1、Copyright 2006 McGraw-Hill Ryerson.7-1Financial AccountingRobert Libby,Patricia A.Libby,Daniel G.Short,George Kanaan,Maureen GowingSecond CANADIAN editionCopyright 2006 McGraw-Hill Ryerson.7-2Chapter 7Reporting and Interpreting Sales Revenue,Receivables,and CashCopyright 2006 McGraw-Hill Ryerson.7-3
2、Accounting for Sales RevenueThe revenue principle requires that revenues be recorded when earned:An exchange has taken place.Collection is probable.The earnings process is nearly complete.Copyright 2006 McGraw-Hill Ryerson.7-4Reporting Net Sales Companies record sales discounts,sales returns and all
3、owances,and credit card discounts separately to allow management to monitor these transactions.Copyright 2006 McGraw-Hill Ryerson.7-5Credit Card Sales to ConsumersCompanies accept credit cards for several reasons:To increase sales.To avoid providing credit directly to customers.To avoid losses due t
4、o bad cheques.To receive payment quicker.Copyright 2006 McGraw-Hill Ryerson.7-6 When credit card sales are made,the company must pay the credit card company a fee for the service it provides.Credit Card Sales to ConsumersCopyright 2006 McGraw-Hill Ryerson.7-7Credit Card Sales to Consumers On January
5、 2,a store had credit card sales of$3,000.The credit card company charges a 3%service fee.Prepare the journal entry to record these sales.GENERAL JOURNALPage 34DateDescriptionDebitCreditJan.2Copyright 2006 McGraw-Hill Ryerson.7-8GENERAL JOURNALPage 34DateDescriptionDebitCreditJan.2 Accounts Receivab
6、le2,910Credit Card Discounts90Sales Revenue3,000$3,000 3%=$90 Credit Card FeeCredit Card Sales to Consumers On January 2,a store had credit card sales of$3,000.The credit card company charges a 3%service fee.Prepare the journal entry to record these sales.Credit Card Discounts are reportedas a contr
7、a-revenue account.Copyright 2006 McGraw-Hill Ryerson.7-9Sales to Businesses on Account When companies allow customers to purchase merchandise on an open account,the customer promises to pay the company in the future for the purchase.Copyright 2006 McGraw-Hill Ryerson.7-10 When customers purchase on
8、open account,they may be offered a sales discount to encourage early payment.Read as:“Two ten,net thirty”Sales to Businesses on AccountCopyright 2006 McGraw-Hill Ryerson.7-11Percentage of DiscountNumber of Days Discount Is AvailableOtherwise,the Full Amount Is Due Number of Days When the Full Amount
9、 Is DueSales to Businesses on AccountCopyright 2006 McGraw-Hill Ryerson.7-12On January 6,Gildan sold$1,000 of merchandise on credit with terms of 2/10,n/30.Prepare the journal entry to record the sale.Sales to Businesses on AccountGENERAL JOURNALPage 34DateDescriptionDebitCreditJan.6Copyright 2006 M
10、cGraw-Hill Ryerson.7-13GENERAL JOURNALPage 34DateDescriptionDebitCreditJan.6 Accounts Receivable1,000Sales Revenue1,000On January 6,Gildan sold$1,000 of merchandise on credit with terms of 2/10,n/30.Prepare the journal entry to record the sale.Sales to Businesses on AccountCopyright 2006 McGraw-Hill
11、 Ryerson.7-14On January 14,Gildan receives the appropriate payment from the customer for the January 6 sale.Prepare the required journal entry.Sales to Businesses on AccountGENERAL JOURNALPage 34DateDescriptionDebitCreditJan.14Copyright 2006 McGraw-Hill Ryerson.7-15GENERAL JOURNALPage 34DateDescript
12、ionDebitCreditJan.14 Cash980Sales Discounts20Accounts Receivable1,000$1,000 2%=$20 sales discount$1,000 -$20 =$980 cash receiptOn January 14,Gildan receives the appropriate payment from the customer for the January 6 sale.Prepare the required journal entry.Sales to Businesses on AccountContra-revenu
13、e accountCopyright 2006 McGraw-Hill Ryerson.7-16If the customer remits the appropriate amount on January 20 instead of January 14,what entry would Gildan record?Sales to Businesses on AccountGENERAL JOURNALPage 34DateDescriptionDebitCreditJan.20Copyright 2006 McGraw-Hill Ryerson.7-17GENERAL JOURNALP
