Chapter 06 - Reporting and Interpreting Sales Revenue, Receivables, and Cash

Chapter 06 Reporting and Interpreting Sales Revenue, Receivables, and Cash

ANSWERS TO
1.

!ESTIONS

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). !ross "rofit or gross margin on sales is the difference between net sales and cost of goods sold. #t re"resents the average gross mar$u" reali%ed on the goods sold during the "eriod. The gross "rofit ratio is com"uted by dividing the amount of gross "rofit by the amount of net sales. &or e'am"le, assuming sales of (1)),))), and cost of goods sold of (*),))), the gross "rofit on sales would be (4),))). The gross "rofit ratio would be (4),)))+(1)),))) ,.4). This ratio may be inter"reted to mean that out of each (1)) of sales, (4) was reali%ed above the amount e'"ended to "urchase the goods that were sold. - credit card discount is the fee charged by the credit card com"any for services. .hen a com"any de"osits its credit card recei"ts in the ban$, 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 e'"ense. - sales discount is a discount given to customers for "ayment of accounts within a s"ecified short "eriod of time. /ales discounts arise only when goods are sold on credit and the seller e'tends credit terms that "rovide for a cash discount. &or e'am"le, the credit terms may be 1+1), n+3). These terms mean that if the customer "ays within 1) days, 10 can be deducted from the invoice "rice of the goods. -lternatively, if "ayment is not made within the 1)1day "eriod, no discount is "ermitted and the total invoice amount is due within 3) days from the "urchase, after which the debt is "ast due. To illustrate, assume a (1,))) sale with these terms. #f the customer "aid within 1) days, (22) would have been "aid. Thus, a sales discount of (1) was granted for early "ayment.

3.

4.

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Chapter 06 - Reporting and Interpreting Sales Revenue, Receivables, and Cash

5.

- sales allowance is an amount allowed to a customer for unsatisfactory merchandise or for an overcharge in the sales "rice. - sales allowance reduces the amount the customer must "ay, or if already "aid, a cash refund is required. /ales allowances may occur whether the sale was for cash or credit. #n contrast, a sales discount is a cash discount given to a customer who has bought on credit, with "ayment made within the s"ecified3 "eriod of time. (4efer to e'"lanation of sales discount in 5uestion 4, above.) -n account receivable is an amount owed to the business on o"en account by a trade customer for merchandise or services "urchased. #n contrast, a note receivable is a short1term obligation owed to the com"any based on a formal written document. #n conformity with the matching "rinci"le, the allowance method records bad debt e'"ense in the same "eriod in which the credit was granted and the sale was made. 8sing the allowance method, bad debt e'"ense is recogni%ed in the "eriod in which the sale related to the uncollectible account was recorded. The write1off of bad debts using the allowance method decreases the asset accounts receivable and the contra1asset allowance for doubtful accounts by the same amount. -s a consequence, (a) net income is unaffected and (b) accounts receivable, net, is unaffected. -n increase in the receivables turnover ratio generally indicates faster collection of receivables. - higher receivables turnover ratio reflects an increase in the number of times average trade receivables were recorded and collected during the "eriod. 9ash includes money and any instrument, such as a chec$, money order, or ban$ draft, which ban$s normally will acce"t for de"osit and immediate credit to the de"ositor:s account. 9ash equivalents are short1term investments with original maturities of three months or less that are readily convertible to cash, and whose value is unli$ely to change (e.g., ban$ certificates of de"osit and treasury bills). The "rimary characteristics of an internal control system for cash are; (a) se"aration of the functions of cash receiving from cash "ayments, (b) se"aration of accounting for cash receiving and cash "aying, (c) se"aration of the "hysical handling of cash from the accounting function, (d) de"osit all cash recei"ts daily and ma$e all cash "ayments by chec$, (e) require se"arate a""roval of all chec$s and electronic funds transfers, and (f) require monthly reconciliation of ban$ accounts.

*.

6.

7. 2.

1).

11.

1 .

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Chapter 06 - Reporting and Interpreting Sales Revenue, Receivables, and Cash

13.

9ash1handling and cash1recording activities should be se"arated to remove the o""ortunity for theft of cash and a cover1u" by altering the records. This se"aration is accom"lished best by assigning the res"onsibility for cash handling to individuals other than those who have the res"onsibility for record1$ee"ing. #n fact, it usually is desirable that these two functions be "erformed in different de"artments of the business. The "ur"oses of a ban$ reconciliation are (a) to determine the <true= cash balance and (b) to "rovide data to ad>ust the 9ash account to that balance. ban$ reconciliation involves reconciling the balance in the 9ash account at the end of the "eriod with the balance shown on the ban$ statement (which is not the <true= cash balance) at the end of that same "eriod. /eldom will these two balances be identical because of such items as de"osits in transit? that is, de"osits that have been made by the com"any but not yet entered on the ban$ statement. -nother cause of the difference is outstanding chec$s, that is, chec$s that have been written and recorded in the accounts of the com"any that have not cleared the ban$ (and thus have not been deducted from the ban$@s balance). 8sually the reconciliation of the two balances, "er boo$s against "er ban$, requires recording of one or more items that are reflected on the ban$ statement but have not been recorded in the accounting records of the com"any. -n e'am"le is the usual ban$ service charge. The total amount of cash that should be re"orted on the balance sheet is the sum of (a) the true cash balances in all chec$ing accounts (verified by a ban$ reconciliation of each chec$ing account), (b) cash held in all <cash on hand= (or <"etty cash=) funds, and (c) any cash "hysically on hand (any cash not transferred to a ban$ for de"ositAusually cash held for change "ur"oses). (Based on /u""lement -) 8nder the gross method of recording sales discounts, the amount of sales discount ta$en is recorded at the time the collection of the account is recorded.

14.

15.

1*.

ANSWERS TO "!#TI$#E C%OICE

1. b) *. c) . b) 6. d) 3. b) 7. b) 4. d) 2. d) 5. c) 1). c)

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Chapter 06 - Reporting and Interpreting Sales Revenue, Receivables, and Cash

Authors& Reco''ended Solution Ti'e

(Ti'e in 'inutes) Mini-exercises No. Time 1 5 5 3 1) 4 1) 5 1) * 1) 6 1) 7 5 2 1) Exercises No. Time 1 15 15 3 15 4 ) 5 ) * 3) 6 3) 7 15 2 15 1) 15 11 15 1 15 13 ) 14 ) 15 ) 1* ) 16 3) 17 3) 12 15 ) 15 1 ) ) 3 ) 4 3) 5 3) Problems No. Time 1 5 35 3 ) 4 35 5 5) * 4) 6 45 7 45 2 45 Alternate Problems No. Time 1 35 35 3 5) 4 4) 5 45 Cases and Projects No. Time 1 5 3) 3 35 4 ) 5 35 * 45 6 C

C Due to the nature of these cases and "ro>ects, it is very difficult to estimate the amount of time students will need to com"lete the assignment. -s with any o"en1ended "ro>ect, it is "ossible for students to devote a large amount of time to these assignments. .hile students often benefit from the e'tra effort, we find that some become frustrated by the "erceived difficulty of the tas$. Eou can reduce student frustration and an'iety by ma$ing your e'"ectations clear. &or e'am"le, when our goal is to shar"en research s$ills, we devote class time to discussing research strategies. .hen we want the students to focus on a real accounting issue, we offer suggestions about "ossible com"anies or industries.

6-4

Chapter 06 - Reporting and Interpreting Sales Revenue, Receivables, and Cash

"INI*E+ERCISES
"6,-. Transaction (a) /ale of inventory to a business ' customer on o"en account (b) 9om"uter sold by mail order ' com"any on a credit card (c) -irline tic$ets sold by an airline on a credit card "6,0. #f the buyer "ays within the discount "eriod, the income statement will re"ort (7,415 as net sales ((7,5)) ' ).22). "6,1. 9redit card sales (4) Gess; 9redit card discount (H4) Iet credit card sales /ales on account (4) Gess; /ales returns (H4) Gess; /ales discounts (1+ ' (1),))) ' 0) (H4) Iet sales on account Iet sales (re"orted on income statement) (2,4)) 7 (2,117 (1),5)) 5)) 1),))) 1)) 2,2)) (12,)17 $oint A /hi"ment /hi"ment Foint of sale $oint / 9ollection of account Delivery ' 9om"letion of flight

"6,2. !ross Frofit Fercentage , !ross Frofit , (45,))) J ( 7,))) , (16,))) , ).367 Iet /ales (45,))) (45,))) The gross "rofit "ercentage is 36.70. This ratio measures the e'cess of sales "rices over the costs to "urchase or "roduce the goods or services sold as a "ercentage. #t indicates a com"any:s ability to charge "remium "rices and "roduce goods and services at lower cost.

