BA 102 Financial Accounting

1
BA 102 Financial Accounting

• Todays Agenda no jokes
• Introduction
• 1. Quizzes
• Use a pencil
• Write your SID and test version numbers on
  Scantron form
• Mark your answer clearly on your paper test since
  you will not get your Scantron back
• 2. Homework
• Submit on time (before 1pm for section3, and
  before 3.30 pm for section4)
• Check the web to see your HW performance
• Write your SID and section number on every HW
• If for some reason (previous agreement, nice
  personality etc.) you submit your previous HW
  lately, do not put it with your current HW, give
  it to me
• !!! Contact me promptly if you discover any
  inconsistency between my online records and your
  actual performance
• Discussion format
• Discussion

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Discussion Format

• Going through the Quiz1(20)
• Overview the material covered in class (25)
• Answering questions (5)
• Quizzes solving and discussing (20)
• Homework problems presentations/ discussions
  (10)

3
Quiz1 Statistics for section 3

• Lowest score 17 (2 people)
• Highest score 25 (8 people)
• Mean 21.85

4
Quiz1 Statistics for section 4

• Lowest score 19 (3 people)
• Highest score 25 (6 people)
• Mean 22.8
• Wow!

5
Chapter 6

• Reporting and Interpreting Sales
  Revenue,Receivables, and Cash

6
Reporting Net Sales

• Companies record sales discounts,sales returns
  and allowances, and creditcard discounts
  separately to allowmanagement to monitor these
  transactions.

7
Credit Card Sales to Consumers

• When credit card sales are made, the company
  must pay the credit card company a fee for the
  service it provides.

8
Credit Card Sales to Consumers

• On January 2, a Timberland factory stores
  credit card sales were 3,000. The credit card
  company charges a 3 service fee.
• Prepare the Timberland journal entry.

9
Credit Card Sales to Consumers

• On January 2, a Timberland factory stores
  credit card sales were 3,000. The credit card
  company charges a 3 service fee.
• Prepare the Timberland journal entry.

Credit Card Discounts are reportedas a contra
revenue account.
10
Sales Discounts to Businesses
2/10, n/30
Read as Two ten, net thirty

• When customers purchase on open account, they
  may be offered a sales discount to encourage
  early payment.

11
Sales Discounts to Businesses
2/10, n/30
12
Sales Discounts to Businesses

• On January 6, Timberland sold 1,000 of
  merchandise on credit with terms of 2/10, n/30.
• Prepare the Timberland journal entry.

13
Sales Discounts to Businesses

• On January 6, Timberland sold 1,000 of
  merchandise on credit with terms of 2/10, n/30.
• Prepare the Timberland journal entry.

14
Sales Discounts to Businesses

• On January 14, Timberland receives the
  appropriate payment from the customer for the
  January 6 sale.
• Prepare the Timberland journal entry.

15
Sales Discounts to Businesses

• On January 14, Timberland receives the
  appropriate payment from the customer for the
  January 6 sale.
• Prepare the Timberland journal entry.

1,000 2 20 sales discount 1,000 -
20 980 cash receipt
16
Sales Discounts to Businesses

• If the customer remits the appropriate amount on
  January 20 instead of January 14, what entry
  would Timberland make?

17
Sales Discounts to Businesses

• If the customer remits the appropriate amount on
  January 20 instead of January 14, what entry
  would Timberland make?

Since the customer paid outside of the discount
period, a sales discount is not granted.
18
Sales Returns and Allowances
Debited for damaged merchandise.
Debited for returned merchandise.
Contra revenue account.
19
Sales Returns and Allowances

• On July 8, Fontana Shoes returns 500 of hiking
  boots originally purchased on account from
  Timberland.
• Prepare the Timberland journal entry.

20
Sales Returns and Allowances

• On July 8, Fontana Shoes returns 500 of hiking
  boots originally purchased on account from
  Timberland.
• Prepare the Timberland journal entry.

21
Accounting for Bad Debts

• Bad debts result from credit customers who will
  not pay the business the amountthey owe,
  regardless of collection efforts.

