Blocher/Chen/Lin

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 Interest 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
23
Remaining Slides

• You can browse through the remaining slides at
  your own discretion. Most of these slides show
  the journal entries underlying bad debt
  accounting. I will not test this material, but
  you may find it useful to give it a quick look.

24
Trade Receivables
Arise from the sale of services or products on
credit
25
Trade Receivables

• On June 4, 19X8 ABC Company sold 3,000 of
  merchandise on credit to a customer.
• Prepare the journal entry.

26
Trade Receivables

• Even though cash was not received, the
  revenue is still considered earned at this point
  because the earnings process is assumed to be
  complete.

27
Trade Receivables

• On July 7, 19X8 ABC Company receives the 3,000
  from the customer.
• Prepare the journal entry.

28
Trade Receivables

• This entry does not affect the companys
  profitability nor the companys total assets.

29
Management Issues
30
Management Issues
31
Management Issues
2/10,net/30
32
Management Issues

• Assume that a customer owes ABC Company 3,000.
  The payment terms are 2/10, net/30, and the
  customer pays within the discount period.
• Prepare the journal entry.

33
Management Issues

• The sales discount amount is used in presenting
  net sales figures on the income statement.

34
Management Issues
35
Net Realizable Value
36
Uncollectible Accounts
We must use an estimate because we do not know
which specific customers will default.
An estimate of the expense relating to selling
goods on credit should be recorded in the period
when the revenue is earned.
Matching Principle
37
Uncollectible Accounts
The adjusting entry to record the estimate of
uncollectible accounts is as follows
38
Uncollectible Accounts
Estimation Methods
Percentage of Credit Sales
Percentage of Accounts Receivable
39
Percentage of Credit Sales
Current Year Credit Sales
Bad Debt Estimated Bad Debt Expense
40
Percentage of Credit Sales
As of 12/31/X3 Tools-R-Us had total sales of
550,000, of which 75,000 were cash sales.
Historically, Tools-R-Us has had a bad debt
percentage of 1 based on credit sales. Prepare
the 12/31/X3 entry for Tools-R-Us.
550,000 Total Sales - 75,000 Cash Sales
475,000 Credit Sales .01 4,750
41
Percentage of Credit Sales
As of 12/31/X3 Tools-R-Us had total sales of
550,000, of which 75,000 were cash sales.
Historically, Tools-R-Us has had a bad debt
percentage of 1 based on credit sales. Prepare
the 12/31/X3 entry for Tools-R-Us.
42
Percentage of Credit Sales
If Tools-R-Us had accounts receivable of 100,000
at 12/31/X3, what amount should be reported on
the 12/31/X3 balance sheet?
43
Percentage of Accounts Receivable
44
Percentage of Accounts Receivable
45
Percentage of Accounts Receivable
46
Percentage of Accounts Receivable
47
Percentage of Accounts Receivable
48
Percentage of Accounts Receivable
The adjusting entry is made for the difference
between (1) The total estimated uncollectible
amount and (2) The balance before adjustment in
the Allowance for Uncollectible Accounts
49
Percentage of Accounts Receivable
Assume that the balance in the allowance for
uncollectible accounts is 350 (credit) before
any adjustment is made. Determine the amount of
the journal entry to record uncollectible
accounts.
50
Percentage of Accounts Receivable
51
Write-off of Accounts Receivable

• Occasionally it will become apparent that a
  specific account receivable will not be
  collected.

52
Write-off of Accounts Receivable

• At this point, the specific account receivable
  should be written off

53
Write-off of Accounts Receivable
No effect on the income statement
No effect on total assets
No effect on net realizable value
54
Recovery of Accounts Receivable Written Off

• If an account that has been written off
  subsequently becomes collectible, simply reverse
  the write-off entry.

55
Factoring
Selling accounts receivable at face value less a
service charge
With recourse
Without recourse
56
Pledging
Using accounts receivable as collateral for a loan
Company normally retains title of receivables
Proceeds from receivable used to repay the loan
57
Note Receivable
Principal
Payee
Interest
Promissory Notes
Maker
Maturity Date
58
Analyzing Trade Receivables
This ratio provides a rough measure of the length
of time that a companys accounts receivable have
been outstanding.