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Chapter 06 - Reporting and Interpreting Sales Revenue, Receivables, and Cash

"6,3. (a) -llowance for doubtful accounts (JH-, K-) ...............12,))) -ccounts receivable (J-)................................... To write off s"ecific bad debts. Bad debt e'"ense (KL, J/L)......................................13,))) -llowance for doubtful accounts (KH-, J-)........ To record estimated bad debt e'"ense. 12,)))

(b)

13,)))

"6,6. Assets (a) -llowance for doubtful accounts J16,))) (b) -llowance for doubtful accounts -ccounts receivable "6,8. K K J "6,9. Reconciling Ite' (a) Mutstanding chec$s (b) Ban$ service charge (c) De"osit in transit Co'pan75s /an4 /oo4s State'ent J J K (a) !ranted credit with shorter "ayment deadlines. (b) #ncreased effectiveness of collection methods. (c) !ranted credit to less creditworthy customers. K7,))) J7,))) #iabilities Stoc4holders5 E6uit7 Bad debt e'"ense J16,)))

"6,:. (/ased on Supple'ent A) -n (7,))) credit sale with terms, +1), n+3), should be recorded as follows; -ccounts receivable (K-).............................................. 7,))) /ales revenue (K4, K/L) .................................. 7,))) This entry records the sale at the gross amount. #f the customer does "ay within the discount "eriod, only (6,74) must be "aid, in which case the entry for "ayment would be as follows; 9ash (K-) ..................................................................... 6,74) /ales discounts (KH4, J4, J/L) .................................. 1*) -ccounts receivable (J-) .................................. 7,)))

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Chapter 06 - Reporting and Interpreting Sales Revenue, Receivables, and Cash

E+ERCISES
E6,-. /ales revenue ((75) K (6)) K (45))......................................... Gess; /ales discount ((75) collected from /. !reen ' 0)...... Iet sales..................................................................................... E6,0. /ales revenue ((3,))) K (2,))) K(4,))))................................. Gess; /ales discounts ((2,))) collected from / ' 30)............. Gess; 9redit card discounts ((3,))) from 4 ' 0).................... Iet sales..................................................................................... E6,1. /ales revenue ((5,5)) K (4)) K (2,))))................................... Gess; /ales returns and allowances (1+1) ' (2,))) from D)........ Gess; /ales discounts (2+1) ' (2,))) from D ' 30)..................... Gess; 9redit card discounts ((4)) from 9 ' 0)........................ Iet sales.......................................................................... E6,2. Transaction Nuly 1 Nuly 15 Nuly ) Nuly 1 E6,3. 4eq. 1 (-mount saved O -mount "aid) , #nterest rate for 4) days. (30 O 260) , 3.)20 for 4) days. #nterest rate for 4) days ' (3*5 days O 4) days) , -nnual interest rate 3.)20 ' (3*5 O 4) days) , 7. 0 4eq. Ees, because the 150 rate charged by the ban$ is less than the 7. 0 rate im"licit in the discount. The com"any will earn 13. 0 by doing so ( 7. 0 J 150). Iet /ales K 26 K 5,))) J 15) J 1,))) 9ost of !oods /old K 165 K ,5)) IL J *)) !ross Frofit K1 K ,5)) J 15) J 4)) (14,2)) 2)) 43 7 (13,642 (1*,))) 6) *) (15,*6) ( ,))) 16 (1,273

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Chapter 06 - Reporting and Interpreting Sales Revenue, Receivables, and Cash

E6,6. 4eq. 1 WO#;ERINE WOR#< WI<E INC. Inco'e State'ent =or the >ear Ended (dollars in thousands)

/ales of merchandise 9ost of "roducts sold !ross "rofit /elling and administrative e'"ense #ncome from o"erations Mther income (e'"ense) #nterest e'"ense Mther income Freta' income #ncome ta'es Iet #ncome Larnings "er share ((24,)*4 O 47,777 shares) 4eq. !ross "rofit margin; (1,

(1,

),5*7 634,546 47*,) 1 345,173 14),737

( ,75)) 732 137,7 6 44,6*3 ( 24,)*4 (1.2

),5*7 J (634,546 , (47*,) 1. ),5*7 , .327 (or 32.70).

!ross "rofit "ercentage ratio; (47*,) 1 O (1,

!ross margin or gross "rofit in dollars is the difference between the sales "rices and the costs of "urchasing or manufacturing all goods that were sold during the "eriod (sometimes called the mar$u")? that is, net revenue minus only one of the e'"enses11 cost of goods sold. The gross "rofit ratio is the amount of each net sales dollar that was gross "rofit during the "eriod. &or this com"any, the rate was 32.70, which means that (.327 of each net sales dollar was gross "rofit (alternatively, 32.70 of each sales dollar was gross "rofit for the "eriod). .olverine .orld .ide@s gross "rofit "ercentage was below Dec$ers:s current ( ))7) "ercentage of 44.30. Dec$ers:s shoes have a re"utation as a rugged "roduct as well as a "remium Phigh fashionP "roduct. This has allowed it to maintain higher "rices and higher gross margins. #n mar$eting this is called the value of brand equity.

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Chapter 06 - Reporting and Interpreting Sales Revenue, Receivables, and Cash

E6,8. 4eq. 1 S#ATE, INCOR$ORATE< Inco'e State'ent =or the >ear Ended <ece'ber 1-, 00-0 -mount !ross sales (( 33,))) K (4),))))..................... Gess sales returns and allowances.................... Iet sales revenue............................................... 9ost of goods sold.............................................. !ross "rofit ........................................................ M"erating e'"enses; -dministrative e'"ense.................................... ( ),))) /elling e'"ense................................................ 46, )) Bad debt e'"ense ((4),))) ' 30)................... 1, )) #ncome from o"erations...................................... #ncome ta' e'"ense ((5),*)) ' 3)0).............. Iet income......................................................... Larnings "er share ((35,4 ) O 4,5)) shares) 4eq. !ross "rofit margin; ( *5,))) J (14*,))) , (112,))). !ross "rofit "ercentage ratio; (112,))) O ( *5,))) , .45 (or 450). !ross margin or gross "rofit in dollars is the difference between the sales "rices and the costs of "urchasing or manufacturing all goods that were sold during the "eriod (sometimes called the mar$u")? that is, net revenue minus only one of the e'"enses11 cost of goods sold. The gross "rofit ratio is the amount of each net sales dollar that was gross "rofit during the "eriod. &or this com"any, the rate was 450, which means that (.45 of each net sales dollar was gross "rofit (alternatively, 450 of each sales dollar was gross "rofit for the "eriod). ( 63,))) 7,))) *5,))) 14*,))) 112,)))

*7,4)) 5),*)) 15,17) ( 35,4 ) (6.76

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Chapter 06 - Reporting and Interpreting Sales Revenue, Receivables, and Cash

E6,9. (a)

Bad debt e'"ense (KL, J/L) ((7)),))) ' ).)1)........7,))) -llowance for doubtful accounts (KH-, J-)........ To record estimated bad debt e'"ense. -llowance for doubtful accounts (JH-, K-) ............... -ccounts receivable (J-)................................... To write off a s"ecific bad debt. ,5))

7,)))

(b)

,5))

E6,:. (a)

Bad debt e'"ense (KL, J/L) ((62),))) ' ).) )........15,7)) -llowance for doubtful accounts (KH-, J-)........ To record estimated bad debt e'"ense. -llowance for doubtful accounts (JH-, K-) ............... -ccounts receivable (J-)................................... To write off a s"ecific bad debt. 3*)

15,7))

(b)

3*)

