Chapter 06 – Reporting and Interpreting Sales Revenue, Receivables, and Cash
Chapter 6
Reporting and Interpreting Sales Revenue,
Receivables, and Cash
ANSWERS TO QUESTIONS
1. The difference between sales revenue and net sales includes the amount of
goods returned by customers because the goods were either unsatisfactory or
2. Gross profit or gross margin on sales is the difference between net sales and
3. A credit card discount is the fee charged by the credit card company for services.
4. A sales discount is a discount given to customers for payment of accounts within
a specified short period of time. Sales discounts arise only when goods are sold
on credit and the seller extends credit terms that provide for a cash discount. For
Chapter 06 – Reporting and Interpreting Sales Revenue, Receivables, and Cash
Financial Accounting, 8/e 6-3
13. Cash-handling and cash-recording activities should be separated to remove the
opportunity for theft of cash and a cover-up by altering the records. This
14. The purposes of a bank reconciliation are (a) to determine the “true” cash
balance and (b) to provide data to adjust the Cash account to that balance. A
bank reconciliation involves reconciling the balance in the Cash account at the
end of the period with the balance shown on the bank statement (which is not the
15. The total amount of cash that should be reported on the balance sheet is the
sum of (a) the true cash balances in all checking accounts (verified by a bank
16. (Chapter Supplement) Under the gross method of recording sales discounts, the
ANSWERS TO MULTIPLE CHOICE
1. b)
2. c)
3. b)
4. d)
5. c)
6. c)
7. d)
8. b)
9. d)
10. c)
Chapter 06 – Reporting and Interpreting Sales Revenue, Receivables, and Cash
Authors’ Recommended Solution Time
(Time in minutes)
Mini-exercises
Exercises
Problems
Alternate
Problems
Cases and
Projects
No.
Time
No.
Time
No.
Time
No.
Time
No.
Time
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5
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35
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15
2
35
2
35
2
30
3
10
3
15
3
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3
50
3
35
4
10
4
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4
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4
40
4
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5
10
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5
40
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45
5
35
6
10
6
15
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45
6
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7
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7
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45
7
*
8
10
8
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8
45
9
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11
20
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20
Continuing Case
14
20
1
30
15
20
16
30
17
30
18
15
19
15
20
20
21
20
22
20
23
30
24
30
* Due to the nature of these cases and projects, it is very difficult to estimate the amount
of time students will need to complete the assignment. As with any open–ended project,
Chapter 06 – Reporting and Interpreting Sales Revenue, Receivables, and Cash
MINI-EXERCISES
M6–1.
Transaction
Point A
Point B
(a) Sale of inventory to a business
customer on open account
x
Shipment
Collection of account
(b) Computer sold by mail order
company on a credit card
x
Shipment
Delivery
(c) Airline tickets sold by an airline on a
credit card
Point of sale
x
Completion of flight
M6–2.
If the buyer pays within the discount period, the income statement will report $9,405 as
net sales ($9,500 x 0.99).
M6–3.
Credit card sales (R)
$9,400.00
Less: Credit card discount (XR)
282.00
Net credit card sales
$9,118.00
Sales on account (R)
$12,000.00
Less: Sales returns (XR)
650.00
11,350.00
Less: Sales discounts (1/2 x $11,350 x 2%) (XR)
113.50
Net sales on account
11,236.50
Net sales (reported on income statement)
$20,354.50
Chapter 06 – Reporting and Interpreting Sales Revenue, Receivables, and Cash
EXERCISES
E6–1.
E6–2.
Sales revenue ($3,000 + $9,000 +$4,000) ………………………….. $16,000
E6–3.
Sales revenue ($5,500 + $400 + $9,000) ……………………………. $14,900
Less: Sales returns and allowances (1/10 x $9,000 from D) ……. 900
E6–4.
Cost of
Transaction
Net Sales
Goods Sold
Gross Profit
July 12
+ 297
+ 175
+ 122
July 15
+ 5,000
+ 2,500
+ 2,500
July 20
– 150
NE
– 150
July 21
– 1,000
– 600
– 400
E6–5.
3.09% x (365 ÷ 40 days) = 28.22%
Req. 2 Yes, because the 15% rate charged by the bank is less than the 28.22%
Chapter 06 – Reporting and Interpreting Sales Revenue, Receivables, and Cash
E6–10.
Aged accounts receivable
Estimated
percentage
uncollectible
Estimated
amount
uncollectible
Not yet due
$22,000
x
3%
=
$ 660
Up to 120 days past due
6,500
x
14%
=
910
Over 120 days past due
2,800
x
34%
=
952
Estimated balance in Allowance for Doubtful Accounts
2,522
Current balance in Allowance for Doubtful Accounts
1,200
Bad Debt Expense for the year
$1,322
E6–11.
Req. 1
December 31, 2013-Adjusting entry:
Bad debt expense (+E, –SE) ………………………………… 4,180
Allowance for doubtful accounts (+XA, –A) ……. 4,180
To adjust for estimated bad debt expense for 2013 computed as follows:
Aged accounts receivable
Estimated
percentage
uncollectible
Estimated
amount
uncollectible
Not yet due
$50,000
x
3%
=
$ 1,500
Up to 180 days past due
14,000
x
12%
=
1,680
Over 180 days past due
4,000
x
30%
=
1,200
Estimated balance in Allowance for Doubtful Accounts
4,380
Current balance in Allowance for Doubtful Accounts
200
Bad Debt Expense for the year
$4,180
Req. 2
Balance sheet:
Accounts receivable ($50,000 + $14,000 + $4,000) $68,000
Less allowance for doubtful accounts ………………… 4,380
Accounts receivable, net of allowance for
doubtful accounts ………………………………….. $63,620
Chapter 06 – Reporting and Interpreting Sales Revenue, Receivables, and Cash
E6–14.
