accounting

the upside of extending credit to customers is that it

boosts sales by allowing customers the ability to purchase on account and pay cash later

cost of goods sold ( cost of sales, cost of merchandise sold, cost of products sold)

the company repots the cost of inventory it sold

uncollectible accounts effect

1. reducing assets (accounts receivable) by an estimate of the amount we don't expect to collect. 2. increasing expense (bad debt expense) to reflect the cost of offering credit to customers.

to use the allowance method

a company first estimates at the end of the current year how much in uncollectible accounts will occur in the following year.

we report inventory as

a current asset in the balance sheet.

are the companies credit sales polices too lenient?

a high ratio of the allowance for uncollectiable accounts to total accounts receivable could be a indication that the company extends too much credit to high-risk customers

is the company effectively managing its receivables

a high receivables turnover over ratio (or low average collection period) generally indicates that the companies credit sales and collection policies are effective

aging method

a more accurate method than assuming a single percentage uncollectiable for all accounts is to consider the age of various accounts receivable, and use a higher percentage for "old" accounts than for "new" accounts

the net in net credit sales refers to

a total credit sales net of discounts, returns, and allowances

contra revenue account

an account with a balance that is oppose to that of its related revenue account. used to be able keep a record of the total revenue earned separate from the reduction due to subsequent sales allowances.

extraordinary item

an event that produces a gain or loss must meet two conditions. 1. unusual in nature. 2. infrequent in occurrence.

average collection period

another way to express the same efficiency measure, shows the approximate number of days the average accounts receivable balance is outstanding. 365/ receivables turn over ratio

notes receviable

are similar to accounts receivable but are more formal credit arrangements evidenced by a written debt instrument, or "note"

in the situation that if uncollectible accounts are not anticipated or are immaterial, or if it not possible to reliably estimate them, we need to make an allowance for them, in these rare situations, we do not estimate uncollectiable accounts

but we write off any bad debts that do arise as bad debt expense at that time

an account receivable we do not expect to

collect has no value

income before income taxes

cominging operating income with non operating revenues and expenses yields this

to determine the age of accounts receivable

companies must keep track of their individual customers

2/10

customer will receive a 2% discount if the amount owed is paid with in 10 days

uncollectiable accounts

customers accounts that we no longer consider a collectible

percentage- of- receivables method

estimating uncollectiable accounts based on the percentage of accounts receivable expected no to be collected. knowns as the balance sheet method, because we base the estimate of bad debts on a balance sheet amount- accounts receivable

operating income

gross profit reduced by these operating expenses, it measures profitability from normal operations, a key performance measure for predicting the future profit-generating ability of the company

sales return

if a customer returns a product, A. reduce the customers account balance if the sale was on account, B. we issue a cash refund if the sale was for cash

does a company have a recurring problem with customer satisfaction?

if a sales return and allowances are routinely high relative to total sales, this might indicate that customers are not satisfied with the companies products or services

n/30

if the customer does not take the discount, full payment net of any returns or allowances is due within 30 days

we record sales discounts

in a contra revenue account

inventory

includes items a company intends for sale to customers.

companies choose the multiple step format because

it shows the revenues and expenses that arise from different activities.

companies that earn revenue by selling inventory are either

manufacturing or merchandising companies.

a credit balance before adjustment indicates that the estimate of uncollectiable accounts at the beginning of the year (or end of last year)

may have been to high

specific identification method

method you might think of as the most logical, it matches- identifies- each unit of inventory with its actual cost. (only practical for companies selling expensive, unique products)

gross profit

net sales minus cost of goods sold, its the first level of profit shown.

collecting cash on an account previously written off has

no effect on total assets and no effect on net income

the downside of extending credit to customers is that

not all customers will pay fully on their accounts.

how likely is it that the companys accounts receivable will be collected

older accounts are less likely to be paid

a firm must use the allowance method if it is

probable that the fir will not collect a material amount of receivables and it can reasonably estimate that amount

merchandising companies

purchsase inventories that are primarily in finished form for resale to customers.

discounts offer ways to

quickly sell old inventory, attract new customers, reward long-term loyal customers and encourage customers to pay quickly on their accounts.

nontrade receviables

receivables that originate from sources other than customers. (tax refund claims, interest receivable, loans by the company to other entities, including stockholders and employees)

trade discounts are not

recognized directly, its indirectly by recording the sale at the discounted price

sales allowance is

recorded as a contra revenue

direct write off method

recording bad debt expense at the time we know the account to be uncollectiable. it is used for tax purposes but is generally not permitted for financial reporting.

net revenues

refer to a companys total revenues less any amounts for discounts, returns, and allowances.

multiple step income statement

reffering to the fact that the income statement reports multiple levels of income

trade discounts

represent a reduction in the listed price of a product or service. use them to provide incentives to larger customers or consumer groups to purchase from a company. also a way to change prices without publishing a new price list or to disguise real prices from competitors

accounts receivable

represent the amount of cash owed to a company by its customers from the sale of products or services on account

sales discount

represents a reduction, not in the selling price of a product or service, but in amount to be paid by a credit customer if payment is made within a specified period of time.

bad debt expense

represents the cost of the estimated future bad debts. it is included in the same income statement as the credit sales.

we report any gains or losses on discontinued operations in the current year

separately from gains and losses on the portion of the business that will continue

receviables turnover ratio

shows the number of times during a year that the average accounts receivable balance is collected. net credit sales/ average accounts receivable

to determine the cost of inventory

specific identification, FIFO, LIFO, weighted-average cost

net income

subtracts income tax expense ,

the primary benefit of using lifo is

tax savings

sales allowance

the customer does not return the product or service, but the seller reduces the customers balance owed to provide at least a partial refund

net accounts receivable

the difference between total account receivable and the allowance for uncollectible accounts is reffered to as this.

even though the seller does not receive cash at the time of the credit sale

the firm records revenue immediately, as long as future collection from the customer is reasonably certain

the older the account

the less likely it is to be collected

the more frequently a business is able to "turn over" its average accounts receivable,

the more quickly it is receiving cash from its customers

two important ratios that help in understanding the companies effectiveness in managing receivables are

the receivables turnover ratio and the average collection period

discontinued operation

the sale or disposal of a significant component of a companies operations.

operating expenses

the selling, general, and administrative expenses.

net realizable value

to be useful to decision makers, accounts receivable should be reported at the amount of cash the firm expects to collect

overall the write-off of the account receivable has no effect on

total amounts reported in the balance sheet or in the income statement

the legal right to receive cash is (race receivables)

valuable and represents an asset of the company

a debit balance before adjustment indicates that the estimate at the beginning of the year

was to low

allowance method

we account for uncollectiable accounts using this, involves allowing for the possibility that some accounts will be uncollectiable at some point in the future. (estimates future uncollectiable accounts)

allowance for uncollectible accounts(allowance for doubtful accounts)

we adjust for future bad debts by making this. reported in the balance sheet. but represents a reduction in the balance of accounts receivable.

notes receviable

when receivables are accompanied by formal credit arrangements made with written debt instruments (or notes)

credit cales (sales on account or services on account)

where accounts receivable originate, transfer products and services to a custom roe today while bearing the risk of collecting payment from that custom ore in the future.