Chapter 5: Sales and Receivables Flashcards
cash-basis accounting recognizes revenue…
in the period payment is received (as on your tax return)
accrual basis accounting recognizes revenue…
when the company’s performance obligation is satisfied by transferring control of the promised good or service to the customer
T or F: control can pass either at a point in time or over time.
True
_______ provides detail as to when revenue should be recognized.
FASB
For most retail organizations, revenue is recognized at the _____ ___ _____.
point of sale
For service industries, revenue is recognized when…
the service is performed
Companies often induce customers to buy by modifying the terms of the sale.
Three modifications that affect the amount the company expects to collect are:
- Discounts
- Returns
- Allowances
a price reduction (usually expressed as a percentage of the selling price) that companies may offer to encourage prompt payment
sales discounts
Why are sales discounts attractive to:
1. Buyers
2. Sellers
- Buyers: reduced cost of goods/services
- Sellers: quicker cash and collection costs are reduced
The interest expense associated with borrowing money has a (positive/negative) effect on net income.
negative
Sales invoices use a standard notation to state discount and credit terms.
Ex: the invoice of a seller who expects payment in 30 days offers a 2% discount if payment is made within 10 days would bear the notation:
2/10 ; n/30
What does n/30 indicate in a sales invoice standard notation?
What does 2/10 indicate?
n/30: the gross amount of the invoice (the full pre-discount amount) must be paid in 30 days.
2/10: if payment is made within the 10-day discount period, the amount owed is 2% less than the gross (pre-discount) amount of the invoice.
2/10: if payment is made within the 10-day discount period, the amount owed is 2% less than the gross (pre-discount) amount of the invoice.
This is referred to as the ___ price. (___ of the 2% discount)
net
Full payment is expected once the 10 day discount period has passed and this is called the _______ (pre-discount) amount of the invoice.
gross
Companies should record the ______ and associated _________ at the amount (gross or net) they expect to receive from the customer.
revenue; receivable
For customers expected to take the discount → sales revenue should be recorded at the (net/gross) invoice amount.
net
For customers not expected to pay in the discount period → sales revenue should be recorded at the (net/gross) invoice amount.
gross
conceptually a company should report sales revenue at a (gross/net) price for most of its customers.
net
failure of a large number of customers to take discounts may indicate what?
that an increase in the discount percentage is needed
customers who stop taking sales discounts may be experiencing _____ _____ problems and therefore are _______ ______ _______.
cash flow; potential credit risks
a reduction in the selling price granted by the seller to a particular class of customers, for example: to customers who purchase goods for resale rather than for use.
trade discount
a reduction in the selling price granted by the seller because selling costs per unit are less when larger quantities are ordered.
quantity discount
The selling or invoice price is usually assumed to be the price (before/after) adjustment for the trade and quantity discounts; accordingly, trade and quantity discounts (are/ are not) recorded separately in the accounting records.
after; are not
when a customer will return goods as unsatisfactory
sales return
when a customer agrees to keep goods with minor defects or that arrived late in return for a price reduction (could be a service that wasn’t completed on time too)
sales allowance
T or F: Sales returns and allowances should be recorded IN the period of sale to correctly report sales revenue as the amount a company expects to collect.
True
Problem: for sales made near the end of the year, the return or allowance may not occur until the following period. So, companies must _______ the amount of returns and allowances so that sales revenue can be reduced to their proper amounts.
If the bill has already been paid, the seller can either refund a portion of the purchase price and record a _____ to cash or apply the allowance against future purchases by the customer by recording a ______ to accounts receivable.
estimate; credit/credit
Management should look for unusual behavior in both sales revenue and sales returns and allowances. Often, significant changes in these accounts help to explain other changes in _______ statement or ______ _______ accounts.
income; balance sheet
money due from another business or individual
receivable
What are the three different dimensions receivables are typically categorized as?
- Accounts Receivable or Notes Receivable
- Current or Non-current Receivables
- Trade or Non-trade Receivables
a formal legal document given by a borrower to a lender stating the timing of repayment and amount (principal and/or interest) to be repaid.
a note
T or F: Accounts receivable have a formal note.
False; do not
Accounts receivable are typically due in ____ to _____ days and (do/do not) have interest.
Notes receivable are typically due anywhere from _____ to _____ months and (do/do not) have interest.
If the due date is over ___ _____, the note receivable will typically be classified as noncurrent.
- 30-60; do not
- 3-12; do
- one year
due from customers purchasing inventory in the ordinary course of business
trade receivables
arise from transactions not involving inventory (such as interest receivable or cash advances to employees)
non-trade receivables
_______ requires accounts receivable to be shown at their “_______ _______ ______”
GAAP; net realizable value
the amount of cash the company expects to collect
net realizable value
When customers don’t pay their accounts receivable, what results?
Bad Debts (or uncollectible accounts)