BlocherChenLin

1
5
Revenue and Monetary Assets
Part One Financial Accounting

• The McGraw-Hill Companies, Inc., 1999

2
The Business Operating Cycle
Slide 5-1
Collect cash from the customer
Customer acknowledges receipt of the item
Purchase materials
Ship the product and send the customer an invoice
Convert materials into a finished product
Inspect the product
Receive an order for the product from a customer
Store the product in a warehouse
3
Timing of Revenue Recognition
Slide 5-2


Typical Revenue Recognition
Revenue Recognition Event
at This
Time Method

• 1. Sales order received no none
• 2. Deposit or advance no none payment received
• 3. Goods being produced For certain
  long- percentage of term contracts completion
• 4. Production completed For precious
  metals production goods stored and certain
  agri- cultural products
• 5. Goods shipped or usually delivery
• 6. Customer pays account collection
  is installment receivable uncertain

4
Consignment Shipments
Slide 5-3
Goods costing 1,000 were shipped out on
consignment.

• dr. Inventory on consignment 1,000
• cr. Merchandise inventory 1,000

5
Consignment Shipments
Slide 5-4
These goods are sold by the consignee for 1,400.

• dr. Cost of goods sold 1,000
• cr. Inventory on consignment 1,000
• dr. Accounts receivable 1,400
• cr. Sales revenue 1,400

6
Completed-Contract Method
Slide 5-5
Customer Project
Year-End Payments Costs
Percent Year Received Incurred
Complete Revenues Expenses Income

• 1 120,000 160,000 20 0
  0 0
• 2 410,000 400,000 70 0 0 0
• 3 370,000 240,000 100 900,000 800,000 100,000
• Total 900,000 800,000 900,000 800,000 100,0
  00

If the amount of income to be earned on the
contract cannot be reliably estimated, then
revenue is to be recognized only when the project
has been completed.
7
Percentage-of-Completion Method
Slide 5-6
Customer Project Year-End
Payments Costs Percent Year
Received Incurred Complete Revenues
Expenses Income

• 1 120,000 160,000 20 180,000 160,000
  20,000
• 2 410,000 400,000 70 450,000 400,000 50,000
• 3 370,000 240,000 100 270,000 240,000 30,000
• Total 900,000 800,000 900,000 800,000 100,0
  00

GAAP assumes that the percentage-of-completion
method will be used to account for long-term
contracts.
8
Bad Debts
Slide 5-7
Check out the aging schedule in Illustration 5-4.
The firm expects bad debts of 7,132 .
9
Bad Debts
Slide 5-8
The adjusting entry would be
dr. Bad Debts Expense 7,132 cr. Allowance
for Doubtful 7,132

• The accounts receivable section of the December
  31, 1997 balance sheet would appear as follows
• Accounts receivable 262,250 less allowance for
  doubtful accounts 7,132 accounts receivable,
  net 255,118

10
Bad Debts
Slide 5-9
If sometime in 1998 the Essel Company decided
that James Johnson was never going to pay his
bill of 250, the following entry would be made
dr. Allowance for Doubtful Accounts 250 cr.
Accounts Receivable 250
Note the the net amount of accounts receivable
is unchanged.

• The accounts receivable section of the balance
  sheet immediately after the write-off entry would
  show--
• Accounts receivable 262,000 less allowance for
  doubtful accounts 6,882 accounts receivable,
  net 255,118

11
Sales Discounts
Slide 5-10
Sold 1,000 of merchandise on credit terms of
2/10, net/30.
12
Sales Discounts
Slide 5-10
Sold 1,000 of merchandise on credit terms of
2/10, net/30.
dr. Accounts Receivable 980 cr. Sales
Revenue 980
If payment is made within the discount period
dr. Cash 980 cr. Accounts Receivable 980
13
Sales Discounts
Slide 5-11
If payment is made after the discount period
dr. Cash 1,000 cr. Discounts Not
Taken 20 Accounts Receivable 980
14
Credit Card Sales
Slide 5-12
Bank plan (MasterCard and Visa)
dr. Cash 970 Sales Discounts (Credit
Cards) 30 cr. Sales Revenue 1,000
Other plans (American Express and Discover)
dr. Accounts Receivable 970 Sales Discounts
(Credit Cards) 30 cr. Sales Revenue 1,000
15
Interest Revenue
Slide 5-13
On September 1, 1997, a bank loaned 10,000 for
one year at 9 percent interest, the interest and
principal to be paid on August 31, 1998. The
banks entry on September 1, 1997 is
dr. Loan Receivable 10,000 cr. Cash 10,000
On December 31, 1997, an adjusting entry is made
to record the fact that interest for one-third of
a year, 300, was earned in 1997
dr. Loan Receivable 300 cr. Interest
Revenue 300
16
Interest Revenue
Slide 5-14
On September 1, 1997, a bank loaned 10,000 for
one year at 9 percent discounted.
dr. Loan Receivable 10,000 cr.
Cash 9,100 Unearned Interest Revenue 900
On December 31, 1997, an adjusting entry is made
to record the fact that 300 of interest was
earned in 1997.
dr. Unearned Interest Revenue 300
cr. Interest Revenue 300
17
Interest Revenue
Slide 5-15
On August 31, 1998, when the loan is repaid, the
entry is
dr. Cash 10,000 cr. Loans
Receivable 10,000
After repayment by the borrower, an adjusting
entry is also made by the bank to record the fact
that 600 interest was earned in 1998.
dr. Unearned Interest Revenue 600
cr. Interest Revenue 600
18
Current Ratio
Slide 5-16
19
Acid-Test Ratio
Slide 5-17
Cash, temporary investments, and accounts
receivable (net)
20
Cash Cost Per Day
Slide 5-18
21
Days Cash
Slide 5-20
22
Chapter 5
The End