chapter 6: reporting and interpreting sales revenue, receivables, and cash Flashcards
what is the free on board shipping point
title of the product changes hands to customer once its ships
customer usually pays for shipping
what is the free on board destination point
title of the product changes hands to customer once its arrived at the destination
customer usually pays for shipping
revenues for FOB shipping point are recognized when?
upon shipping
revenues for FOB destination point are recognized when?
upon delivery
credit card discount
the fee that credit card companies will charge once a sale is made
you gotta take it off from the recognized revenue
what does n/30 mean?
the full amount of the invoice is due in max 30 days
what is a sales ( or cash ) discount?
a discount that will encourage the customer to buy live or before the full invoice is due
for ex: 90/10, you get gyu 90% discount
what us the advantage of a sales ( or cash ) discount?
cash gets to company faster, hence they don’t need loans or additional funds to buy shit
since customer pays earlier, decreases the chances of the subject to be broke all of a sudden and not be able to pay
where does the discount go in the A = L + SE equation?
it becomes negative in the SE section
it debits from the retained earnings
how do you calculate the interest rate?
amount saved / amount paid = interest for the difference of day limits (of discount and full invoice payment)
interest rate per day: you divide by whatever amount the difference per day was
interest day per year: you multiply the interest rate per day by 365
sales returns and allowances
reduction of gross sale revenues because of returns or allowances of deg products
costs of sales are also reduced
what is the gross profit percentage
how do you calculate it?
what does it measure?
to find how effective management is at selling goods and services for more than the costs of sales
gross profit / net sales
how many dollars of profit were produced per dollar of net sales
what are trade receivables?
open accounts owed to the business by trade customers
happens when there is a sale of merchandise on credit
what is a non trade receivable
a transaction other than a normal selling transaction
what is a note receivable and what does it contain
written promise that requires another party ti pay the business under specific conditions
must include a principal
must include a maturity date
a specified amount of integers true at one or more future dates
what is a principal
a specified amount of money on a note receivable
what is a maturity date
specified amount of interest at one or more future dates
what is the allowance method?
what are the steps in apllying this method?
bases bad debt expense on an estimate of uncollectible accounts
1, estimating and recording bad debts expense
- writing off specific accounts determined to be uncollectible during the period
what is a bad debt expense?
where do you record it, or how?
expense associated with estimated uncollectible accounts receivable
accounts receivable that cannot be collected
recorded through an adjusting journal entry at end of accounting period
if bad debt expenses is considered as a debited expense, what does it do to the Net earnings and SE?
it decreases both of them
which account does the credit to match the bad debt expense go to?
the allowance for doubtful accounts account
what is the allowance for doubtful accounts?
contra asset account
contains estimated estimated uncollectible accounts receivable
it is always taken off from the assets if recorded as an expense
debited in assets when cancelling AR
what are the steps for the whole bad debts process
- record estimated bad debts adjust adjustment
2, identify and write off actual bad debts
- record recovery¡y of bad debts that were previously written off
- record estimated bad debts adjust adjustment
when is it recorded?
which accounts affected?
what happens to accounts in financial statements ?
recorded at the end of period in which sales are made
bad debt expense (E)
allowance for doubtful accounts (XA)
net earnings decrease
assets decrease
2, identify and write off actual bad debts
when is it recorded?
which accounts affected?
what happens to accounts in financial statements ?
throughout period as bad debts are known
Allowance for doubtful accounts (XA)
Accounts receivable
net earnings have no effect
assets have no effect (they cancel out)
- record recovery¡y of bad debts that were previously written off
when is it recorded?
which accounts affected?
what happens to accounts in financial statements ?
throughout the period as bad debts are recovered
Accounts receivable
allowance of doubtful accounts (XA)
Cash
Accounts receivable
net earnings have no effect
assets decrease
Cash increases (they cancel out den)
what is the aging of accounts receivable method
estimates uncollectible accounts based on the age of each account receivable
what is the receivables turnover ratio used for
how is it calculated?
to assess effectiveness of overall credit granting and collection activities
reflects how many times average accounts receivable are recorded and collected during the period
the higher the ratio, the faster the collection of receivables
net credit sales / average net accounts receivable
average net accounts receivable = (beginning + end) / 2
what is the average collection period?
how do you calculate it
to check how many days are needed to turn accounts receivable over once?
365 / receivables turnover ratio
what does the term internal control refer to?
the process by which the board of directors, management, and other personnel provide reasonable assurance regarding the reliability of the company’s financial reporting, effectiveness and efficiency of operations, and if it respects rules.
what is cash?
money or any instrument that banks will accept for deposit and immediate credit to the company’s account
cheque, money order , bank draft
what are cash equivalents?
short term, highly liquid investments that are readily convertible to known amounts of cash
they are subject to insignificant amount risk or change in value
bank certificates of deposit
treasury bills issued by big G to finance activities
what is a bank statement
provided by a bank to a company
lists each despot recorded by the bank during the period
each cheque cleared by the bank during the period
other debits and credits
running balance in the company’s accounts
what is a bank reconciliation
process of verifying the accuracy of both the bank statement and the cash accounts of a business
what are the most common causes of differences between ending cash balances of bank statement and cash accounts?
bank service charges
NSF cheques (bad cheque)
interest
deposits in transit (cash deposits not yet recorded by bank)
outstanding cheques ( cheques that credit on cash accounts but not recorded in bank statement)
errors
what is the completed contract method?
records revenue when the product is completed and delivered to customers
what is the percentage completion method?
records revenues based on a reliable measure of the percentage of work completed
what is the zero profit method?
records revenue that is equal tot eh actual costs incurred during the accounting period
what must be written on note receivable?
a specified amount of money (a principal) due at a certain maturity date
a specified amount of interest at one or future dates