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Accounting for Bad Debts
Bad Debt Expense
Record in same accounting period.
Matching Principle
Sales Revenue
23
Accounting for Bad Debts

• Most businesses record an estimate ofthe bad
  debt expense by an adjustingentry at the end of
  the accounting period.

24
Recording Bad Debt Expense Estimates

• Timberland estimated bad debt expense for 2000 to
  be 2,395,000.
• Prepare the adjusting entry.

25
Recording Bad Debt Expense Estimates

• Timberland estimated bad debt expense for 2000 to
  be 2,395,000.
• Prepare the adjusting entry.

Bad Debt Expense is normally classified as a
selling expense and is closed at year-end.
26
Allowance for Doubtful Accounts
Balance Sheet Disclosure
27
Writing Off Uncollectible Accounts

• When it is clear that a specific customers
  account receivable will be uncollectible, the
  amount should be removed from the Accounts
  Receivable account and charged to the Allowance
  for Doubtful Accounts.

28
Writing Off Uncollectible Accounts

• Timberlands total write-offs for2000 were
  1,480,000.
• Prepare a summary journalentry for these
  write-offs.

29
Writing Off Uncollectible Accounts

• Timberlands total write-offs for2000 were
  1,480,000.
• Prepare a summary journalentry for these
  write-offs.

30
Writing Off Uncollectible Accounts

• Assume that before the write-off, Timberlands
  Accounts Receivable balance was 81,000,000 and
  the Allowance for Doubtful Accountsbalance was
  2,000,000.
• Lets see what effect the total write-offs of
  1,480,000 had on these accounts.

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Writing Off Uncollectible Accounts
Notice that the total write-offs of 1,480,000
did not change the net realizable value nor did
it affect any income statement accounts.
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Methods for Estimating Bad Debts

• Percentage of credit sales
• or
• Aging of accounts receivable

????
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Percentage of Credit Sales
Bad debt percentage is based on actual
uncollectible accounts from prior years credit
sales.
Focus is on determining the amount to record on
the income statement asBad Debt Expense.
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Percentage of Credit Sales
35
Percentage of Credit Sales

• In 2003, Kids Clothes had credit sales of
  60,000. Past experience indicates that bad
  debts are one percent of sales.
• What is the estimate of bad debts expense for
  2003?

36
Percentage of Credit Sales

• In 2003, Kids Clothes had credit sales of
  60,000. Past experience indicates that bad
  debts are one percent of sales.
• What is the estimate of bad debts expense for
  2003?
• 60,000 .01 600
• Now, prepare the adjusting entry.

37
Percentage of Credit Sales
38
Aging Schedule

• Each customers account is aged by breaking down
  the balance by showing the age (in number of
  days) of each part of the balance.
• An aging of accounts receivable for Kids Clothes
  in 2003 might look like this . . .

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Aging Schedule
Based on past experience, the business estimates
the percentage of uncollectible accounts in each
time category.
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Aging Schedule
The column totals are then added to arrive at the
total estimate of uncollectible accounts of
1,201.
41
Aging of Accounts Receivable

• Record the Dec. 31, 2003, adjusting entry
  assuming that the Allowance for Doubtful Accounts
  currently has a 50 credit balance.

42
Aging of Accounts Receivable

• After posting, the Allowance account would look
  like this . . .

43
Aging of Accounts Receivable
Allowance for Doubtful Accounts
Notice that the balance after adjustment is equal
to the estimate of 1,201 based on the aging
analysis performed earlier.
44
Cash and Cash Equivalents
Checks
Money Orders
Bank Drafts
Certificates of Deposit
T-Bills
45
Internal Control of Cash
Bank Reconciliations
Daily Deposits
Purchase Approval
Payment Approval
Check Signatures
Prenumbered Checks
46
Bank Reconciliation
Explains the difference between cash reported on
bank statement and cash balance on companys
books.
47
Bank Reconciliation
Balance per Bank
Balance per Book
Deposits by Bank (credit memos)
Deposits in Transit
- Service Charge - NSF Checks
- Outstanding Checks
Bank Errors
Book Errors
Adjusted Balance
Adjusted Balance
48
Bank Reconciliation