April 17, 2016

Accounting for Sales - Review Notes

Revenue Recognition
•The timing of revenue recognition is important since itis critical to the measurement of income.

• Cash-basis
 –revenues are recognized when cash iscollected for goods or services.
• Accrual basis
 –recognition of revenue occurs at the point of sale
. Both IFRS and U.S. GAAP require the following two criteria be met for revenue recognition:
 –Revenue is earned–goods or services must bedelivered to the customer –Revenue is realized–cash or an asset virtually assuredto be converted into cash is received

Revenue Recognition
• Percentage of Completion Method
 –recognizes revenue on long term contracts as production occursand assigns the associated expenses to abide by thematching principle.
•US GAAP considers the usage of the methodappropriate only if:
 –the progress measures are dependable –contract obligations are explicit –both seller and the buyer are expected to meet their obligations.
•IFRS is not that specific with these requirements

Cash and Credit Sales Revenue
•Revenue is recorded at the present cash value of the asset received.

Sales Returns
• Sales Returns
-previously purchasedmerchandise returned to the seller for any reason

Sales Allowances
• Sales Allowance
 –reduction of the originalselling price mostly to settle customercomplaints

Cash and Trade Discounts
• Trade discounts
 –reductions to the gross salesprice for a particular class of customers or fordiffering order sizes.
• Cash discounts
 –reductions of invoice pricesfor prompt payment; rewards extended to thecustomers

Some Cash Discount Terms
• n/30
 –The full billed price (net price) due in 30days after the invoice date.•
15 E.O.M
. –The full price is due within 15 daysafter the end of the month of sale.•
 –2% off invoice price, if paid within 10days of invoice date; net amount due in 30 daysafter invoice date.

Uncollectible Accounts
•Two methods to measure uncollectible accounts
Specific Write-off Method
: assumes all receivablesare collectable until proven otherwise; is used bycompanies that rarely experience bad debts; writes-off the specific receivable when it is apparent that itwill not be collected.
•Pros: less costly, Cons: violates the matchingprinciple. –
Allowance method
: estimates the amount ofuncollectible accounts at year end; net income andreceivables are reduced to reflect potentialuncollectible accounts.
•Pros: better matching, Cons: prone tomanipulations

Assessing Accounts Receivable
•Cash sales produce cash instantly
•Credit sales generally cause sales to increasebut they also delay cash receipts.
 –Major credit cards
•Just a few days before credit card companytransfers cash to the company
•Some treat these receivables as cash equivalents –Company credit cards –using last year’s data
•How long did it take to collect receivables
•Is that length of time acceptable?

Review Notes  -  Merchandising Operations (Sales)

Presentation slides


Updated 17 Apr 2016
8 Dec 2011

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