E6,-0. Assets (a) -llowance for doubtful accounts J15,7)) (b) -llowance for doubtful accounts -ccounts receivable E6,--. 4eq. 1 (a) K3*) J3*) #iabilities Stoc4holders5 E6uit7 Bad debt e'"ense J15,7))

Bad debt e'"ense (KL, J/L) ((*7),))) ' ).)35)...... 3,7)) -llowance for doubtful accounts (KH-, J-)........ To record estimated bad debt e'"ense. -llowance for doubtful accounts (JH-, K-) ............... -ccounts receivable (J-)................................... To write off a s"ecific bad debt. ,7))

3,7))

(b)

,7))

4eq. Transaction a. b. Iet /ales IL IL !ross Frofit IL IL #ncome from M"erations J 3,7)) IL

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Chapter 06 - Reporting and Interpreting Sales Revenue, Receivables, and Cash

E6,-0. Lstimated Lstimated "ercentage amount -ged accounts receivable uncollectible uncollectible Iot yet due (1*,))) ' 0 , ( 3 ) 8" to 1 ) days "ast due 5,5)) ' 140 , 66) Mver 1 ) days "ast due ,5)) ' 350 , 765 Lstimated balance in -llowance for Doubtful -ccounts 1,2*5 9urrent balance in -llowance for Doubtful -ccounts 2)) Bad Debt L'"ense for the year (1,)*5 E6,-1. 4eq. 1 December 31, )111-d>usting entry; Bad debt e'"ense (KL, J/L)......................................... 4,17) -llowance for doubtful accounts (KH-, J-)........ 4,17) To ad>ust for estimated bad debt e'"ense for )11 com"uted as follows; Lstimated Lstimated "ercentage amount -ged accounts receivable uncollectible uncollectible Iot yet due (5),))) ' 30 , ( 1,5)) 8" to 17) days "ast due 14,))) ' 1 0 , 1,*7) Mver 17) days "ast due 4,))) ' 3)0 , 1, )) Lstimated balance in -llowance for Doubtful -ccounts 4,37) 9urrent balance in -llowance for Doubtful -ccounts )) Bad Debt L'"ense for the year (4,17) 4eq. Balance sheet; -ccounts receivable ((5),))) K (14,))) K (4,)))) Gess allowance for doubtful accounts...................... -ccounts receivable, net of allowance for doubtful accounts..........................................

(*7,))) 4,37) (*3,* )

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Chapter 06 - Reporting and Interpreting Sales Revenue, Receivables, and Cash

E6,-2. 4eq. 1 December 31, )1 1-d>usting entry; Bad debt e'"ense (KL, J/L)......................................... ), 5 -llowance for doubtful accounts (KH-, J-)........ ), 5 To ad>ust for estimated bad debt e'"ense for )1 com"uted as follows; Lstimated Lstimated "ercentage amount -ged accounts receivable uncollectible uncollectible Iot yet due ( 65,))) ' 3.50 , (2,* 5 8" to 1 ) days "ast due 5),))) ' 1)0 , 5,))) Mver 1 ) days "ast due ),))) ' 3)0 , *,))) Lstimated balance in -llowance for Doubtful -ccounts ),* 5 9urrent balance in -llowance for Doubtful -ccounts 4)) Bad Debt L'"ense for the year ( ), 5 4eq. Balance sheet; -ccounts receivable (( 65,))) K (5),))) K ( ),)))) Gess allowance for doubtful accounts...................... -ccounts receivable, net of allowance for doubtful accounts.......................................... E6,-3. 1. Bad debt e'"ense (KL, J/L) .................................................. -llowance for doubtful accounts (KH-, J-)................... To record estimated bad debt e'"ense. 61 61

(345,))) ),* 5 (3 4,365

-llowance for doubtful accounts (JH-, K-)............................. 153 -ccounts receivable (J-).............................................. To write off s"ecific bad debts. .

153

#t would have no effect because the asset <-ccounts receivable= and contra1 asset <-llowance for doubtful accounts= would both decline by Luro 1) million. Ieither <4eceivables, net= nor <Iet income= would be affected.

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Chapter 06 - Reporting and Interpreting Sales Revenue, Receivables, and Cash

E6,-6. 4eq. 1 .rite1offs Allo?ance @or <oubt@ul Accounts 5 116 77 153 Beg. balance Bad debt e'". Lnd. balance

Beg. Balance K Bad debt e'". J .rite1offs , Lnd. Balance Beg. Balance K Bad debt e'". J Lnd. Balance , .rite1offs 116 K 77 J 153 , 5 Bad debt e'"ense increases (is credited to) the allowance. /ince we are given the beginning and ending balances in the allowance, we can solve for write1offs, which decrease (are debited to) the allowance. 4eq. Beg. balanceC Iet sales Lnd. balance CC Accounts Receivable (Aross) 11,455 *),4 ) 13,64 5 57,)71 .rite1offs 9ash collections

C 11,337 K 116 CC 13,572 K 153 Beg. balance K Iet sales J .rite1offs J 9ash collections , Lnd. Balance Beg. balance K Iet sales J .rite1offs J Lnd. Balance , 9ash collections 11,455 K *),4 ) J 5 J 13,64 , 57,)71 -ccounts receivable gross is increased by recording credit sales and decreased by recording cash collections and write1offs of bad debts. Thus, we can solve for cash collections as the missing value.

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Chapter 06 - Reporting and Interpreting Sales Revenue, Receivables, and Cash

E6,-8. 4eq. 1 The allowance for doubtful accounts is increased (credited) when bad debt e'"ense is recorded and decreased (debited) when uncollectible accounts are written off. This case gives the beginning and ending balances of the allowance account and the amount of uncollectible accounts that were written off. Therefore, the amount of bad debt e'"ense (in thousands) can be com"uted as follows; Allo?ance @or <oubt@ul Accounts .rite1offs 711,))) 56),))) 1, 51,))) 1,)1),))) Beg. balance Bad debt e'". Lnd. balance

Beg. Balance K Bad debt e'". J .rite1offs , Lnd. Balance Lnd. Balance J Beg. Balance K .rite1offs , Bad debt e'". 1,)1),))) J 56),))) K 711,))) , 1, 51,))) 4eq. .or$ing ca"ital is unaffected by the write1off of an uncollectible account when the allowance method is used. The asset account (accounts receivable) and the contra1 asset account (allowance for doubtful accounts) are both reduced by the same amount? therefore, the boo$ value of net accounts receivable is unchanged. .or$ing ca"ital is decreased when bad debt e'"ense is recorded because the contra1 asset account (allowance for doubtful accounts) is increased. &rom requirement (1), we $now that net accounts receivable was reduced by (1, 51,))) when bad debt e'"ense was recorded in year , reducing wor$ing ca"ital by (1, 51,))). Iote that income before ta'es was reduced by the amount of bad debt e'"ense that was recorded, therefore ta' e'"ense and ta' "ayable will decrease. The decrease in ta' "ayable caused wor$ing ca"ital to increase? therefore, the net decrease was (1, 51,))) J ((1, 51,))) ' 3)0) , (765,6)). 4eq. 3 The entry to record the write1off of an uncollectible account did not affect any income statement accounts? therefore, net income is unaffected by the (711,))) write1off in year . The recording of bad debt e'"ense reduced income before ta'es in year by (1, 51,))) and reduced ta' e'"ense by (365,3)) (i.e., (1, 51,))) ' 3)0). Therefore, year net income was reduced by (765,6)) (as com"uted in 4eq. ).

