Financial Accounting (Chapter 6) Flashcard

Net Sales Revenue
located on income statement; affected by sales discounts, credit card discounts, sales returns and allowances, and bad debt expense
FOB shipping point
title changes hands at shipping point
buyer pays for shipping
FOB destination
title changes hands on delivery
seller pays for shipping
Credit Card Discount (contra-revenue)
is the fee a credit card company charges for its services; must be SUBTRACTED from SALES REVENUE

EXAMPLE:
MasterCard charges 3% on 3000 purchase
CCD = (0.03 × $3,000) = $90 fee

Sales Discount (contra-revenue)
is a cash discount offered to encourage prompt payment of an account receivable; must be SUBTRACTED from SALES REVENUE

EXAMPLE:
Buyer pays $1000 to account with terms (2/10, n/30) within 9 days
SD= (0.02 × $1,000) = $20 discount

Sales Returns and Allowances (contra-revenue)
is a reduction of sales revenues for return of or allowances for unsatisfactory goods; must be SUBTRACTED from SALES REVENUES

EXAMPLE:
Buyer buys 65 items costing $2,500 then returns 30 items
SR&A= (30/65) = 0.46
SR&A= (0.46 × $2,500) = $1150 reimbursed

Net Sales
reported on the income statement;
Sales Returns
-Credit Card Discounts
-Sales Discounts
-Sales Return & Allowances
_____________________________
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Gross Profit Percentage Ratio
EQUALS:
(Gross Profit ÷ Net Sales) ×100

HIGHER NUMBER is BETTER (means higher net income)

Accounts Receivable
are open accounts owed to the business by trade customers
Notes Receivable
are written promises that require another party to pay the business under specific conditions (amount,time, period)
Allowance Method
bases BAD DEBT EXPENSE on an ESTIMATE of noncollectable accounts
Bad Debt Expense
is the EXPENSE associated with estimated uncollectible accounts receivable; recorded as “selling expense” on INCOME STATEMENT decreasing Net Income (IS) and Stockholders’ Equity (BS)

Is and ADJUSTED ENTRY recorded at the END OF PERIOD

DEBIT: Bad Debt Expense (+E, -SE)
CREDIT: Allowance for Doubtful Accounts (-A)

Allowance for Doubtful Accounts (contra-asset)
is a CONTRA-ASSET account containing the estimated uncollectible accounts receivable; always SUBTRACTED from the balance of “Accounts Receivable”
Write-Off
is recorded after determining a customer will not pay its debts;
DEBIT: Allowance for Doubtful Accounts (+A)
CREDIT: Accounts Receivable (- A)

**Does NOT affect income statement

Customer makes payment after Write-Off
customer pays on an account that has ALREADY been written off
DEBIT: Accounts Receivable (-A)
CREDIT: Allowance for Doubtful Accounts
Percentage of Credit Sales Method
a method used to ESTIMATE bad debt expense on the HISTORICAL PERCENTAGE of credit sales that resulted in bad debts

Credit Sales (Total Customer Debts)
× Bad Debt Loss Rate (Historical Percentage)
_______________________________________
Bad Debt Expense

Aging of Accounts Receivable Method
Aging of Accounts Receivable Method
a method to ESTIMATE bad debts based on the age of each account receivable
Receivable Turnover Ratio
RATIO that reflects how many times average trade receivables are recorded and collected during the period; HIGH NUMBER means FAST COLLECTION on receivables

EQUALS:
Net Sales ÷ Average Net Trade Accounts Receivable

Average Collection Period
RATIO that indicates the AVERAGE TIME (in days) it takes customers to pay its accounts

EQUALS:
365 ÷ Receivables Turnover

Internal Controls
the processes by which a company safeguards its assets and provides reasonable assurance regarding the reliability of the company’s financial reporting, the effectiveness and efficiency of its operations, and its compliance with applicable laws and regulations
Bank Reconciliation
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