Chapter 06 – Reporting and Interpreting Sales Revenue, Receivables, and Cash
6-1
CHAPTER 6
REPORTING AND INTERPRETING
SALES REVENUE, RECEIVABLES, AND CASH
Learning Objectives and Related Assignment Materials
Learning Objectives
Mini-
Exercises
Exercises
Problems
Alternate
Problems
Cases and
Projects
6-1 Analyze the impact of credit card
sales, sales discounts, sales returns,
1, 2
1, 2, 3, 4,
5, 6, 7
1, 4,
1, 4
1,4
23
Chapter Supplement: Recording
29
7
6-3 Analyze and interpret the receivables
turnover ratio and the effects of
5,
24, 25,
26
4
4
4, 6
Discounts and Returns
Synopsis of Chapter Revisions
Focus Company: Skechers U.S.A.
• New Focus Company: The chapter material is rewritten around the financial statements of
Skechers U.S.A., a fast-growing leader in the casual and athletic footwear market.
• Content narrowed to three related topics: revenue recognition and determinants of net sales,
receivables valuation, and control of cash.
Chapter 06 – Reporting and Interpreting Sales Revenue, Receivables, and Cash
6-2
PowerPoint Slides
Learning Objectives
PowerPoint® Slides
6-1 Analyze the impact of credit card sales, sales discounts, sales returns, and
sales of bundled items on the amounts reported as net sales.
6-3 through 6-17
receivable (bad debts) on financial statements.
6-3 Analyze and interpret the receivables turnover ratio and the effects of
accounts receivable on cash flows.
6-33 through 6-35
6-2 Estimate, report, and evaluate the effects of uncollectible accounts
6-18 through 6-32
Chapter Take-Aways
6-1 Analyze the impact of credit card sales, sales discounts, sales returns, and sales of bundled
items on the amounts reported as net sales.
6-2 Estimate, report, and evaluate the effects of uncollectible accounts receivable (bad debts) on
financial statements.
When receivables are material, companies must employ the allowance method to account for
6-3 Analyze and interpret the receivables turnover ratio and the effects of accounts receivable on
cash flows.
a. Receivables turnover ratio—This ratio measures the effectiveness of credit-granting and
6-4 Report, control, and safeguard cash.
Cash is the most liquid of all assets, flowing continually into and out of a business. As a result, a
Chapter 06 – Reporting and Interpreting Sales Revenue, Receivables, and Cash
6-3
Key Ratio
Receivables turnover ratio measures the effectiveness of credit-granting and collection activities. It is
computed as follows:
Finding Financial Information
BALANCE SHEET
Under Current Assets
Accounts receivable (net of allowance for
INCOME STATEMENT
Revenues
Net sales (sales revenue less discounts and
STATEMENT OF CASH FLOWS
Under Operating Activities (indirect
method)
Net income
NOTES
Under Summary of Significant Accounting
Policies
Revenue recognition policy
Chapter 06 – Reporting and Interpreting Sales Revenue, Receivables, and Cash
6-4
Chapter Outline
Teaching Notes
I. Accounting for Net Sales Revenue
A. Revenue recognition principle
As discussed in chapter 3
1. Requires that revenues be recorded when the company
transfers goods and services to customers, in the amount
it expects to be entitled to receive
2. For sellers of goods, sales revenue is recorded when title
and risks of ownership transfer to the buyer
a. The point at which title (ownership) changes hands is
3. Service companies most often record sales revenue when
they have provided services to the buyer
4. Companies disclose the recognition rule they follow in a
footnote to the financial statements entitled Summary of
the five-step process discussed later in this section
LO 6-1 Analyze the impact of credit card sales, sales discounts, sales returns, and sales of bundled
items on the amounts reported as net sales.