14、age 34DateDescriptionDebitCreditJan.20 Cash1,000Accounts Receivable1,000Since the customer paid after the discount period,a sales discount is not granted.Sales to Businesses on AccountIf the customer remits the appropriate amount on January 20 instead of January 14,what entry would Gildan record?Cop
15、yright 2006 McGraw-Hill Ryerson.7-18Sales Returns and AllowancesDebited for damaged merchandise.Debited for returned merchandise.Contra revenue account.Copyright 2006 McGraw-Hill Ryerson.7-19Sales Returns and AllowancesOn July 8,The T-Shirt Store returns$500 of shirts originally purchased on account
16、 from Gildan.Prepare the required journal entry.GENERAL JOURNALPage 40DateDescriptionDebitCreditJuly8Copyright 2006 McGraw-Hill Ryerson.7-20Sales Returns and AllowancesOn July 8,The T-Shirt Store returns$500 of shirts originally purchased on account from Gildan.Prepare the required journal entry.GEN
17、ERAL JOURNALPage 40DateDescriptionDebitCreditJuly8Sales Returns and Allowances500Accounts Receivable500Copyright 2006 McGraw-Hill Ryerson.7-21Gross Profit PercentageIn 2004,Gildan reported gross profit of$154,671,718 on sales of$533,367,537.Gross ProfitPercentageGross ProfitNet Sales=All other thing
18、s equal,a higher gross profit results in higher net income.Copyright 2006 McGraw-Hill Ryerson.7-22Gross Profit PercentageGross ProfitPercentage$154,671,718$533,367,537=29.0%Gross ProfitPercentageGross ProfitNet Sales=All other things equal,a higher gross profit results in higher net income.Copyright
19、 2006 McGraw-Hill Ryerson.7-23Measuring and Reporting ReceivablesAmounts owed by other companies or persons for cash,goods,or services.Open accounts owed to the business by trade customers.Accounts ReceivableCopyright 2006 McGraw-Hill Ryerson.7-24$1,200Montreal,QuebecJanuary 5,2006Sixty daysafter da
20、te I promise to pay tothe order of First Canadian BankOne thousand two hundred-DollarsPayable atFirst City BankValue received with interest at per annumNo.Due Gildan Activewear10242March 6,200612%Pat RogersMeasuring and Reporting ReceivablesDue DateMakerInterest RatePrincipalTermPayeeCopyright 2006
21、McGraw-Hill Ryerson.7-25Accounting for Bad Debts Bad debts result from credit customers who will not pay the business the amount they owe,regardless of collection efforts.Copyright 2006 McGraw-Hill Ryerson.7-26Accounting for Bad DebtsMatching PrincipleBad Debt ExpenseSales RevenueRecord in same acco
22、unting period.Copyright 2006 McGraw-Hill Ryerson.7-27Accounting for Bad DebtsMost businesses record an estimate of the bad debt expense by an adjusting entry at the end of the accounting period.Copyright 2006 McGraw-Hill Ryerson.7-28Recording Bad Debt Expense EstimatesAssume Gildan estimated bad deb
23、t expense for 2005 to be$2,383,000.Prepare the adjusting entry.GENERAL JOURNALPage 78DateDescriptionDebitCreditDec.31Copyright 2006 McGraw-Hill Ryerson.7-29GENERAL JOURNALPage 78DateDescriptionDebitCreditDec.31 Bad Debt Expense2,383,000Allowance for Doubtful Accounts2,383,000Recording Bad Debt Expen
24、se EstimatesBad Debt Expense is normally classified as a selling expense and is closed at year-end.Assume Gildan estimated bad debt expense for 2005 to be$2,383,000.Prepare the adjusting entry.Contra-asset accountCopyright 2006 McGraw-Hill Ryerson.7-30Allowance for Doubtful AccountsAmount the busine
25、ssexpects to collect.Balance Sheet DisclosureCopyright 2006 McGraw-Hill Ryerson.7-31Writing Off Uncollectible Accounts When it is clear that a specific customers account receivable will be uncollectible,the amount should be removed from the Accounts Receivable account and charged to the Allowance fo
