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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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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 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


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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


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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


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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 $160,000 20 $ 0 $ 0 $ 0

2 410,000 400,000 70 0 0 0

3 370,000240,000 100 900,000800,000100,000

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 $160,000 20 $180,000 $160,000 $ 20,000

2 410,000 400,000 70 450,000 400,000 50,000

3 370,000240,000 100 270,000240,000 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 $262,250 less: allowance for doubtful accounts 7,132 accounts receivable, net $255,118

dr. Bad Debts Expense 7,132

cr. Allowance for Doubtful 7,132


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

dr. Allowance for Doubtful Accounts 250

cr. Accounts Receivable 250

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 Receivable 980

cr. Sales Revenue 980

If payment is made within the discount period:

dr. Cash 980

cr. Accounts Receivable 980


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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. Cash 1,000

cr. Discounts Not Taken 20

Accounts Receivable 980


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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


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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 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


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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 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


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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


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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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