Chapter 6 - Reporting and Interpreting Sales Revenue, Receivables and Cash
This chapter discusses measuring, recording, and reporting revenues, cash, and receivables on the
Revenue recognition policies are widely recognized as one of the most important determinants of the
fair presentation of financial statements.
For most merchandisers and manufacturers, the appropriate
revenue recognition point is the time of shipment or delivery of goods. For service companies, it is the
time services are provided.
Important issues facing companies are proper recording of credit card discounts and cash sales
discounts, sales returns and allowances, and bad debt expense.
Estimating, reporting, and evaluating bad debts are considered by companies where receivables are
The accounts receivable turnover ratio is an important tool for companies.
The gross profit percentage
is also an important assessment tool for managers, analysts, and creditors.
Cash is the most liquid of all assets, and it flows continually into and out of a business. As a result, cash
presents some of the most critical control issues facing managers.
Also, the management of cash is of
critical importance to decision makers. Companies must have cash available to meet current needs, yet
must avoid excess amounts of idle cash which produce no revenue.
It is important to understand the impact of net sales on the income statement and how the net sales
amount is derived.
Cash and accounts receivable are important items listed as current assets on the balance sheet. They are
critical elements for the cash management of a business. They are also key in terms of fraud prevention.
Proper internal controls over these assets should help to avoid misappropriation of their use.
Financial statement users (lenders, shareholders, and analysts) carefully monitor these elements in the
The growth strategy of a company requires careful coordination of marketing,
production, and financing activities.
Revenue Principle Revisited
The revenue principle requires that revenues be reported when earned.
This is determined at the point
when an exchange has taken place, the earnings process is complete or nearly complete, and collection is
The collection may be cash or the cash equivalent (for example, credit cards or traded-in property).
Chapter 6 Review Notes
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