Chap006_solutions - Chapter 06 Reporting and Interpreting...

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Chapter 06 - Reporting and Interpreting Sales Revenue, Receivables, and CashChapter 06Reporting and Interpreting Sales Revenue, Receivables, and CashANSWERS TO QUESTIONS6.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.7.In conformity with the matching principle, the allowance method records bad debt expense in the same period in which the credit was granted and the sale was made.9.The write-off of bad debts using the allowance method decreases the asset accounts receivable and the contra-asset allowance for doubtful accounts by the same amount. As a consequence, (a) net income is unaffected and (b) accounts receivable, net, is unaffected.12.The primary characteristics of an internal control system for cash are: (a) separation of the functions of cash receiving from cash payments, (b) separation of accounting for cash receiving and cash paying, (c) separation of the physical handling of cash from the accounting function, (d) deposit all cash receipts daily and make all cash payments by check, (e) require separate approval of all checks and electronic funds transfers, and (f) require monthly reconciliation of bank accounts.E6–3.Sales revenue ($5,500 + $400 + $9,000)...................................$14,900Less: Sales returns and allowances (1/10x $9,000 from D)........900Less: Sales discounts (9/10x $9,000 from D x 3%).....................243Less: Credit card discounts ($400 from C x 2%)........................8Net sales..........................................................................$13,749E6–7.
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Chapter 06 - Reporting and Interpreting Sales Revenue, Receivables, and CashReq. 1SLATE, INCORPORATEDIncome StatementFor the Year Ended December 31, 2012AmountGross sales ($233,000 + $40,000).....................$273,000Less sales returns and allowances....................8,000Net sales revenue...............................................265,000Cost of goods sold..............................................146,000Gross profit ........................................................119,000Operating expenses:Administrative expense....................................$20,000Selling expense................................................47,200Bad debt expense ($40,000 x 3%)...................1,20068,400Income from operations......................................50,600Income tax expense ($50,600 x 30%)..............15,180Net income.........................................................$ 35,420Earnings per share ($35,420 ÷ 4,500 shares)$7.87Req. 2Gross profit margin: $265,000 – $146,000 = $119,000.Gross profit percentage ratio: $119,000 ÷ $265,000 = .45(or 45%).Gross margin or gross profit in dollars is the difference between the sales prices and the costs of purchasing or manufacturing all goods that were sold during the period (sometimes called the markup); that is, net revenue minus only one of the expenses--cost of goods sold. The gross profit ratio is the amount of each net sales dollar that was gross profit during the period. For this company, the rate was 45%, which means that $.45 of each net sales dollar was gross profit (alternatively, 45% of each sales dollar was gross profit for the period).

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