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Chapter 06 - Reporting and Interpreting Sales Revenue, Receivables, and Cash

E6,-9. 4eq. 1 Dec. 31, )1 -llowance for doubtful accounts (JH-, K-)................ -ccounts receivable (N. Doe) (J-)................... To write off an account receivable determined to be uncollectible. Dec. 31, )1 Bad debt e'"ense (KL, J/L) ..................................... -llowance for doubtful accounts (KH-, J-)..... -d>usting entry11estimated loss on uncollectible accounts? based on credit sales ((65,))) ' 1.50 , (1,1 5). 4eq. #ncome statement; M"erating e'"enses; Bad debt e'"ense......................................................... Balance sheet; Current assets -ccounts receivable ((1*,))) K (65,))) 1 (*),))) 1 (1,6))) ...................................... Gess; -llowance for doubtful accounts ((2)) 1 (1,6)) K (1,1 5) ............................. 4eq. 3 The 1.50 rate on credit sales may be too low because it resulted in bad debt e'"ense only two1thirds the amount of receivables written off ((1,6))) during the year. Qowever, if the uncollectible account receivable written off during )1 is not indicative of average uncollectibles written off over a "eriod of time, the 1.50 rate may be a""ro"riate. There is not sufficient historical data to ma$e a definitive decision. 1,6)) 1,6))

1,1 5 1,1 5

(1,1 5

( 2,3)) 3 5 ( 7,265

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Chapter 06 - Reporting and Interpreting Sales Revenue, Receivables, and Cash

E6,-:. 4eq. 1 Dec. 31, )11 -llowance for doubtful accounts (JH-, K-)................ -ccounts receivable (Toby:s !ift /ho") (J-). . To write off an account receivable determined to be uncollectible. Dec. 31, )11 Bad debt e'"ense (KL, J/L) ..................................... -llowance for doubtful accounts (KH-, J-)..... -d>usting entry11estimated loss on uncollectible accounts? based on credit sales (( 5,))) ' .50 , (* 5). 4eq. #ncome statement; M"erating e'"enses; Bad debt e'"ense......................................................... Balance sheet; Current assets -ccounts receivable ((4,))) K ( 5,))) 1 (12,))) 1 (6))) .......................................... Gess; -llowance for doubtful accounts ((3)) 1 (6)) K (* 5) ................................... 4eq. 3 The .50 rate on credit sales a""ears reasonable because it a""ro'imates the amount of receivables written off ((6))) during the year. Qowever, if the uncollectible account receivable written off during )11 is not indicative of average uncollectibles written off over a "eriod of time, the .50 rate may not be a""ro"riate. There is not sufficient historical data to ma$e a definitive decision. 6)) 6))

* 5 * 5

(* 5

(2,3)) 5 (2,)65

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Chapter 06 - Reporting and Interpreting Sales Revenue, Receivables, and Cash

E6,00. 4eq. 1 4eceivables turnover , Iet /ales , (35,426,))) , 2.1* times -verage Iet Trade (3,765,)))C -ccounts 4eceivable 3*5 , 4eceivables Turnover 3*5 , 32.7 days 2.1*

-verage days sales in receivables

C ((4,352,))) K (3,321,)))) O 4eq. The receivables turnover ratio reflects how many times average trade receivables were recorded and collected during the "eriod. The average days sales in receivables indicates the average time it ta$es a customer to "ay its account. E6,0-. 4eq. 1 4eceivables turnover , Iet /ales , (*1,1)1,))) , 11.43 times -verage Iet Trade (5,34*,)))C -ccounts 4eceivable 3*5 , 3*5 , 31.2 days 4eceivables Turnover 11.43

-verage days sales in receivables

C ((5,2*1,))) K (4,631,)))) O 4eq. The receivables turnover ratio reflects how many times average trade receivables were recorded and collected during the "eriod. The average days sales in receivables indicates the average time it ta$es a customer to "ay its account.

6-1

Chapter 06 - Reporting and Interpreting Sales Revenue, Receivables, and Cash

E6,00. 4eq. 1 The change in the accounts receivable balance ((47,)** J *3,4)3 , J(15,336) would increase cash flow from o"erations by (15,336 thousand. This ha""ens because the 9om"any is collecting cash faster than it is recording credit sales revenue. 4eq. (a) Declining sales revenue leads to lower accounts receivable because fewer new credit sales are available to re"lace the receivables that are being collected. (b) 9ash collections from the "rior "eriod@s higher credit sales are greater than the new credit sales revenue. Iote that in the ne't "eriod, cash collections will also decline. E6,01. 4eq. 1 BACCSON CO"$AN> /an4 Reconciliation, Bune 10, 00-Company's Books Lnding balance "er 9ash accountRRRRRRRRR AdditionsD Ione <eductionsD Ban$ service chargeRR 9orrect cash balanceRRR C(17,1)) J (1*, )) , (1,2)). 4eq. Ban$ service charge e'"ense (KL, J/L).................................... 9ash (J-)......................................................................... To record deduction from ban$ account for service charges. 4) 4) Bank Statement Lnding balance "er ban$ statementRRRRRR AdditionsD De"osit in transitRRRR <eductionsD Mutstanding chec$sR 9orrect cash balanceRR

(*,)))

(*,)*) 1,2))C 8,:60 ,))) (5,2*)

4) (5,2*)

4eq. 3 The correct cash balance "er the ban$ reconciliation ((*,))) J (4)), (5,2*) 4eq. 4 Balance sheet (Nune 3), )11); 9urrent assets; 9ash..................................................................................... (5,2*)

6-1!

Chapter 06 - Reporting and Interpreting Sales Revenue, Receivables, and Cash

E6,02. 4eq. 1 /ENNETT CO"$AN> /an4 Reconciliation, Septe'ber 10, 00-Company's Books Lnding balance "er 9ash account........................... AdditionsD Ione <eductionsD Ban$ service charges. . . I/& chec$ J Betty Brown.............. 9orrect cash balance........ ( *) 16) 3) (5,46) Mutstanding chec$s (( 7,2)) J ( 6,4)))..... 9orrect cash balance........ 1,5)) (5,46) Bank Statement Lnding balance "er ban$ statement......................... AdditionsD De"osit in transitC......... <eductionsD

(5,6))

(5,66) 1, ))C *,26)

C( 7,1)) 1 ( *,2)) , (1, )). 4eq. (1) Ban$ service charge e'"ense (KL, J/L)................................. 9ash (J-)...................................................................... To record ban$ service charges deducted from ban$ balance. *) *)

( )

-ccounts receivable (Betty Brown) (K-).................................. 16) 9ash (J-)...................................................................... To record customer chec$ returned due to insufficient funds.

16)

4eq. 3 /ame as the correct balance on the reconciliation, (5,46). 4eq. 4 Balance /heet (/e"tember 3), )11); 9urrent -ssets; 9ash ............................................................................................(5,46)

6-1"

Chapter 06 - Reporting and Interpreting Sales Revenue, Receivables, and Cash

E6,03 (/ased on Supple'ent A) Iovember ), )1) 9ash (K-)...................................................................... 9redit card discount (KH4, J4, J/L)............................ /ales revenue (K4, K/L)................................... To record credit card sale. Iovember 5, )1); -ccounts receivable (9ustomer 9) (K-)....................... /ales revenue (K4, K/L)................................... To record a credit sale. Iovember 7, )1); -ccounts receivable (9ustomer D) (K-)....................... /ales revenue (K4, K/L)................................... To record a credit sale. 441 2 45)

,7)) ,7))

6, )) 6, ))

Iovember 3), )1); /ales returns and allowances (KH4, J4, J/L)............. *)) -ccounts receivable (9ustomer D) (J-)............. To record return of defective goods, (6, )) ' 1+1 , (*)). December *, )1); 9ash (K-)...................................................................... /ales discounts (KH4, J4, J/L)................................... -ccounts receivable (9ustomer D) (J-)............. To record collection within the discount "eriod, 270 S ((6, )) J (*))) , (*,4*7 December 3), )1); 9ash (K-)...................................................................... -ccounts receivable (9ustomer 9) (J-)............. To record collection after the discount "eriod. *,4*7 13

*))

*,*))

,7)) ,7)) (1),45) *)) 13 2 (2,6)2

/ales revenue ((45) K ( ,7)) K (6, )))................................... Gess; /ales returns and allowances ((6, )) ' 1+1 ).................. Gess; /ales discounts ( 0 S ((6, )) J (*))))........................... Gess; 9redit card discounts ((45) ' 0).................................... Iet sales.....................................................................................

