Chapter 6 (Accounts Receivable & Revenue)

Question 1

• Revenue Recognition: A company recognizes revenue when the company transfers the _____/ performs the _______ in the amount it expects to receive.
  
  • Requires two entries: record sales revenue and ____
• Sales Revenue vs. Net Sales: Sales Revenue - Sales _________ - Sales _______ and __________ = Net Sales (Reported on the ______ statement)

Answer 1

good, service
COGS
Sales discounts - Sales returns and allowances

Question 2

Sales Discounts
- When customers purchase on open account, they may be offered a sales discount to encourage early payment.
Sales Returns & Allowances
- Customers typically have a right to return unsatisfactory or damaged merchandise and receive a refund (_______) or an adjustment to their bill (__________).
- Accumulated in a ______-asset account called Sales Returns and Allowances
- The entry recording ____ is also reversed

Answer 2

return, allowance
contra-asset
COGS

Question 3

Accounting for Bad Debts
- Bad debts result from credit customers who will ___ pay the amount they owe, regardless of collection efforts
- ________ Principle: Record bad debt expense in the ____ accounting period as the related sales revenue.
- Allowance Method: Bad debt expense is estimated at the ___ of the accounting period and recorded as an adjusting entry.
- Recording bad debt expense at period-end: record bad debt expense for expected write-offs of current sales (i.e. _____ (Credit/Debit?) ‘Bad Debt Expense’); (Debit/Credit?) the ‘Allowance for Doubtful Accounts’, a contra-asset to __; AR reported on the balance sheet at net realizable value (i.e. net AR = AR - _________ for ________ _________)
- Bad debt expense reported as part of SG&A on the ______ statement.

Answer 3

not
Matching, same
end
Debit, Credit, AR, Allowance for Doubtful Accounts
income

Question 4

Allowance Method Continued
- Recording bad debt expense through subsequent periods: write-off specific receivables determined to be uncollectable (i.e. _____ (Credit/Debit?) ‘Allowance for Doubtful Accounts’ and (Credit/Debit?) ‘ AR)
- Need to reverse write-off if subsequently collected
- Two Step Process (1. Record estimated bad debts adjustment 2. Identify and write off actual bad debts)
1) Done at the ___ of period in which sales are made
- _____ (Credit/Debit?) Bad Debt Expense, ______ (Credit/Debit?) Allowance for Doubtful Accounts
- Financial Statement Effects: (Increase/Decrease?) NI, (Increase/Decrease?) Assets
2) Performed throughout the period as bed debts become known
- ______ (Credit/Debit?) AR, _____ (Credit/Debit?) Allowance for Doubtful Accounts
- Financial Statement Effects: No effect on NI and Assets (when a specific account is written off)

Answer 4

Debit, Credit
1) end, Debit, Credit, Decrease (x2)
2) Credit, Debit

Question 5

Percentage of Net Sales Method
- Focuses on the amount to record on the ______ statement as bad debt expense
- Formula: ___ ______ Sales * Estimated percent uncollectible = Bad Debt Expense
- Bad Debt percentage is based on ___________ percentage of credit sales that result in bad debts

Answer 5

income
Net Credit Sales * Estimated percent uncollectible
historical

Question 6

Accounts Receivable Aging Method
- Focuses on determining the desired balance in the Allowance for Doubtful Accounts on the balance sheet.
- Formula: Aged Accounts Receivable (separated into ‘not due yet’, ‘up to __ days past due’, and ‘over __ days past due’) * Estimated Percentage Uncollectible = Estimated Amount Uncollectible
- Analyzing Receivables: Ratios help assess how fast a company is collecting its receivables
- Accounts receivable turnover measures how many times a year, on average, AR is collected. ______ is generally better. Formula: Net _____/ Avg. __
- Average collection period measures how many days it takes, on average, to collect AR. _____ is generally better. Formula: 365/ __ Turnover

Answer 6

90 (x2)
Higher, (Net Sales / Avg. AR)
Lower, (365/ AR Turnover)

Question 7

• Sales Returns and Sales Discounts = Contra _______ Accounts
• Estimated Inventory Returns - Contra _____ Account (specifically inventory)
• Allowance for sales discounts & Allowance for doubtful accounts = contra asset accounts (specifically __); Debiting AFDA = “We predicted bad debt, now it’s actually happening”
• Net AR = _____ AR - Allowances (i.e. for doubtful accounts & sales discounts). This is the amount shown on the _______ _____.
• Formula: AFDA = bad debts + bad debts _______ (AFDA remaining from previous year)

Answer 7

Revenue
Asset
AR
Gross, balance sheet
reserve

Question 8

• The collection of a previously written-off account does ___ affect revenue.
  
  • Revenue is only recorded when a ____ is made.

Answer 8

not
sale