Chapter 5: Motivating Sales and Collections Flashcards
Core Principle of Revenue Recognition
Definition: Revenues are recorded when a company transfers goods and services to customers, in the amount it expects to receive.
Determining Expected Entitlement: Commonly the contracted price for items, but may be reduced by incentives like discounts or rebates.
Determining Transfer of Risks and Benefits
Contract Terms: Specifies when risks and benefits of ownership transfer from seller to customer.
Shipping Point: FOB (free on board) shipping point - title changes at shipment, buyer pays for shipping.
Destination Point: FOB destination point - title changes on delivery, seller pays for shipping.
Revenue Recognition: Goods sold FOB shipping point recognized at shipment, FOB destination point recognized at delivery.
Revenue Recognition for Service Companies
Recognition Criteria: Service companies record sales revenue when obligations to the buyer under the agreed contract are fulfilled.
Disclosure: Specific revenue recognition policies are disclosed in financial statements under “Significant Accounting Policies.”
Variable Consideration in Contracts
Types: Sales discounts, sales returns, refunds, and credits.
Effect: Variable consideration affects the expected amount to be received from the customer.
Complex Contracts: For complex contracts with multiple performance obligations, a five-step process is applied for revenue recognition.
Impact of Credit Card Sales on Net Sales
Practice: Gildan allows all customers to use credit cards for purchases.
Impact: Increases convenience, potentially boosts sales, but may involve processing fees that affect net sales figures.
Impact of Sales Discounts on Net Sales
Practice: Business customers receive discounts for early payment.
Impact: Encourages prompt payment, reduces accounts receivable turnover time, affects net sales positively.
Impact of Sales Returns on Net Sales
Practice: Gildan allows returns under specific circumstances.
Impact: Can decrease net sales if products are returned and refunded, impacting revenue figures.
Impact of Sales of Bundled Items on Net Sales
Practice: Gildan sells bundled items to both business and individual customers.
Impact: Can increase sales through bundled offers, potentially boosting revenue; however, careful accounting is needed to calculate net sales accurately.
Reasons for Accepting Credit Cards
Convenience: Enhances customer traffic by offering credit card payment options.
Cost Avoidance: Eliminates expenses related to providing credit directly to customers, such as recordkeeping and debt collection.
Risk Mitigation: Reduces losses due to insufficient funds in customer accounts and minimizes losses from fraudulent credit card sales.
Faster Transactions: Accelerates cash flow as credit card receipts are directly deposited, enabling quicker access to funds.
Credit Card Company Fees
Charges: Credit card companies charge a fee for their services.
Example: If a seller processes a $3,000 credit card payment and receives credit for 97% ($2,910), the credit card discount is 3%.
Calculation: Credit Card Discount = 3% of Gross Sales = 0.03 x $3,000 = $90.
Net Sales Calculation: Gross Sales - Credit Card Discount = Net Sales ($3,000 - $90 = $2,910).
Impact on Net Sales Reporting
Calculation of Net Sales: Gross sales minus credit card discounts equals net sales.
Reporting: Net sales, reflecting credit card discounts, are reported on the statement of earnings.
Uniformity: Similar accounting principles apply when consumers use contactless mobile payment apps like Google Pay or Apple Pay.
Credit Sales and Credit Terms
Definition: Most of Gildan’s sales are credit sales on open account, with no formal promissory note.
Credit Terms Notation: Credit terms, like n/30 (due within 30 days), are indicated on sales documents. ‘n’ means sales amount net of any returns.
Sales Discount Option: Gildan offers sales discounts to encourage prompt payment from business customers.
Sales Discount Terms
Example: Standard credit terms of 2/10, n/30 mean a 2% discount is available if cash payment is made within 10 days; otherwise, the full invoice amount is due within 30 days.
Purpose: Encourages quick payment, benefits seller by improving cash flow and ensuring timely payments.
Calculation: Sales Discount = 2% of Gross Sales = 0.02 x $1,000 = $20.
Impact on Net Sales Reporting (Discounts)
Calculation of Net Sales: Gross sales minus sales discounts equals net sales.
Reporting: Net sales, reflecting deducted sales discounts, are reported on the statement of earnings.
Additional Consideration: Any other price concessions, such as quantity discounts or rebates, also impact the computation of net sales.
Significance of Early Payment Discounts
Savings Impact: Customers pay within the discount period to save substantially.
Example: With terms of 2/10, n/30, 2% is saved by paying 20 days early, equivalent to an annual interest rate of 37%.
Calculation: Annual interest rate is obtained by first computing the interest rate for the discount period.
Discount Calculation
Discount Period: Customer pays 98% of the gross sales amount when a 2% discount is taken.
Example: On a $100 sale with terms of 2/10, n/30, $2 is saved, and $98 is paid 20 days early.
Interest Rate Calculation: (Amount saved + Amount paid) / Interest rate for 20 days = 2.04% for 20 days, or 0.102% per day.
Annual Interest Rate Calculation
Formula: Annual interest rate = (Interest rate for 20 days) × 365 days = 37.23%.
Benefit to Customers: Even with borrowing from a bank at a high interest rate (e.g., 15%), customers save money by taking advantage of cash discounts.
Bank’s interest rate is typically lower than the high rate associated with failing to take cash discounts.
Importance of Prompt Delivery
Significance: Essential for customer satisfaction and maintaining good relations.
Impacts of Poor Delivery: Late or incorrect deliveries can lead to lost sales, damage reputation, and strain relationships.
Customer Rights: Customers can return unsatisfactory or damaged merchandise for a replacement, refund, or bill adjustment.
Sales Returns Management
Estimation Process: Gildan estimates expected product returns based on past experience.
Calculation: Estimated sales returns are subtracted from gross sales to determine net sales revenue.
Example: If a customer bought $2,000 worth of T-shirts and 5% is expected to be returned, net sales would be $1,900.
Reporting: Net sales, after deducting estimated sales returns, are reported on the statement of earnings.
Handling of Sales Returns
Options: Customers can return products for credit, refund, or replacement within a specified period.
Management Approach: Gildan manages sales returns to ensure accurate accounting of net sales revenue.
Regulation: Accounting for sales returns follows specific guidelines discussed in detail in related appendices.
Computation of Net Sales
Calculation: Net sales on the statement of earnings are computed by deducting credit card discounts, sales discounts, and estimated sales returns from gross sales.
Example: Gross sales of $6,000, minus $90 (credit card discounts), $20 (sales discounts), and $100 (estimated sales returns) result in net sales of $5,790.
Components of Net Sales
Deductions: Credit card discounts, sales discounts, and estimated sales returns are subtracted to compute net sales.
Disclosure Practices: Companies often do not disclose these components in annual reports to prevent revealing their credit policies to competitors.
Confidentiality Concerns: External users may find it challenging to accurately assess the effects of these deductions on net sales and net earnings.
Bundle of Goods and Services
Definition: Refers to a sales contract involving both goods and services.
Nature: Enforceable agreement creating rights and obligations between parties.
Examples: Smartphone purchases with service contracts, car sales with warranties and maintenance, iPad sales with future software upgrades.
Implicit Contracts in Daily Purchases
Example: Purchasing food in a food court involves implicit contracts based on purchasing norms.
Distinctiveness: Smartphone purchases involve paying for the device and signing a service contract, often with discounts and legally enforceable obligations.