6-20

Chapter 06 - Reporting and Interpreting Sales Revenue, Receivables, and Cash

$RO/#E"S
$6,-. 9ase Because .endy@s collects cash when the cou"on boo$s are sold, cash collection is not an issue in this case. #n order to determine if the revenue has been earned, the student must be careful in analy%ing what .endy@s actually sold. /tudents who focus on the sale of the cou"on boo$ often conclude that the earning "rocess is com"lete with the delivery of the boo$ to the customer. #n reality, .endy@s has a significant additional service to "erform? it has to serve a meal. The correct "oint for revenue recognition in this case is when the customer uses the cou"on or when the cou"on e'"ires and .endy@s has no further obligation. 9ase B #n this case there is an e'tremely low down "ayment and some reason to believe that 8"town Builders may default on the contract because of "rior actions. #f students believe that 4ussell Gand Develo"ment could sue and collect on the contract, they will "robably argue for revenue recognition. !iven the ris$ of cash collection, most students will argue that revenue should be recogni%ed as cash is collected. The te't does not discuss &-/B T** (-/9 3*)1 )14)), but the instructor may want to mention during the discussion that there is authoritative guidance concerning minimum down "ayments before revenue can be recorded on a land sale. 9ase 9 .hile warranty wor$ on refrigerators can involve significant amounts of effort and money, com"anies are "ermitted to record revenue at the "oint of sale. The te't does not discuss this s"ecific issue but the matching conce"t is mentioned in the conte't of revenue recognition. This is an e'cellent o""ortunity to mention the need to accrue estimated warranty e'"ense at the time that sales revenue is recorded. /ome students are sur"rised to see that costs that will be incurred in the future can be recorded as an e'"ense in the current accounting "eriod.

6-21

Chapter 06 - Reporting and Interpreting Sales Revenue, Receivables, and Cash

$6,0. 4eq. 1 Sales Revenue K 34,))) K11,5)) K 5,))) IL K *,))) IL IL IL K16,5)) IL IL IL IL K(314,))) Sales <iscounts (ta4en) IL IL IL IL IL K ) K ,)))C K5)) IL J6) IL IL IL K( ,*5) Sales Returns and Allo?ances IL IL IL K5)) IL IL IL IL IL K3,5)) IL IL IL K(4,))) /ad <ebt EEpense IL IL IL IL IL IL IL IL IL IL IL IL K1,14)CC K(1,14)

(a) (b) (c) (d) (e) (f) (g) (h) (i) (>) ($) (l) (m) Total

C(27,))) O (1 U .) ) , (1)),))) gross sales? (1)),))) ' .) , ( ,))) CC9redit sales ((11,5)) K ( 5,))) K ( *,))) K (16,5))).. (7),))) Gess; /ales returns ((5)) K (3,5))).............................. 4,))) Iet sales revenue............................................................ 6*,))) Lstimated bad debt rate...................................................' 1.50 Bad debt e'"ense............................................................ (1,14) 4eq. #ncome statement; /ales revenue............................................................. (314,))) Gess; /ales returns and allowances............... 4,))) /ales discounts..................................... ,*5) Iet sales revenue....................................................... M"erating e'"enses Bad debt e'"ense.....................................................

(3)6,35) 1,14)

6-22

Chapter 06 - Reporting and Interpreting Sales Revenue, Receivables, and Cash

$6,1. Inco'e State'ent Ite's !ross sales revenue /ales returns and allowances Iet sales revenue 9ost of goods sold !ross "rofit M"erating e'"enses Freta' income #ncome ta' e'"ense ( )0) #ncome before e'traordinary items L'traordinary gain (loss) Gess; #ncome ta' ( )0) Iet income LF/ (1),))) shares) Iote , 9om"utations in order a. b. c. d. e. f. g. h. i. a. b. c. d. e. f. g. h. i. CASE A ( 52,))) J ( ),))) , ( 32,))) ( 32,))) ' .3) , (61,6)) ( 32,))) J (61,6)) , (1*6,3)) (61,6)) J ( ,))) , (42,6)) ( ,))) ' . ) , (4,4)) ( ,))) J (4,4)) , (16,*)) ( ,))) ' . ) , (4)) (16,*)) 1 ( ,))) K (4)) , (1*,))) (1*,))) O 1),))) , (1.*) CASE B ( .54 ' 1),))) shares , ( 5,4)) (1),))) ' . ) , ( ,))) ( 5,4)) 1 (1),))) K ( ,))) , (16,4)) (16,4)) O .7) , ( 1,65) ( 1,65) 1 (16,4)) , (4,35) ( 1,65) K (15,*)) , (36,35) (36,35) O (1 1 .6)) , (1 4,5)) (1 4,5)) 1 (36,35) , (76,15) (1*5,))) 1 (1 4,5)) , (4),5)) Case A ( 52,))) ),))) 32,))) 1*6,3)) (3)0) 61,6)) 42,6)) ,))) 4,4)) 16,*)) ( ,)))) 4)) (1*,))) (1.*) i. g. h. f. d. e. c. b. a. Case / (1*5,))) 4),5)) 1 4,5)) (6)0) 76,15) 36,35) 15,*)) 1,65) 4,35) 16,4)) 1),))) ( ,)))) ( 5,4)) ( .54

a. c. b. d. e. f. g. h. i.

6-23

Chapter 06 - Reporting and Interpreting Sales Revenue, Receivables, and Cash

$6,2. 1. Bad debt e'"ense (KL, J/L)...................................................... 6 -llowance for doubtful accounts (KH-, J-)..................... Lnd1of1"eriod bad debt e'"ense estimate. -llowance for doubtful accounts (JH-, K-)................................ -ccounts receivable (J-)................................................. .rite1off of bad debts. . Eear ........................................(145 Eear 1........................................ (72 Allo?ance @or <A >ear 0 .rite1offs 67 145 ) *6 Beg. bal. Bad debt e'". Lnd. bal. K () K (56 J (67 , (*6 J (1 , (145 6

Allo?ance @or <A >ear .rite1offs 1 72 56 145 Beg. bal Bad debt e'". Lnding Bal.

The solution involves solving for the missing value in the T1account.

6-24

Chapter 06 - Reporting and Interpreting Sales Revenue, Receivables, and Cash

$6,3. 4eq. 1 Aging Analysis of Accounts Receivable (b) 8" to Mne (c) Vore Than Total (a) Iot Eet Eear Fast Mne Eear 4eceivables Due Due Fast Due ( 5, )) (5, )) 7,))) ( 7,))) 6,))) ( 6,))) ,5)) ,))) ),5)) 4,))) 4,))) (4*,6)) (13,))) ( 7,5)) (5, ))

9ustomer B. BrownRRRR.. D. DonaldsRRR.. I. Ia"ierRRRR. /. /trothersRRR T. ThomasRRR... TotalsRRRRR

4eq. Aging Schedule--Estimated Amounts Uncollectible -mount of Lstimated Lstimated -ge 4eceivables 8ncollectible -mount Fercentage 8ncollectible Iot yet dueRRRRRRRR (13,))) 0 ( *) 8" to one year "ast dueRR. 7,5)) 60 1,225 Mver one year "ast dueRR.. 5, )) 3)0 1,5*) Lstimated ending balance in 3,715 -llowance for Doubtful -ccounts Balance before ad>ustment 2 ) Bad Debt L'"ense for the year 4eq. 3 Bad debt e'"ense (KL, J/L)........................................... -llowance for doubtful accounts (KH-, J-)............ 4eq. 4 #ncome statement; M"erating e'"enses Bad debt e'"ense............................................................ Balance sheet; 9urrent -ssets; -ccounts receivable......................................................... (4*,6)) Gess; -llowance for doubtful accounts........................... 3,715 -ccounts receivable (net) ............................................... ,725 ,725 ( ,725

a. b. c.

