Accounting For Managers

Transcription

1 Accounting For Managers Professor ZHOU Ning SCHOOL OF ECONOMICS AND MANAGEMENT BEIHANG UNIVERSITY

2 Chapter 5 Revenue and Monetary Assets

3 The objectives of chapter 5 Timing of revenue recognition Amount of revenue recognized Monetary assets Analysis of monetary assets 5-3

4 Operating cycle Receive cash from customer Customer acknowledges receipt of the item Purchase materials/services & pay cash Ship the product and send the customer an invoice Convert materials / services to salable Receive an order for the product from a customer Inspect the product Store the product 5-4

5 Revenue recognition When? (Timing) & How much? (Amount) At one point in revenue cycle (objectivity). Criteria: When? Earned (Conservatism) Normally, goods shipped. Service performed. How much? Realized or realizable (Realization). Already collected or collectible. Amount can be measured reliably. Next step: matching costs. 5-5

6 Revenue recognition 5-6

7 Revenue recognition Revenue can be defined as: The gross inflow of economic benefits during the period arising in the course of the ordinary activities of an entity when those inflows result in increase in equity, other than increases relating to contributions from equity participants (IAS). 5-7

8 Delivery Method Recognize revenue when goods or services are delivered. For goods: when title transfers. FOB shipping point (when goods are given to carrier). Examples: Order is received for $900. Sales entry? Goods are produced. Sales entry? Goods are shipped. Sales entry? 5-8

9 Consignment Method Consignor ships goods to consignee. Dr. Inventory on consignment $1,000 Cr. Merchandise inventory $1,000 Consignor retains title until goods are sold to customer. At sale: Dr. Accounts receivable $1,400 Cr. Sales revenue $1,400 Dr. COGS $1,000 Cr. Inventory on consignment $1,

10 Franchise Revenue Recognize: When earned: service has been provided. Not necessarily when agreement signed or fee received. Normally, after franchisee commences operations. 5-10

11 Franchise Revenue Example Lakers, Inc. receives $600,000 from a franchisee for the right to use its trademark and have access to its know-how for a period of 5 years. This know-how includes training sessions, and some one available to answer questions. When should the $600,000 be recognized as revenue? 5-11

12 Percentage-of-Completion Method Design/development and construction/production projects that extends over several years. Customer pays either fixed price or cost reimbursement/plus contract. Reasonable assurance of profit margin and ultimate realization. Revenue recognized based on total percentage of project work performed during period. 5-12

13 Completed Contract Method Percentage of completion method required unless: Amount of income to be earned on contract cannot reasonably be determined. Alternative is completed contract method. Costs incurred are an asset/inventory (Contract Work in Progress) until revenue is recognized. 5-13

14 Completed Contract Method 5-14

15 Installment Method Customer pays a certain amount per period. Installment payment is recognized as revenue and a proportional part of cost of sales is recorded. Under cost recovery method, cost is recorded equal to installment payment until total cost of sales is covered. 5-15

16 Installment Method Credit risk: Customer will default on payments; The payment will not be received on time. It s generally accepted that deferring revenue recognition until completion of the contract, although reliable, is not appropriate. Credit risk is taken into account for receivable by raising an allowance for doubtful debts. An allowance for doubtful debts does not reduce the gross amount of revenue recognized. 5-16

17 Installment Method-example A jeweler sells a watch in 2005 for $400, and the customer agrees to make payments totaling $200 in 2005 and $200 in The watch cost the jeweler $220. Effect on Income Statement Delivery Method Installment Method Sales revenue $400 $0 $200 $200 Cost of goods sold Gross margin $180 $90 $

18 Amount of Revenue Recognized Net realizable value (amount reasonably estimated to be collected). 2 approaches: Direct write-off method. Allowance method. % of sales. % of (analysis of) AR. 5-18

19 Bad Debts Direct Write-Off Method Write-off when specific account that is uncollectible is identified, usually is not possible. Why is this not acceptable under GAAP? Dr. bad debt expense $200 Cr. Account receivable $

20 Allowance Method Estimate amount of current period credit sales that will not be collected. Historical % of sales tempered by judgment. Historical % of aged receivables (+ judgment). Adjusting entry at end of period. When an uncollectible account is identified, it is written off. 5-20

21 Bad Debt Exercise 1 Amount of revenue recognized: Sales for the year were $2,000 for cash and $6,000 on credit. Historically we don t collect about 5% of our credit sales due to customer bankruptcies or unable to locate customer. A customer, The XYZ Company went bankrupt. They owed us $175. Entry for revenue? Entry for bad debts - direct write-off (not-gaap)? Entries for bad debts (allowance method)? 5-21

