increases selling expense. 4. A sales discount is a discount given to customers for payment of accounts within a specified short period of time. Sales discounts arise only when goods are sold on credit and the seller extends credit terms that provide for a cash discount. For example, the credit terms may be 1/10, n/30. These terms mean that if the customer pays within 10 days, 1% can be deducted from the invoice price of the goods. Alternatively, if payment is not made within the 10-day period, no discount is permitted and the total invoice amount is due within 30 days from the purchase, after which the debt is past due. To illustrate, assume a \$1,000 sale with these terms. If the customer paid within 10 days, \$990 would have been paid. Thus, a sales discount of \$10 was granted for early payment. 6-1

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Chapter 06 - Reporting and Interpreting Sales Revenue, Receivables, and Cash 5. A sales allowance is an amount allowed to a customer for unsatisfactory merchandise or for an overcharge in the sales price. A sales allowance reduces the amount the customer must pay, or if already paid, a cash refund is required. Sales allowances may occur whether the sale was for cash or credit. In contrast, a sales discount is a cash discount given to a customer who has bought on credit, with payment made within the specified period of time. (Refer to explanation of sales discount in Question 4, above.) 6. An account receivable is an amount owed to the business on open account by a trade customer for merchandise or services purchased. In contrast, a note receivable is a short-term obligation owed to the company based on a formal written document.
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Chap006 - Chapter 06 Reporting and Interpreting Sales...

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