B. Motivating Sales and Collections
1. Sales practices differ depending on whether sales are
made to businesses or customers
a. Allowing customers to use credit cards to pay for
b. Providing business customers direct credit and
2. Methods to motivate customers to buy products and make
3. These methods affects the computation of net sales
revenue
C. Credit Card Sales to Consumers
1. Managers decided to accept credit cards to:
a. Increase customer traffic
b. Avoid the costs of providing credit directly to
e. Receive money faster (credit card receipts are directly
Chapter 06 – Reporting and Interpreting Sales Revenue, Receivables, and Cash
6-5
2. Credit card discount––Fee charged by the credit card
company for its services
D. Sales Discounts to Businesses
1. Most sales to businesses are credit sales on open account
(there is no formal written promissory note or credit card)
2. Credit terms of n/30 mean that the full price is due within
30 days of the invoice date; the n means the sales amount
3. Sales (or cash) discount––cash discount offered to
encourage prompt payment of the accounts receivable
Accounting discussed in more
detail in Chapter Supplement
a. Terms of 2/10, n/30:
i. The customer may deduct 2% from the invoice
price if cash payment is made within 10 days of
date of sale
See Financial Analysis
company’s bill is paid
c. Companies commonly subtract sales discounts taken
(as well as any quantity discounts or rebates) from
Sales Revenue to get Net Sales. Accounting for sales
discounts is discussed in more detail in the Chapter
Supplement
E. Sales Returns and Allowances
1. Sales returns and allowances––A reduction of sales
revenues for return of or allowances for unsatisfactory
goods
Accounting discussed in more
detail in Chapter Supplement
2. Cost of goods sold (related to the goods returned) is also
reduced
F. Reporting Net Sales
Less: Credit Card Discounts (a contra-revenue)
1. Credit Card Discounts, Sales Discounts, and Sales
See A Question of Ethics
Chapter 06 – Reporting and Interpreting Sales Revenue, Receivables, and Cash
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Sales Returns and Allowances (a contra-revenue)
3. Net Sales––the top line reported on the income statement.
G. Revenue Recognition for Bundled Goods and Services: A
Five-Step Process
1. Bundling of goods and services within one sales contract
is common in a variety of industries. FASB standards
specify a five-step process to determine the amount to be
recognized as revenues:
b. Identify the performance obligations (promised goods
and services)
d. Allocate the transaction price to the performance
obligations
II. Measuring and Reporting Receivables
A. Classifying Receivables
1. Accounts receivable–– open accounts owed to the
business by trade customers
3. Classifications
See International Perspective
2. Notes receivable––written promises that require another
party to pay the business a specified amount-(principal) at
collected
LO6- 2 Estimate, report, and evaluate the effects of uncollectible accounts receivable (bad debts)
on financial statements.
B. Accounting for Bad Debts
1. Subsidiary account:
a. A separate accounts receivable account maintained for
each customer
2. When a company sells on credit, it knows that some of
these customers will not pay their debts
Chapter 06 – Reporting and Interpreting Sales Revenue, Receivables, and Cash
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b. Company may not learn know which customers will
3. Allowance method––bases bad debt expense on an
estimate of uncollectible accounts; two primary steps:
a. Making the end-of-period adjusting entry to record
C. Recording Bad Debt Expense Estimates
estimated uncollectible accounts receivable
3. Sketchers estimated bad debt expense to be $18,398 (all
dr Bad Debt Expense (+E, –SE)
cr Allowance for Doubtful
Accounts (+XA, –A)
1. Bad Debt Expense (Doubtful Accounts Expense,
Uncollectible Accounts Expense, Provision for
Uncollectible Accounts)––expense associated with
4. Bad Debt Expense is included in General and
Administrative Expenses on the income statement;
decreases net income and stockholders’ equity
5. Accounts Receivable is not credited because the company
does not know which customers will not pay
7. As a contra-asset, the balance in Allowance for Doubtful
Accounts is always subtracted from the balance in
Accounts Receivable
6. Credit is made instead to the Allowance for Doubtful
D. Writing Off Specific Uncollectible Accounts
1. When it is determined that a customer will not pay its