22 Bad Debt Exercise 1 Entry for revenue recognized: Dr. Cash $2,000 Account receivable $6,000 Cr. Sales $8,000 Entry for bad debts - direct write-off (not-gaap)? Dr. Bad debt expense $175 Cr. Account receivable $175 Accounts receivable net $5,825 ($6,000-$175) 5-22

23 Bad Debt Exercise 1 BS will show BS will show Entries for bad debts (allowance method)? Dr. Bad debt expense $300 Cr. Allowance for doubtful accounts $300 Accounts receivable $6,000 less: Allowance doubtful for accounts $300 Accounts receivable, net $5,700 Dr. Allowance for doubtful accounts $175 Cr. Accounts receivable $175 Accounts receivable $5,825 less: Allowance doubtful for accounts $125 Accounts receivable, net $5,

24 Allowance Method (continued) Discussion problem 5-3, P

25 Sales Discounts Sales terms are 2/10 net 30 Customer gets 2% cash discount if paid within 10 days. Otherwise, total amount is due within 30 days. What does 1/15 net 45 mean? What is the effective annual rate of savings by taking advantage of terms of 2/10 net 30? 5-25

26 Alternative methods of accounting for sales discounts Record initial sale at gross. At collection of net amount record discount as a reduction from gross sales. Record initial sale at gross. At collection of net amount record discount as an expense of the period. Record initial sale at net. Record amounts not taken as discounts as additional revenue. 5-26

27 Sales Discount Exercise We sold $10,000 of mdse. Sales terms are 2/10, n/30. Customers paid us for $8,000 of the merchandise billed within 10 days. The remaining $2,000 was paid within 30 days. Record at gross. Record at net. 5-27

28 Sales Discount Exercise Record at gross: Dr. Account receivable $9,840 sale discount 160 Cr. Sales revenue $10,000 Record at net. Dr. Account receivable $9,840 Cr. Sales revenue $9,

29 Warranty Costs Amounts are estimated (usually as a percentage of sales). Part of Cost of goods sold. Record accrual (adjusting entry) Record the actual expenditures. Allowance is a liability account. Estimated warranty expense is part of costs of sales. 5-29

30 Warranty Expenses Exercise We estimate that warranty expenses will be 4% of our $10,000 of sales. Entry? Dr. Estimated warranty expense $400 Cr. provision for warranty $400 We spent $120 on parts and $250 on labor for repairs under warranty. Entry? Dr. provision for warranty $370 Cr. Cash $250 parts inventory

31 Monetary& Non-monetary Assets Monetary assets are money or claims to receive fixed sums of money. Non-monetary assets are items used in future production and sales of goods and services. Balance sheet distinction Current and non-current assets. Not monetary and non-monetary. Non-monetary assets (except inventory) on BS at unexpired cost. (Cost less depreciation) Monetary assets: Cash reported at face. AR at NRV. Other at fair value. 5-31

32 Cash Funds available for disbursement. May include liquid short term investments. Highly liquid debt instruments with original maturities of 90 days or less. 5-32

33 Receivables Trade receivables Accounts receivables from usual sales of products or services for non-financial institutions. Other receivables are shown separately. E.g. due from employees, advances or loans. 5-33

34 Marketable Securities Must be marketable. E.g. commercial paper, treasury bills, publicly traded stocks and bonds issued by companies. Also called Temporary Investments. 5-34

35 Analysis of Monetary Assets monetary CA=CA - inventories - prepaid items 5-35

36 Analysis of Monetary Assets 3. Cash expenses total expenses - depreciation. 4. Ratios differ by industry. Discussion problem 5-7, P

37 Analysis of Monetary Assets - Exercise Answer on page

38 Summary of Chapter 5 Timing of revenue recognition Amount of revenue recognized Monetary assets Analysis of monetary assets 5-38

39 Assignments of Chapter 5 Problem 5-4 Problem 5-6 Case

40 Thank you 5-40

41 Answer for Discussion problem To record the write-off: (1). If Alcon uses the direct write-off method Dr. Bad debt Expense $3,000 Cr. Accounts Receivable $3,000 (2). If Alcon uses the allowance method: Dr. Allowance for Doubtful Accounts $3,000 Cr. Accounts Receivable $3, To record the partial payment: (1). If Alcon uses the direct write-off method Dr. Cash $950 Cr. Bad Debts Recovered $950 (or Bad Debt Expense $950) (2). If Alcon uses the allowance method: Dr. Cash $950 Cr. Allowance for doubtful accounts $

42 Answer for Discussion problem 5-7 a. Current ratio = $125,200 / $71,300 = 1.76 Quick ratio = ($23,100 + $32,800) / $71,300 =.78 b. Days cash = $23,100 / ($231,000 / 365) = 36.5 days. c. Days receivables = Net receivables / (Credit sales / 365) = $32,800 / ($323,400 x.77 / 365). = 48 days. 5-42