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Revenue and Monetary Assets PowerPoint PPT Presentation

5 Revenue and Monetary Assets Part One: Financial Accounting The McGraw-Hill Companies, Inc., 1999 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

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Revenue and Monetary Assets

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5

Revenue and Monetary Assets

Part One: Financial Accounting

  • The McGraw-Hill Companies, Inc., 1999


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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

Receive an order

for the product

from a customer

Inspect the product

Store the product in

a warehouse


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Timing of Revenue Recognition

Slide 5-2

Typical

Revenue Recognition Revenue Recognition

Event at This Time Method

1.Sales order receivednonone

2.Deposit or advancenononepayment received

3.Goods being producedFor certain long-percentage ofterm contractscompletion

4.Production completed;For precious metalsproductiongoods storedand certain agri-cultural products

5.Goods shipped orusuallydelivery

6.Customer pays accountcollection isinstallmentreceivableuncertain


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Consignment Shipments

Slide 5-3

Goods costing $1,000 were shipped out on consignment.

dr.Inventory on consignment1,000

cr.Merchandise inventory1,000


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Consignment Shipments

Slide 5-4

These goods are sold by the consignee for $1,400.

dr.Cost of goods sold1,000

cr.Inventory on consignment1,000

dr.Accounts receivable1,400

cr.Sales revenue1,400


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Completed-Contract Method

Slide 5-5

Customer Project Year-End

Payments Costs Percent

Year Received Incurred Complete Revenues Expenses Income

1$120,000$160,00020$ 0$ 0$ 0

2410,000400,00070000

3370,000240,000100900,000800,000100,000

Total$900,000$800,000$900,000$800,000$100,000

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.


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Percentage-of-Completion Method

Slide 5-6

Customer Project Year-End

Payments Costs Percent

Year Received Incurred Complete Revenues Expenses Income

1$120,000$160,00020$180,000$160,000$ 20,000

2410,000400,00070450,000400,00050,000

3370,000240,000100270,000240,000 30,000

Total$900,000$800,000$900,000$800,000$100,000

GAAP assumes that the percentage-of-completion method will be used to account for long-term contracts.


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Bad Debts

Slide 5-7

The firm expects

bad debts of

$7,132 .

Check out the aging

schedule in Illustration 5-4.


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Bad Debts

Slide 5-8

The adjusting entry would be:

The accounts receivable section of the December 31, 1997 balance sheet would appear as follows:

Accounts receivable$262,250less: allowance for doubtful accounts 7,132accounts receivable, net$255,118

dr. Bad Debts Expense7,132

cr. Allowance for Doubtful7,132


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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:

The accounts receivable section of the balance sheet immediately after the write-off entry would show--

Accounts receivable$262,000less: allowance for doubtful accounts 6,882accounts receivable, net$255,118

dr. Allowance for Doubtful Accounts250

cr. Accounts Receivable250

Note the the net

amount of accounts

receivable is unchanged.


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Sales Discounts

Slide 5-10

Sold $1,000 of merchandise on credit terms of 2/10, net/30.


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Sales Discounts

Slide 5-10

Sold $1,000 of merchandise on credit terms of 2/10, net/30.

dr. Accounts Receivable980

cr. Sales Revenue980

If payment is made within the discount period:

dr. Cash980

cr. Accounts Receivable980


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The 2 percent discount

really amounts to an

annual rate of 32 percent.

Sales Discounts

Slide 5-11

If payment is made after the discount period:

dr. Cash1,000

cr.Discounts Not Taken20

Accounts Receivable980


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Credit Card Sales

Slide 5-12

Bank plan (MasterCard and Visa)

dr. Cash970

Sales Discounts (Credit Cards)30

cr. Sales Revenue1,000

Other plans (American Express and Discover)

dr. Accounts Receivable970

Sales Discounts (Credit Cards)30

cr. Sales Revenue 1,000


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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 bank’s entry on September 1, 1997 is:

dr. Loan Receivable10,000

cr.Cash10,000

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 Receivable300

cr.Interest Revenue300


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Interest Revenue

Slide 5-14

On September 1, 1997, a bank loaned $10,000 for one year at 9 percent discounted.

dr. Loan Receivable10,000

cr. Cash9,100

Unearned Interest Revenue900

On December 31, 1997, an adjusting entry is made to record the fact that $300 of interest was earned in 1997.

dr. Unearned Interest Revenue300

cr.Interest Revenue300


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Interest Revenue

Slide 5-15

On August 31, 1998, when the loan is repaid, the entry is:

dr. Cash10,000

cr. Loans Receivable10,000

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 Revenue600

cr.Interest Revenue600


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Current assets

Current liabilities

Current Ratio =

$1,245.1

$1,214.6

Current Ratio =

1.03

Current Ratio =

Current Ratio

Slide 5-16


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Acid-Test Ratio

Acid-Test Ratio

Acid-Test Ratio

Monetary Current assets

Current liabilities

=

=

=

$634.9

$1,214.6

0.52

Acid-Test Ratio

Slide 5-17

Cash, temporary investments, and accounts receivable (net)


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Expenses (net of depreciation)

365

Cash Cost Per Day

=

$5,348.0

365

Cash Cost Per Day

=

Cash Cost Per Day

$14.65 per day

=

Cash Cost Per Day

Slide 5-18


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Cash

Cash costs per day

Days’ Cash =

$98.1

$14.65

Days’ Cash =

Days’ Cash =

7 days

Days’ Cash

Slide 5-20


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Chapter 5

TheEnd


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