debts, a write-off is recorded in a journal entry
now identified, is removed with a credit
3. The related estimate is no longer needed in the contra-
asset Allowance for Doubtful Accounts and is removed
by a debit
2. The specific uncollectible customer account receivable,
Chapter 06 – Reporting and Interpreting Sales Revenue, Receivables, and Cash
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Accounts (–XA, +A)
cr Accounts Receivable (–A)
Accounts Receivable (A) – 8,865 = 0
5. This journal entry did not:
a. Affect any income statement accounts
period of sale
b. Record a bad debt expense because the estimated
6. When a customer makes a payment on an account that
has already been written off:
See Financial Analysis
feature “Bad Debt
a. The journal entry to write off the account is reversed
to put the receivable back on the books
Recoveries”
dr Accounts Receivable (+A)
Accounts (+XA, –A)
dr Cash (+A)
cr Accounts Receivable (–A)
– 677 = 0
E. Reporting Accounts Receivable and Bad Debts
1. Reporting of accounts receivable, net of allowance for
doubtful accounts (the net book value)
Illustrated in Exhibit 6.2
or in a note
b. Accounts Receivable (Gross), the total accounts
amounts together
a. Balance in the Allowance for Doubtful Accounts is
Refer students to Guided
Help 6-1
F. Estimating Bad Debts
1. Bad debt expense is often estimated based on either a
percentage of total credit sales for the period or an aging
of accounts receivable
Chapter 06 – Reporting and Interpreting Sales Revenue, Receivables, and Cash
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2. Percentage of Credit Sales Method
a. Bases bad debt expense on the historical percentage of
credit sales that result in bad debts
Chapter 06 – Reporting and Interpreting Sales Revenue, Receivables, and Cash
3. Aging of Accounts Receivable
a. Estimates uncollectible accounts based on the age of
each account receivable
c. Steps:
i. The individual customer accounts receivable are
sorted into aging categories
ii. Based on experience, the probable bad debt loss
rates for each category is estimated (e.g., not yet
due, 2%; 1 to 90 days past due, 10%; over 90 days,
30%)
is multiplied by its probable bad debt loss rate
age categories is totaled; this total equals the
estimate of total uncollectible amounts
Doubtful Accounts minus the unadjusted credit
balance in Allowance for Doubtful Accounts
equals the Bad Debt Expense for the year
4. Comparison of Two Methods
a. The approach to recording bad debt expense using the
percentage of credit sales method is different from that
for the aging method
Stress this to students
Debt Expense on the income statement for the
period in the adjusting journal entry
c. Aging:
necessary adjusting entry
the adjusting entry for Bad Debt Expense for the
period
i. Compute the estimated ending balance we would
like to have in the Allowance for Doubtful
Accounts on the balance sheet after we make the
Chapter 06 – Reporting and Interpreting Sales Revenue, Receivables, and Cash
5. Actual Write-Offs Compared with Estimates
statement values for prior annual accounting periods
a. If uncollectible accounts actually written off differ
from the estimated amount previously recorded, a
1. Companies that emphasize sales without monitoring the
collection of credit sales soon find much of their current
assets tied up in accounts receivable
2. The following practices can help minimize bad debts:
c. Reward both sales and collections personnel for
a. Require approval of customers’ credit history by a
LO 6-3 Analyze and interpret the receivables turnover ratio and the effects of accounts receivable
on cash flows.
H. Key Ratio Analysis – Receivables Turnover Ratio
1. Receivables Turnover = Net Sales ÷ Average Net Trade
Accounts Receivable
4. A related number is average collection period or average
days sales in receivables (365 ÷ Receivables Turnover)
I. Focus on Cash Flows – Accounts Receivable
1. The change in accounts receivable can be a major
determinant of a company’s cash flow from operations
a. While the income statement reflects the revenues of
the period, the cash flow from operating activities
Chapter 06 – Reporting and Interpreting Sales Revenue, Receivables, and Cash
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2. Effect on Statement of Cash Flows
a. If net decrease in accounts receivable, cash collected
Chapter 06 – Reporting and Interpreting Sales Revenue, Receivables, and Cash
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LO6-4 Report, control, and safeguard cash.