26、r Doubtful Accounts.Copyright 2006 McGraw-Hill Ryerson.7-32Writing Off Uncollectible Accounts Assume on May 6,Gildan wrote off aspecific account receivable witha balance of$2,500.Prepare the required journal entry.GENERAL JOURNALPage 37DateDescriptionDebitCreditMay6Copyright 2006 McGraw-Hill Ryerson
27、.7-33Writing Off Uncollectible AccountsGENERAL JOURNALPage 37DateDescriptionDebitCreditMay6 Allowance for Doubtful Accounts2,500Accounts Receivable2,500 Assume on May 6,Gildan wrote off aspecific account receivable witha balance of$2,500.Prepare the required journal entry.Copyright 2006 McGraw-Hill
28、Ryerson.7-34Writing Off Uncollectible AccountsAssume that before the write-off entry,Gildans Accounts Receivable balance was$81,000,000 and the Allowance for Doubtful Accounts balance was$2,000,000.Lets see what effect the write-off had on these accounts.Copyright 2006 McGraw-Hill Ryerson.7-35Writin
29、g Off Uncollectible AccountsNotice that the write-off did not change the net realizable value nor did it affect any income statement accounts.Copyright 2006 McGraw-Hill Ryerson.7-36Methods for Estimating Bad DebtsPercentage of credit sales or Aging of accounts receivableCopyright 2006 McGraw-Hill Ry
30、erson.7-37Percentage of Credit SalesBad debt percentage is based on actual uncollectible accounts from prior years credit sales.The focus is on determining the amount to record on the income statement asBad Debt Expense.Copyright 2006 McGraw-Hill Ryerson.7-38Percentage of Credit SalesCopyright 2006
31、McGraw-Hill Ryerson.7-39Percentage of Credit SalesIn 2005,Kids Clothes had credit sales of$60,000.Past experience indicates that bad debts are one percent of sales.What is the estimate of bad debts expense for 2005?Copyright 2006 McGraw-Hill Ryerson.7-40Percentage of Credit SalesIn 2005,Kids Clothes
32、 had credit sales of$60,000.Past experience indicates that bad debts are one percent of sales.What is the estimate of bad debts expense for 2005?$60,000 .01=$600Now,prepare the adjusting entry.Copyright 2006 McGraw-Hill Ryerson.7-41Percentage of Credit SalesGENERAL JOURNALPage 76DateDescriptionDebit
33、CreditDec.31 Bad Debt Expense600Allowance for Doubtful Accounts600Copyright 2006 McGraw-Hill Ryerson.7-42Now lets discuss another method that is used to account for uncollectible accounts.Copyright 2006 McGraw-Hill Ryerson.7-43Aging of Accounts ReceivableThe focus is on determining the desired balan
34、ce in the Allowance for Doubtful Accounts on the balance sheet.Copyright 2006 McGraw-Hill Ryerson.7-44Aging of Accounts ReceivableCopyright 2006 McGraw-Hill Ryerson.7-45Aging ScheduleEach customers account is aged by breaking down the balance by showing the age(in number of days)of each part of the
35、balance.An aging of accounts receivable for Kids Clothes in 2005 might look like this.Copyright 2006 McGraw-Hill Ryerson.7-46Aging ScheduleBased on past experience,the business estimates the percentage of uncollectible accounts in each time category.Copyright 2006 McGraw-Hill Ryerson.7-47Aging Sched
36、uleThese percentages are then multiplied by the appropriate column totals.Copyright 2006 McGraw-Hill Ryerson.7-48Aging ScheduleThe column totals are then added to arrive at the total estimate of uncollectible accounts of$1,201.Copyright 2006 McGraw-Hill Ryerson.7-49Aging of Accounts ReceivableRecord
37、 the Dec.31,2005 adjusting entry assuming that the Allowance for Doubtful Accounts currently has a$50 credit balance.Copyright 2006 McGraw-Hill Ryerson.7-50Aging of Accounts ReceivableAfter posting,the Allowance account would look like this.GENERAL JOURNALPage 76DateDescriptionPost.Ref.DebitCreditDe
38、c.31 Bad Debt Expense1,151Allowance for Doubtful Accounts1,151Copyright 2006 McGraw-Hill Ryerson.7-51Aging of Accounts ReceivableAllowance for Doubtful AccountsNotice that the balance after adjustment is equal to the estimate of$1,201 based on the aging analysis performed earlier.Copyright 2006 McGr
