Installment Sales Flashcards
1
Q
Calculating installment sales is a four step process
A
Step 1, calculate the total gross profit. Gross profit is needed in order to establish how much profit we have earned from the sale, but not yet realized.
Step 2, we calculate the gross profit percentage based on gross profit calculated in step 1.
Step 3, we take our gross profit percentage and apply it to our total cash collections (i.e. cash received from the customer). This gives us an amount of profit that can be recognized on the financial statements.
Step 4 applies the gross profit percentage to the amount that is still in accounts receivable. This calculation gives us the amount of deferred gross profit.