( ,725

(4 ,775

6-25

Chapter 06 - Reporting and Interpreting Sales Revenue, Receivables, and Cash

$6,6. 4eq. 1 T!NASTEN CO"$AN>, INC. Inco'e State'ent =or the >ear Ended <ece'ber 1-, 00-Iet sales revenue ((146,1)) (5,*)) (*,4)))................. 9ost of goods sold................................................................. !ross "rofit on sales.............................................................. M"erating e'"enses; /elling e'"ense............................................................. (14,1)) -dministrative e'"ense................................................. 15,4)) Bad debt e'"ense......................................................... 1,*)) #ncome from o"erations......................................................... #ncome ta' e'"ense...................................................... Iet income ......................................................................... (135,1)) 67,4)) 5*,6))

31,1)) 5,*)) 6,*7) ( 16,2 ) (1.62

Larnings "er share on ca"ital stoc$ outstanding ((16,2 ) O 1),))) shares).................................................................. 4eq. !ross Frofit Fercentage , !ross Frofit Iet /ales ,

(5*,6)) , ).4 ) (4 .)0) (135,1))

The gross "rofit "ercentage measures the e'cess of sales "rices over the costs to "urchase or "roduce the goods or services sold as a "ercentage. 4eceivables , Turnover Iet /ales -verage Iet Trade -ccounts 4eceivable , (135,1)) , 7.72 (15, ))C

C ((1*,))) K (14,4))) O The receivables turnover ratio measures the effectiveness of credit1granting and collection activities.

6-26

Chapter 06 - Reporting and Interpreting Sales Revenue, Receivables, and Cash

$6,8. 4eq. 1 WOO< CO"$AN> /an4 Reconciliation, April 10, 00-Co'pan7&s /oo4s Lnding balance "er 9ash account.......................... AdditionsD #nterest collected................. <eductionsD I/&A-.B. .right............... Ban$ charges..................... 9orrect cash balance.......... ( 3,2)) 1,17) 5,)7) 1*) 5) /an4 State'ent Lnding balance "er ban$ statement....................... AdditionsD De"osits in transitC.............. <eductionsD Mutstanding chec$s............. 1) ( 4,76) 9orrect cash balance........... ( 3,56) 5,4)) 7,26) 4,1)) ( 4,76)

C(41,5)) 1 (3*,1)) , (5,4)). 4eq. (1) 9ash (K-)............................................................................ 1,17) #nterest revenue (K4, K/L)...................................... #nterest collected. ( ) -ccounts receivable (-. B. .right) (K-)............................. 9ash (J-)................................................................. 9ustomer@s chec$ returned, insufficient funds. Ban$ service charge e'"ense (KL, J/L)............................ 9ash (J-)................................................................. Ban$ service charges deducted from ban$ statement. 1*) 1*) 5) 5)

1,17)

(3)

These entries are necessary because of the changes to the regular 9ash account that have not yet been recorded by the com"any. The ban$ already has recorded them in its accounts. The 9ash account (and the other accounts in the entries) must be brought u" to date for financial statement "ur"oses. 4eq. 3 Balance in regular 9ash account........................................................ 4eq. 4 Balance /heet (-"ril 3), )11); 9urrent -ssets; 9ash.............................................................................. ( 4,76)

( 4,76)

6-2

Chapter 06 - Reporting and Interpreting Sales Revenue, Receivables, and Cash

$6,9. 4eq. 1 9om"arison of de"osits listed in the 9ash account with de"osits listed on the ban$ statement reveals a (5, )) de"osit in transit on -ugust 31. 4eq. 9om"arison of the chec$s cleared on the ban$ statement with (a) outstanding chec$s from Nuly, and (b) chec$s written in -ugust reveals two outstanding chec$s at the end of -ugust (( 7) K (51) , (62)). 4eq. 3 A##ISON CO"$AN> /an4 Reconciliation, August 1-, 00-/an4 State'ent Lnding balance "er ban$ statement....................... AdditionsD De"osits in transit................ <eductionsD Mutstanding chec$s............. 9orrect cash balance...........

Co'pan7&s /oo4s Lnding balance "er 9ash account.......................... AdditionsD #nterest collected................. <eductionsD Ban$ service charges............................ 9orrect cash balance............................

( ),36) ,35) ,6 ) 1 ) ,*))

(17,12) 5, )) 3,32) 62) ,*))

4eq. 4 (1) 9ash (K-)............................................................................ #nterest revenue (K4, K/L)...................................... #nterest collected. ( ) Ban$ service charge e'"ense (KL, J/L) ........................... 9ash (J-)................................................................. /ervice charges deducted from ban$ balance.

,35) ,35) 1 ) 1 )

These entries are necessary because of the changes in the regular 9ash account that have not yet been recorded by the com"any. The ban$ already has recorded them in its accounts. The 9ash account (and the other accounts in the entries) must be brought u" to date for financial statement "ur"oses. 4eq. 5 9urrent -ssets; 9ash............................................................................................... (

,*))

6-2!

Chapter 06 - Reporting and Interpreting Sales Revenue, Receivables, and Cash

$6,:. (/ased on Supple'ent A) 4eq. 1 (a) 9ash (K-).................................................................... /ales revenue (K4, K/L)................................. 9ash sales for )11. -ccounts receivable (4. /mith) (K-).......................... /ales revenue (K4, K/L)................................. 9redit sale, (11,5)). -ccounts receivable (W. Viller) (K-)........................... /ales revenue (K4, K/L)................................. 9redit sale, ( 5,))). /ales returns and allowances (KH4, J4, J/L).......... -ccounts receivable (4. /mith) (J-)............... /ale return, 1 unit X (5)). -ccounts receivable (B. /ears) (K-).......................... /ales revenue (K4, K/L)................................. 9redit sale, ( *,))). 9ash (K-).................................................................... /ales discounts (KH4, J4, J/L)................................ -ccounts receivable (4. /mith) (J-)............... Faid account in full within discount "eriod, ((11,5)) 1 (5))) ' (1 1 .) ) , (1),67). 9ash (K-).................................................................... /ales discounts (KH4, J4, J/L)................................ -ccounts receivable ("rior year) (J-).............. 9ollected receivables of "rior year, all within discount "eriods (27,))) O .27 , (1)),))). 9ash (K-).................................................................... /ales discounts (KH4, J4, J/L)................................ -ccounts receivable (W. Viller) (J-)................ 9ollected receivable within the discount "eriod ( 5,))) ' .27 , ( 4,5)). -ccounts receivable (4. 4oy) (K-)............................. /ales revenue (K4, K/L)................................. 9redit sale. 34,))) 34,))) 11,5)) 11,5)) 5,))) 5,))) 5)) 5)) *,))) *,))) 1),67) ) 11,)))

(b)

(c)

(d)

(e)

(f)

(g)

27,))) ,))) 1)),)))

(h)

4,5)) 5)) 5,)))

(i)

16,5)) 16,5))

6-2"

Chapter 06 - Reporting and Interpreting Sales Revenue, Receivables, and Cash

$6,:. (continued) (>) /ales returns and allowances (KH4, J4, J/L).......... 9ash (J-)......................................................... /ales discounts (JH4, K4, K/L)..................... /ales return, 6 units X (5)) less sales discounts ta$en , (3,5)) ' .27. 9ash (K-).................................................................... -ccounts receivable (J-)................................. 9ollected receivable of "rior year, after the discount "eriod. -llowance for doubtful accounts (JH-, K-)................ -ccounts receivable ( )1) account) (J-)....... .rote off uncollectible account from )1). 3,5)) 3,43) 6)

($)

*,))) *,)))

(l)

3,))) 3,)))

(m)

Bad debt e'"ense (KL, J/L)...................................... 1,14) -llowance for doubtful accounts (KH-, J-)..... To ad>ust for estimated bad debt e'"ense 9redit sales ((11,5)) K ( 5,))) K ( *,))) K (16,5)))... (7),))) Gess; /ales returns ((5)) K (3,5))).............................. 4,))) Iet sales revenue............................................................ 6*,))) Lstimated bad debt rate................................................... ' 1.50 Bad debt e'"ense.................................................... (1,14) .

1,14)

4eq. #ncome statement; /ales revenue (( 34,))) K (11,5)) K ( 5,))) K ( *,))) K (16,5)))...................................... (314,))) Gess; /ales returns and allowances ((3,5)) K (5)))............... 4,))) /ales discounts (( ) K ( ,))) K (5)) J (6))...................................... ,*5) Iet sales revenue .............................................................. M"erating e'"enses Bad debt e'"ense.............................................................

