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Week 6

by: Petey Martin

Week 6 ACC 201

Petey Martin
GPA 3.25

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About this Document

Week 6 of Notes.
Class Notes
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This 4 page Class Notes was uploaded by Petey Martin on Thursday October 8, 2015. The Class Notes belongs to ACC 201 at University of Rochester taught by WOJDAT K in Summer 2015. Since its upload, it has received 26 views. For similar materials see FINANCIAL ACCOUNTING in Accounting at University of Rochester.


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Date Created: 10/08/15
Petey Martin Notes 10815 Chapter 6 Introductory Accounting 0 Revenue or Sales is an important component of the income statement 0 Investors can use changes in reported revenue to determine if a company s markets or market share are growing 0 As discussed before reporting of revenue is an area open to fraud 0 Timing of revenue recognition is critical to fair presentation of reported annual revenue 0 Under the revenue realization principle revenue is recognized when Earnings process is complete or virtually complete ie delivery has been provided Price is xed ie the amount to be charged is certain Collection is reasonably assured ie has occurred or there is persuasive evidence of an arrangement for customer payment 0 Most companies selling goods consider the earnings process to be nearly complete when goods pass from the seller to the buyer ie when title and the risks of ownership pass to the buyer FOB free on board shipping point title changes hands when shipped and the buyer pays for shipping and insurance in transit FOB destination title changes hands when goods arrive and the seller pays for shipping and insurance in transit o Recognizing sales at the time goods leave the seller may be acceptable under terms of FOB destination as long as policy consistently applied 0 Revenue recognition rule is disclosed in firm s footnotes The amount recognized as Revenue or Sales is the cash equivalent sales price 0 Journal entry for cash or noncash asset Cash or Asset Value of cash or asset received Sales or Revenue Value of cash or asset received 0 Sales to Businesses 0 Sales Discounts and Sales on Account Businesses often sell to other businesses on account which means seller accepts the customers word that they will pay layer with no formal promissory note drafted Journal entry for sales 0 Accounts Receivable Cash to be received Sales or Revenue Sales value Payment occurs according to terms under which the credit is extended Credit terms often incorporate sales discounts for early payment Standard credit terms that include a sales discount will look like the following id nD o i is the percentage of the invoice total that the customer can avoid paying if payment occurs within d days net is due with D days 0 i interest is charged for D d days on each 1 i not paid within d days 0 Journal entry 0 Accounts Receivable Amount of cash promised Sales revenue Price charged customer Cash Actual cash received Sales Discounts Reduction for timely payment Accounts Receivable Amount of cash promised Sales discounts is a contra revenue account revenue reduction carried in a separate accountL 0 Trade Discounts Companies that often provide a discount to customers who buy in large quantities Trade discounts determine the reduction from list price that applies to large orders Journal entry 0 Cash or AR Cash received or promised net of discount Sales or Revenue Price charged net of discount 0 Sales Returns and Allowances Customer can return for a refund or get an allowance price reduction on goods that are damaged or of the wrong kind Sales Revenue and Allowances are a reduction of Net Sales or Net Revenue The return undoes the sale the allowance reduces the effective price at which the sale occurred Journal entry 0 Sales Returns and AllowancesAmount of refund or allowance Accounts Receivable Amount of refund or allow Sales returns and Allowances is a contra revenue account revenue reduction carried in a separate account 0 Retail Sales to Customers 0 Credit Card Discounts Retailing Businesses often accept a credit card as payment Credit card process includes the following 0 Customer settles store bill using credit card 0 Customer pays credit card company 0 Credit card company pays store a portion of the customer s bull 0 Credit card company keeps some money paid to it by store s customers as a fee for services provided This fee is called a credit card discount Journal entry Receivable Receivable from credit card company Credit Card Discounts Fee amount Sales Actual price charged customer Credit Card Discounts is a contra revenue account revenue reduction carried in a separate account 0 Net Sales is a term referring to 0 Sales or Revenue recorded at the price charged net of trade discounts Less Sales Discounts and Credit Card Discounts separate accounts reported as a reduction to Net Sales in Income Statement Less Sales Returns and Allowances separate account unless Sales or Revenue itself had been reduced 0 Summary Sales Revenue recorded net of trade discounts Less Sales Returns and Allowances Sales Discounts Credit Card Discounts Net Sales reported on the income statement 0 Gross margins 0 Gross margin or gross pro t is de ned as Net Sales less Cost of Goods Sold 0 Gross margin percent is de ned as Gross Pro t Net Sales Cost of Goods Sold Net Sales


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