39、aw-Hill Ryerson.7-52Receivable TurnoverThis ratio measures how quickly a companycollects its accounts receivable.Gildan reported 2004 net sales of$533,367.The receivables were$64,260 at September 29,2003(beg.of year)and$85,317 at October 5,2004(end of year).(All amounts in thousands.)Net Sales Avera
40、ge Net Trade ReceivablesReceivable Turnover=Copyright 2006 McGraw-Hill Ryerson.7-53Receivable Turnover Net Sales Average Net Trade ReceivablesReceivable Turnover=$533,367($64,260+$85,317)2=7.13 timesReceivable Turnover=This ratio measures how quickly a companycollects its accounts receivable.Copyrig
41、ht 2006 McGraw-Hill Ryerson.7-54Focus on Cash FlowsSales RevenueAdd Decrease in Accounts ReceivableSubtract Increase in Accounts ReceivableCash Collected from CustomersCopyright 2006 McGraw-Hill Ryerson.7-55Internal Controls are the processes by which the companys board of directors,management,and o
42、ther personnel provide reasonable assurance regarding the reliability of the companys financial reporting,the effectiveness and efficiency of its operations,and its compliance with applicable laws and regulations.Copyright 2006 McGraw-Hill Ryerson.7-56Controls Over Accounts ReceivableTo guard agains
43、t the extending credit to non-worthy customers,the following practices can help minimize bad debts:1.Require approval of customers credit history by a person independent of the sales and collection functions.2.Monitor the age of accounts receivable periodically and contact customers with overdue pay
44、ments.3.Reward both sales and collection personnel for speedy collections so that they work as a team.Copyright 2006 McGraw-Hill Ryerson.7-57Now lets start our discussion of cash.Copyright 2006 McGraw-Hill Ryerson.7-58Cash and Cash EquivalentsCash and Cash EquivalentsChequesMoney OrdersBank DraftsCe
45、rtificates of DepositT-BillsCopyright 2006 McGraw-Hill Ryerson.7-59Internal Control of CashCash is the asset most susceptible to theft and fraud.properly account for assets.safeguard assets.ensure the accuracy of financial records.Internal control refers to policies and procedures that are designed
46、to:Copyright 2006 McGraw-Hill Ryerson.7-60Internal Control of CashSeparationof DutiesCustodyRecordingAuthorizationCopyright 2006 McGraw-Hill Ryerson.7-61Internal Control of CashDaily DepositsPurchase ApprovalPrenumbered ChequesPayment ApprovalCash Controls VerifySignaturesBank ReconciliationsCopyrig
47、ht 2006 McGraw-Hill Ryerson.7-62Bank ReconciliationProvides information for reconciling journal entries.Explains the difference between cash reported on bank statement and cash balance on companys books.Copyright 2006 McGraw-Hill Ryerson.7-63Bank Reconciliation Balance per Bank+Deposits in Transit-O
48、utstanding Cheques Bank Errors=Adjusted Balance Balance per Book+Deposits by Bank (credit memos)-Service Charge-NSF Cheques Book Errors=Adjusted BalanceCopyright 2006 McGraw-Hill Ryerson.7-64Bank Reconciliation Balance per Book+Deposits by Bank (credit memos)-Service Charge-NSF Cheques Book Errors=A
49、djusted Balance Balance per Bank+Deposits in Transit-Outstanding Cheques Bank Errors=Adjusted BalanceAll reconciling items on the book side require an adjusting entry to the cash account.Copyright 2006 McGraw-Hill Ryerson.7-65Bank ReconciliationPrepare a July 31 bank reconciliation statement and the
50、 resulting journal entries for the Simmons Company.The July 31 bank statement indicated a cash balance of$9,610,while the cash ledger account on that date shows a balance of$7,430.Additional information necessary for the reconciliation is shown on the next page.Copyright 2006 McGraw-Hill Ryerson.7-6