Req. 1 Allowance for Doubtful Accounts
117
Beg. balance
Write-offs
52
88
Bad debt exp.
153
End. balance
Req. 2 Accounts Receivable (Gross)
Beg. balance*
11,455
52
Write-offs
Net sales
60,420
58,081
Cash collections
End. balance **
13,742
by recording cash collections and write-offs of bad debts. Thus, we can solve for
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E6–15.
Req. 1 Allowance for Doubtful Accounts
375
Beg. balance
Write-offs
56
14
Bad debt exp.
333
End. balance
Req. 2 Accounts Receivable (Gross)
Beg. balance*
13,389
56
Write-offs
Net sales
69,943
67,956
Cash collections
End. balance **
15,320
Chapter 06 – Reporting and Interpreting Sales Revenue, Receivables, and Cash
E6–16.
Req. 1
The allowance for doubtful accounts is increased (credited) when bad debt expense is
recorded and decreased (debited) when uncollectible accounts are written off. This case
gives the beginning and ending balances of the allowance account and the amount of
uncollectible accounts that were written off. Therefore, the amount of bad debt expense
(in thousands) can be computed as follows:
Allowance for Doubtful Accounts
690,000
Beg. balance
Write-offs
414,000
154,000
Bad debt exp.
430,000
End. balance
Beg. Balance + Bad debt exp. – Write-offs = End. Balance
End. Balance – Beg. Balance + Write-offs = Bad debt exp.
430,000– 690,000 + 414,000 = 154,000
Req. 2
Working capital is unaffected by the write-off of an uncollectible account when the
allowance method is used. The asset account (accounts receivable) and the contra–
asset account (allowance for doubtful accounts) are both reduced by the same amount;
Note that income before taxes was reduced by the amount of bad debt expense that
was recorded, therefore tax expense and tax payable will decrease. The decrease in
tax payable caused working capital to increase; therefore, the net decrease was
$154,000 – ($154,000 x 30%) = $107,800.
Req. 3
The entry to record the write-off of an uncollectible account did not affect any income
Chapter 06 – Reporting and Interpreting Sales Revenue, Receivables, and Cash
E6–18.
Req. 1
Dec. 31, 2014
Allowance for doubtful accounts (–XA, +A) …………… 550
Accounts receivable (Toby’s Gift Shop) (–A) .. 550
To write off an account receivable determined to
Req. 3
The 2% rate on credit sales appears reasonable because it approximates the amount of
receivables written off ($550) during the year. However, if the uncollectible account
receivable written off during 2014 is not indicative of average uncollectibles written off over
a period of time, the 2% rate may not be appropriate. There is not sufficient historical data
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any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
E6–19.
Req. 1
Receivables turnover
=
Net Sales
=
$39,304,000
=
8.99 times
Average Net Trade
Accounts Receivable
$4,372,000*
Average days sales
=
365
=
365
=
40.60 days
in receivables
Receivables Turnover
8.99
E6–20.
Req. 1
Receivables turnover
=
Net Sales
=
$62,071,000
=
9.5722 times
Average Net Trade
Accounts Receivable
$6,484,500*
Average days sales
=
365
=
365
=
38.13 days
in receivables
Receivables Turnover
9.5722
Chapter 06 – Reporting and Interpreting Sales Revenue, Receivables, and Cash
E6–21.
Req. 1
The change in the accounts receivable balance ($48,066 – 63,403 = –$15,337) would
increase cash flow from operations by $15,337 thousand. This happens because the
E6–22.
Req. 1
JACKSON COMPANY
Bank Reconciliation, June 30, 2014
Company’s Books
Bank Statement
Ending balance per Cash
account………………………
$5,600
Ending balance per bank
statement………………
$6,060
Additions:
Additions:
None
Deposit in transit…………
1,900*
Deductions:
Deductions:
7,960
Bank service charge……
40
Outstanding checks…
2,400
Correct cash balance………
$5,560
Correct cash balance……
$5,560
*$18,100 – $16,200 = $1,900.
Req. 2
Bank service charge expense (+E, –SE) …………………………….. 40
Cash (–A) ……………………………………………………………… 40
To record deduction from bank account for service charges.
Req. 3
The correct cash balance per the bank reconciliation ($5,600 – $40), $5,560
Req. 4
Balance sheet (June 30, 2014):
Current assets:
Cash ……………………………………………………………………….. $5,560
Chapter 06 – Reporting and Interpreting Sales Revenue, Receivables, and Cash
E6–24 (Based on Supplement A)
November 20, 2013
Cash (+A) ………………………………………………………….. 441
Credit card discount (+XR, –R, –SE) ……………………… 9
Sales revenue (+R, +SE) ……………………………. 450
November 28, 2013:
Accounts receivable (Customer D) (+A) …………………. 7,200
Sales revenue (+R, +SE) ……………………………. 7,200
To record a credit sale.
November 30, 2013:
Sales discounts (+XR, –R, –SE) ……………………………. 132
Accounts receivable (Customer D) (–A)………… 6,600
To record collection within the discount period,
98% × ($7,200 – $600) = $6,468
December 30, 2013:
Less: Sales discounts (2% × ($7,200 – $600)) …………………….. 132
Less: Credit card discounts ($450 x 2%) …………………………….. 9
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P6–1.
Case A
Because Wendy’s collects cash when the coupon books are sold, cash collection is not
an issue in this case. In order to determine if the revenue has been earned, the student
must be careful in analyzing what Wendy’s actually sold. Students who focus on the
sale of the coupon book often conclude that the earning process is complete with the