(3)6,35) 1,14)

6-30

Chapter 06 - Reporting and Interpreting Sales Revenue, Receivables, and Cash

A#TERNATE $RO/#E"S
A$6,-. 4eq. 1 Sales Revenue K 6,))) K1 ,))) K 3,5)) IL K *,))) IL IL IL IL K17,5)) IL IL IL K(3)6,))) Sales <iscounts (ta4en) IL IL IL K 4) IL 11) K1,7))C IL K4)) IL IL IL IL K( ,43) Sales Returns and Allo?ances IL IL IL IL IL K5)) IL K3,5)) IL IL IL IL IL K(4,))) /ad <ebt EEpense IL IL IL IL IL IL IL IL IL IL IL IL K3,)4)CC K(3,)4)

(a) (b) (c) (d) (e) (f) (g) (h) (i) (>) ($) (l) (m) Total

C Y((77, ))+.27) ' .) Z , (1,7)) CC9redit sales ((1 ,))) K ( 3,5)) K ( *,))) K (17,5))).. Gess; /ales returns ((5)) K (3,5))).............................. Iet sales revenue............................................................ Lstimated bad debt rate................................................... Bad debt e'"ense............................................................ 4eq. #ncome statement; /ales revenue............................................................. (3)6,))) Gess; /ales returns and allowances............... 4,))) /ales discounts..................................... ,43) Iet sales revenue....................................................... M"erating e'"enses Bad debt e'"ense..................................................... (7),))) 4,))) (6*,))) ' 40 (3,)4)

(3)),56) (3,)4)

6-31

Chapter 06 - Reporting and Interpreting Sales Revenue, Receivables, and Cash

A$6,0. 1. Bad debt e'"ense (KL, J/L)......................................................*,)14 -llowance for doubtful accounts (KH-, J-)..................... *,)14 Lnd of "eriod bad debt e'"ense estimate. -llowance for doubtful accounts (JH-, K-)................................5,241 -ccounts receivable (J-)................................................. 5,241 .rite1off of bad debts. . Allo?ances @or <oubt@ul Accounts Eear 3 Eear Eear 1 /alance at /eginning o@ >ear (1,1)7 ,4)* ,456 Additions Charged to Costs and EEpenses (*,)14 4,453 4,65 <eductions @ro' Reserve (5,241 5,651 4,7)3 /alance at End o@ >ear (1,171 1,1)7 ,4)*

>ear 1

Allo?ance @or <oubt@ul Accounts 1,1)7 Beg. bal. .rite1offs 5,241 *,)14 1,171 Bad debt e'". Lnd. bal.

>ear 0

Allo?ance @or <oubt@ul Accounts ,4)* Beg. bal. .rite1offs 5,651 4,453 1,1)7 Bad debt e'". Lnd. bal.

>ear -

Allo?ance @or <oubt@ul Accounts ,456 Beg. bal .rite1offs 4,7)3 4,65 ,4)* Bad debt e'". Lnding bal.

The solution involves solving for the missing value in the T1account.

6-32

Chapter 06 - Reporting and Interpreting Sales Revenue, Receivables, and Cash

A$6,1. 4eq. 1 Aging Analysis of Accounts Receivable (a) (b) (c) Iot Eet 8" to * to Total Due * Vo. 1 Vo. 9ustomer 4eceivable Fast Due Fast Due 4. Devens RRR.. ( ,))) ( ,))) 9. Qoward RRR.. *,))) D. Vc9lain .RRR. 4,))) ( 4,))) T. /$ibins$i RRR 14,5)) ( 4,5)) 1),))) Q. .u RRR..R... 13,))) 13,))) TotalsRRRRR 4eq. Estimated Amounts Uncollectible -mount of Lstimated -ge 4eceivable Goss 4ate Iot yet dueRRRRRRRR (16,5)) 10 8" to * months "ast due...R. 14,))) 50 * to 1 months "ast due.R. ,))) )0 Mver 1 months "ast dueR... *,))) 5)0 Lstimated ending balance in -llowance for Doubtful -ccounts Balance before ad>ustment Bad Debt L'"ense for the year ,6 5 ,6 5 Lstimated 8ncollectible ( 165 6)) 4)) 3,))) 4, 65 1,55) ( ,6 5 (32,5)) (16,5)) (14,))) ( ,))) (d) Vore Than 1 Vo. Fast Due (*,)))

(*,)))

a. b. c. d.

4eq. 3 Bad debt e'"ense (KL, J/L) .......................................... -llowance for doubtful accounts (KH-, J-) ........... 4eq. 4 #ncome statement; M"erating e'"enses Bad debt e'"ense............................................................

( ,6 5

Balance sheet; 9urrent -ssets; -ccounts receivable......................................................... (32,5)) Gess; -llowance for doubtful accounts........................... 4, 65 -ccounts receivable, net........................................

(35,

6-33

Chapter 06 - Reporting and Interpreting Sales Revenue, Receivables, and Cash

A$6,2. 4eq. 1 $ERR> COR$ORATION Inco'e State'ent =or the >ear Ended <ece'ber 1-, 00-0 Iet sales revenue ((174,))) 1 (2,)))1 (7,)))).................. 9ost of goods sold............................................................... !ross "rofit........................................................................... M"erating e'"enses; /elling e'"ense............................................................ (16,))) -dministrative and general e'"ense........................... 17,))) Bad debt e'"ense........................................................ ,))) Total o"erating e'"enses.................................... #ncome from o"erations....................................................... #ncome ta' e'"ense..................................................... Iet income........................................................................... (1*6,))) 27,))) *2,)))

36,))) 3 ,))) 1),2)) ( 1,1)) ( .11

Larnings "er share on common stoc$ outstanding (( 1,1)) O 1),))) shares).................................................................. 4eq. !ross Frofit Fercentage , !ross Frofit Iet /ales ,

(*2,))) , ).413 (41.30) (1*6,)))

The gross "rofit "ercentage measures the e'cess of sales "rices over the costs to "urchase or "roduce the goods or services sold as a "ercentage. 4eceivables , Turnover Iet /ales -verage Iet Trade -ccounts 4eceivable , (1*6,))) , 2.7 (16,)))C

C ((1*,))) K (17,)))) O The receivables turnover ratio measures the effectiveness of credit1granting and collection activities.

6-34

Chapter 06 - Reporting and Interpreting Sales Revenue, Receivables, and Cash

A$6,3. 4eq. 1 9om"arison of (a) the unrecorded de"osit carried over from Iovember and (b) the de"osits listed on the ban$ statement reveals that the (13,))) de"osit for December 31 is in transit. 4eq. 9om"arison of the chec$s cleared on the ban$ statement with (a) outstanding chec$s from Iovember and (b) chec$s written in December reveals that the outstanding chec$s at the end of December are (5,))) K (3,5)) K 5)) , (2,))). 4eq. 3 RI;AS CO"$AN> /an4 Reconciliation, <ece'ber 1-, 00-Co'pan7&s /oo4s Lnding balance "er 9ash account.......................... AdditionsD #nterest collected................. <eductionsD I/& chec$AN. Geft............. Ban$ service charges.......... 9orrect cash balance.......... (*1,)*) 5, 5) **,31) (3)) 15) /an4 State'ent Lnding balance "er ban$ statement....................... AdditionsD De"osits in transit................ <eductionsD 45) (*5,7*) Mutstanding chec$s............. 9orrect cash balance........... 2,))) (*5,7*) (*1,7*) 13,))) 64,7*)

6-35

Chapter 06 - Reporting and Interpreting Sales Revenue, Receivables, and Cash

A$6,3. (continued 4eq. 4 (1) -ccounts receivable (N. Geft) (K-).................................... 9ash (J-).............................................................. To record I/& chec$. 9ash (K-)......................................................................... #nterest revenue (K4, K/L)................................... #nterest collected. Ban$ service charge e'"ense (KL, J/L)......................... 9ash (J-).............................................................. /ervice charges deducted from ban$ balance. 3)) 3)) 5, 5) 5, 5) 15) 15)

( )

(3)

These entries are necessary because of the changes in the regular 9ash account that have not yet been recorded by the com"any. The ban$ already has recorded them in its accounts. The 9ash account (and the other accounts in the entries) must be brought u" to date for financial statement "ur"oses. 4eq. 5 Balance /heet ( )11); 9urrent -ssets; 9ash ................................................................................... (*5,7*)

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Chapter 06 - Reporting and Interpreting Sales Revenue, Receivables, and Cash

