revenue and monetary assets
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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. - PowerPoint PPT PresentationTRANSCRIPT
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© The McGraw-Hill Companies, Inc., 1999
Revenue and Monetary Assets
© The McGraw-Hill Companies, Inc., 1999
5Part One: Financial Accounting
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© The McGraw-Hill Companies, Inc., 1999
The Business Operating Cycle Slide 5-1
Purchase materials
Convert materialsinto a finished
product
Inspect the productReceive an order for the productfrom a customer
Ship the product and send the customer an
invoice
Customer acknowledges
receipt of the item
Store the product ina warehouse
Collect cash from the customer
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1. Sales order received no none2. Deposit or advance no nonepayment received3. Goods being produced For certain long- percentage of
term contracts completion4. Production completed; For precious metals productiongoods stored and certain agri-
cultural products5. Goods shipped or usually delivery6. Customer pays account collection is installmentreceivable uncertain
Timing of Revenue Recognition Slide 5-2
Typical
Revenue Recognition Revenue Recognition Event at This Time Method
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dr. Inventory on consignment 1,000
cr. Merchandise inventory 1,000
Consignment Shipments Slide 5-3
Goods costing $1,000 were Goods costing $1,000 were shipped out on consignment.shipped out on consignment.
Goods costing $1,000 were Goods costing $1,000 were shipped out on consignment.shipped out on consignment.
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dr. Cost of goods sold 1,000
cr. Inventory on consignment 1,000
dr. Accounts receivable 1,400
cr. Sales revenue 1,400
Consignment Shipments Slide 5-4
These goods are sold by the These goods are sold by the consignee for $1,400.consignee for $1,400.
These goods are sold by the These goods are sold by the consignee for $1,400.consignee for $1,400.
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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 $100,000
Completed-Contract Method Slide 5-5
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.
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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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 $100,000
Customer Project Year-End Payments Costs PercentYear Received Incurred Complete Revenues Expenses Income
Percentage-of-Completion Method Slide 5-6
GAAP assumes that the percentage-of-completion method will be used to account for
long-term contracts.
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
Check out the aging schedule in
Illustration 5-4.
Check out the aging schedule in
Illustration 5-4.
The firm expectsbad debts of
$7,132 .
The firm expectsbad debts of
$7,132 .
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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
Bad Debts Slide 5-8
The adjusting entry would be:
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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:dr. Allowance for Doubtful Accounts 250
cr. Accounts Receivable 250
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
Note the the net Note the the net amount of accountsamount of accounts
receivable is unchanged.receivable is unchanged.
Note the the net Note the the net amount of accountsamount of accounts
receivable is unchanged.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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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
The 2 percent discount really amounts to an
annual rate of 32 percent.
The 2 percent discount really amounts to an
annual rate of 32 percent.
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Credit Card Sales Slide 5-12
Bank plan (MasterCard and Visa)Bank plan (MasterCard and Visa)
dr. Cash 970
Sales Discounts (Credit Cards) 30
cr. Sales Revenue 1,000
Other plans (American Express and Discover)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 Ratio Slide 5-16
Current assets
Current liabilitiesCurrent Ratio =
$1,245.1
$1,214.6Current Ratio =
1.03Current Ratio =
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Slide 5-17 Acid-Test Ratio
Cash, temporary
investments, and accounts
receivable (net)
Monetary Current assets
Current liabilities
Acid-Test Ratio =
$634.9
$1,214.6
Acid-Test Ratio =
0.52Acid-Test
Ratio =
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Slide 5-18 Cash Cost Per Day
Expenses (net of depreciation)
365
Cash Cost Per Day =
$5,348.0
365
Cash Cost Per Day =
$14.65 per dayCash Cost Per Day =
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Slide 5-20 Days’ Cash
Cash
Cash costs per dayDays’ Cash =
$98.1
$14.65Days’ Cash =
7 daysDays’ Cash =
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Chapter 5
The End