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Revenue and Monetary Assets

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.

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Revenue and Monetary Assets

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  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 Receive an order for the product from a customer Inspect the product 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 3 370,000240,000 100 900,000800,000100,000 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.

  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 3 370,000240,000 100 270,000240,000 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.

  8. Bad Debts Slide 5-7 The firm expects bad debts of $7,132 . Check out the aging schedule in Illustration 5-4.

  9. 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

  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: 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.

  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. 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

  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 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

  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 assets Current liabilities Current Ratio = $1,245.1 $1,214.6 Current Ratio = 1.03 Current Ratio = Current Ratio Slide 5-16

  19. 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)

  20. 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

  21. Cash Cash costs per day Days’ Cash = $98.1 $14.65 Days’ Cash = Days’ Cash = 7 days Days’ Cash Slide 5-20

  22. Chapter 5 TheEnd

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