CASES AN< $ROBECTS

ANNUAL REP RT CA!E! C$6,-. 1. The com"any includes liquid financial instruments with original maturities of three months or less to be cash and cash equivalents. This information is from note of the financial statements. The amount disclosed is li$ely to be close to the fair mar$et value of the securities, given the short maturity date of the securities. . #n addition to 9ost of !oods /old, -merican Lagle Mutfitters subtracts buying, occu"ancy and warehousing costs from Iet /ales in its com"utation of !ross Frofit. This follows standard "ractice among retailers. Io such additional e'"enses are subtracted in Dec$ers:s (a footwear manufacturer) com"utation of !ross Frofit. This ma$es the inter"retation of gross "rofit "ercentages across different industries difficult. 3. 4eceivables turnover , C ((31,2 ) K 41,461) O This question is designed to focus student attention on the mechanics of the com"utation of the receivables turnover ratio and the effect of industry differences. The receivables turnover is so high because of the nature of the com"any:s business. 4etail sales are li$ely to be made with cash or credit card. -s a consequence, most retailers would not have accounts receivable related to sales unless they had "rivate store credit card accounts. The accounts receivable on -merican Lagle:s balance sheet relate "rimarily to amounts owed from landlords for construction allowances for building new stores in malls. 4. Io, the com"any does not re"ort an allowance for doubtful accounts on the balance sheet or in the notes. -s a retailer, its trade receivables from customers are immaterialAthe com"any:s receivables consist of non1trade receivables and notes receivable. Iet /ales , ( ,277,7** , 71.4 times -verage Iet Trade (3*,*2*C -ccounts 4eceivable

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Chapter 06 - Reporting and Interpreting Sales Revenue, Receivables, and Cash

C$6,0. 1. The com"any held (31*,)35 thousand of cash and cash equivalents at the end of the current year. This is disclosed on the balance sheet and the statement of cash flows. . -ccounts receivable increased by (1),) 5 thousand, decreasing Iet 9ash Frovided by M"erating -ctivities for the current year. This is included in the o"erating section of the statement of cash flows in the line item relating to changes in receivables. Eou may wish to note to students that this amount does not agree with the amount on the statement of cash flows which indicates a (1),6 * increase. This difference is the result of the translation of foreign currency receivables. 3. 000: !ross Frofit , Fercentage !ross Frofit Iet /ales (613,467 , ).372 1,734,*17 0009 (56*,66 , ).373 1,5)6,6 4

The gross "rofit "ercentage increased slightly from ))7 to ))2. The increase im"lies that the com"any has increased its ability to charge "remium "rices or to "urchase goods for resale at lower cost. 4. #t discloses its revenue recognition "olicies in note which summari%es significant accounting "olicies. The com"any recogni%es revenue from selling gift cards when customers redeem a gift card for merchandise rather than when the gift card is sold. .hen gift cards are sold, a current liability (deferred revenue) is recorded.

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Chapter 06 - Reporting and Interpreting Sales Revenue, Receivables, and Cash

C$6,1. 1. Current 7ear !ross Frofit , Fercentage $rior 7ear !ross Frofit , Fercentage !ross Frofit Iet /ales !ross Frofit Iet /ales A'erican Eagle Out@itters (1,164,1)1 , ).323 ,277,7** A'erican Eagle Out@itters (1,4 3,137 , ).4** 3,)55,412 !rban Out@itters (613,467 , ).372 1,734,*17 !rban Out@itters (56*,66 , ).373 1,5)6,6 4

The im"roved gross "rofit "ercentage for 8rban Mutfitters suggests higher sales "rices and+or lower costs of merchandise. Because other costs (occu"ancy, etc.) are included along with cost of goods sold, the im"roved ratios may also result from im"roved com"arable store sales and better cost controls. The declining gross "rofit "ercentage for -merican Lagle suggests the o""osite scenarios. . 9om"anies with unique items for sale or valuable brand images often "roduce higher gross "rofit margins. Because -merican Lagle Mutfitters and 8rban Mutfitters have unique items for sale as well as valuable brand images in certain mar$ets, their margins are "redicted to be in the mid to u""er range of their industry. 3. Industr7 Average 32.)0 A'erican Eagle Out@itters 32.30 !rban Out@itters 37.20

!ross Frofit Fercentage ,

8rban Mutfitters: gross "rofit "ercentage is >ust below and -merican Lagle Mutfitters: is above the industry average. The higher gross "rofit "ercentage for -merican Lagle Mutfitters was antici"ated in 4equirement , but 8rban Mutfitters is not above the industry average (although it is close).

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Chapter 06 - Reporting and Interpreting Sales Revenue, Receivables, and Cash

"#NANC#AL REP RT#N$ AN% ANAL&!#! CA!E! C$6,2. 1. Ees. !iven that only one three1year "ro>ect is wor$ed on at a time, the com"leted contract method would result in no revenue being recogni%ed for two out of every three years, and all of the revenue from each "ro>ect being recogni%ed during the third. #f the same amount of wor$ was com"leted each year, the "ercentage of com"letion method would result in an a""ro'imately equal amount of revenue each "eriod. #f the com"any regularly started and com"leted a larger constant number of equal si%ed "ro>ects each re"orting "eriod, the si%e of any difference between revenues re"orted under the two methods would decline. 8nder generally acce"ted accounting "rinci"les, the a""ro"riate method would be determined by whether the costs to com"lete can be accurately assessed. #f they can be accurately estimated, the "ercentage of com"letion method is a""ro"riate. #f not, the com"leted contract method should be used. Qowever, managers generally "refer to re"ort the smoother earnings "attern conveyed by the "ercentage of com"letion method because smoother earnings are generally thought to convey lower ris$ to investors.

3.

CR#T#CAL T'#N(#N$ CA!E! C$6,3. 1. 4ecording sales for goods or services that had not been delivered as of year1end violates the revenue "rinci"le. 4ecording revenue for sales that were sub>ect to cancellation, without estimating returns "ro"erly, is also a violation. #t should establish a sales returns and allowances account (a contra revenue) for "otential cancellations. -n estimate of future cancellations should be made and the amount should reduce net sales in the "eriod the revenue is recogni%ed. Frofiting from sales of stoc$ they owned at an inflated stoc$ "rice and "erha"s receiving bonuses determined on the basis of growth in net income "robably motivated management. Vanagement was very focused on re"orting increased growth because the growth fueled the run1u" in the stoc$ "rice.

3.

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Chapter 06 - Reporting and Interpreting Sales Revenue, Receivables, and Cash

C$6,3. (continued) 4. The other investors who "aid inflated amounts for the stoc$, customers who were "oorly served during the "eriod, and em"loyees of the com"any who were drawn into the fraud and suffered damage to their re"utations were all hurt by management:s conduct. /ales transactions boo$ed near the end of the quarter and sales with s"ecial terms, e.g. right of return or cancellation, should receive s"ecial attention from auditors. 9hannel stuffing often lowers the receivables turnover ratio. To cover u" this change, management im"ro"erly reclassified some accounts receivable as notes receivable.

5.

C$6,6. 4eq. 1 (a) (5) ' 1 months (b) (1 ' (5 wee$s ' 5 days "er wee$) (c,d) -ccounts receivable collections ((3)) K (7))) Total a""ro'imate amount stolen , , , ( *)) 3,1 ) 1,1)) (4,7 )

4eq. Basic recommendations; (1) #nstall a tight system of internal control, including the following; a. /e"arate cash handling from record$ee"ing. b. De"osit all cash daily. c. Va$e all "ayments by chec$. 9onsider a se"arate cash on hand system for small e'"ense "ayments. d. 4econcile ban$ statement monthly. e. #nstitute a system of s"ot chec$s. f. Lstablish cash and "a"erwor$ flows. ( ) a. -rrange for an annual inde"endent audit on a continuing basis. b. 9arefully "lan and assign definite res"onsibilities for all em"loyees. &ocus on attaining internal control. #solate the once trusted em"loyee from all cash handling and accounting activities and consider dismissing and bringing charges against the em"loyee.

"#NANC#AL REP RT#N$ AN% ANAL&!#! PR )ECT! C$6,8. The solutions to this case will de"end on the com"any and+or accounting "eriod selected for analysis.

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