III. Reporting and Safeguarding Cash
A. Cash and Cash Equivalents Defined
1. Cash––money or any instrument that banks will accept
2. Cash equivalents
three months or less that are readily convertible to
cash and whose value is unlikely to change
a. Short-term investments with original maturities of
3. Most companies:
a. Combine all of bank accounts and cash equivalents
into one amount, Cash and Equivalents, on the balance
sheet
b. Report the book values of cash equivalents on the
balance sheet equal to their fair market values
B. Cash Management – responsibilities include:
2. Controls to ensure that enough cash is available to meet
(a) current operating needs, (b) maturing liabilities, and
3. Prevention of the accumulation of excess amounts of idle
cash; idle cash earns no revenue
1. Accurate accounting so that reports of cash flows and
C. Internal Control of Cash
1. Internal controls––processes by which a company
safeguards its assets and provides reasonable assurance
See A Question of Ethics
feature “Ethics and the Need
2. Cash is most vulnerable to theft and fraud; a significant
number of internal control procedures focus on cash
a. Separation of duties:
Chapter 06 – Reporting and Interpreting Sales Revenue, Receivables, and Cash
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b. Prescribed policies and procedures:
i. Require that all cash receipts be deposited in a
bank daily; keep any cash on hand under strict
control
ii. Require separate approval of the purchases and the
D. Reconciliation of Cash Accounts and the Bank Statements
1. Content of a Bank Statement
a. Bank statement––monthly report from a bank that
shows deposits recorded, checks cleared, other debits
and credits, and a running bank balance
Illustrated in Exhibit 6.4
b. EFT is the code for electronic funds transfers
sufficient funds to cover the check
ii. The NSF check is now a receivable; consequently,
c. NSF (not sufficient funds) signifies that the bank
2. Need for Reconciliation
a. Bank reconciliation––process of verifying the
accuracy of both the bank statement and the cash
accounts of a business
i. Should be completed at the end of each month
ii. Usually, the ending cash balance on the bank
Chapter 06 – Reporting and Interpreting Sales Revenue, Receivables, and Cash
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ii. Deposits in transit – Deposits sent to the bank by
the company and recorded in the company’s Cash
3. Bank Reconciliation Illustrated
Illustrated in Exhibit 6.5
a. Steps:
i. Identify the outstanding checks
iii. Record bank charges and credits
4. Bank reconciliation accomplishes two major objectives:
a. It checks the accuracy of the bank balance and the
company cash records
Use Supplemental
Enrichment Activity #4
Chapter 06 – Reporting and Interpreting Sales Revenue, Receivables, and Cash
6-16
IV. Chapter Supplement: Recording Discounts and Returns
for January 2
dr Cash (+A)
2,910
dr Credit Card Discounts (+XR, –R,
cr Sales Revenue (+R, +SE)
3,000
Assets = Liabilities + Stockholders’ Equity
Cash (A) +2,190 = Credit Card Discounts (XR, SE) – 90 +
A. The credit card company is charging a 3 percent fee for its
service and Skechers’ Internet credit card sales are $3,000
discount period
dr Accounts Receivable (+A)
1,000
cr Sales Revenue (+R, +SE)
1,000
+1,000
dr Cash (+A)
dr Sales Discount (+XR, –R, –SE)
cr Accounts Receivable (–A)
1,000
dr Accounts Receivable (+A)
2,000
Assets = Liabilities + Stockholders’ Equity
Accounts Receivable (A) + 1,000 = Sales Revenue (R)
cr Sales Revenue (+R, +SE)
2,000
Assets = Liabilities + Stockholders’ Equity
Accounts Receivable (A) +2,000 = Sales Revenue (R, SE)
+2,000
(+XR, –R, –SE)
cr Accounts Receivable (–A)
Allowances (XR, SE) –500
D. Before paying for the sandals, however, Fontana discovers
Chapter 06 – Reporting and Interpreting Sales Revenue, Receivables, and Cash
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Supplemental Enrichment Activities
Note: These activities would be suitable for individual or group activities.
1. Handout 6-1
Use Handout 6-1 for an in-class activity designed to review the preparation of journal entries relating
2. Handout 6-2
Use Handout 6-2 for an in-class activity designed to review the estimation of uncollectible accounts
3. Handout 6-3
Use Handout 6-3 for an in-class activity designed to review the estimation of uncollectible accounts
4. Handout 6-4
Use Handout 6-4 for an in-class activity designed to review the preparation of a bank reconciliation
5. Handout 6-5
Use Handout 6-5 for an in-class activity designed to review the preparation of a bank reconciliation
6. Handout 6-6
Use Handout 6-6 for an in-class activity designed to review the preparation of journal entries relating
Chapter 06 – Reporting and Interpreting Sales Revenue, Receivables, and Cash
6-18
HANDOUT 6 – 1
ACCOUNTS RECEIVABLE JOURNAL ENTRIES
Prepare journal entries to record the following transactions:
(1) On December 15, Year 1, the company recorded $150,000 sales on credit.
Dec. 15
(2) On December 31, Year 1, the company estimated bad debt expenses of $15,000.
Dec. 31
(3) On January 12, Year 2, the company collected $100,000 worth of accounts receivable.
Jan. 12