Chapter5Sales Revenue, Cash, andAccountsReceivableRecognitionof salesrevenueMeasurement of sales revenueCashandaccountsreceivableMeasurement of uncollectible accounts
Chapter 5 Sales Revenue, Cash, and Accounts Receivable Recognition of sales revenue Measurement of sales revenue Cash and accounts receivable Measurement of uncollectible accounts
RecognitionofSalesRevenueTheImportanceofRecognitionTwo Criteria of Revenue recognitionApplications of The Criteria
Recognition of Sales Revenue The Importance of Recognition Two Criteria of Revenue recognition Applications of The Criteria
Why is the timing of revenuerecognition important?Becauseit is critical to themeasurement of net income
Why is the timing of revenue recognition important? Because it is critical to the measurement of net income
Some users of financial informationwant revenues to be recorded as soonaspossibleOthers want to be sure that a companywill actually receive payment beforerevenues arerecordedAccountants must carefully assess whenrevenue shouldberecognized
Some users of financial information want revenues to be recorded as soon as possible. Others want to be sure that a company will actually receive payment before revenues are recorded. Accountants must carefully assess when revenue should be recognized
Under accrual-basis accounting, recognition ofrevenue requires a two-pronged test:(1) goods or services must be delivered to thecustomers ( that is , the revenue is earned);(2) cash or an asset virtually assured of beingconverted into cash must be received (that istherevenueisrealized)
Under accrual-basis accounting, recognition of revenue requires a two-pronged test: (1) goods or services must be delivered to the customers ( that is , the revenue is earned); (2) cash or an asset virtually assured of being converted into cash must be received ( that is , the revenue is realized)
Both revenue recognition tests are generallymetatthetime ofpurchaseSometimes the two revenue recognition tests arenot met at the same time. In such cases, revenueis generally recognized only when both tests aremet.Sometimes accountants must exercise judgmentin deciding whenthe recognitioncriteria are met
Most revenue is recognized at the point of sale. Both revenue recognition tests are generally met at the time of purchase. Sometimes the two revenue recognition tests are not met at the same time. In such cases, revenue is generally recognized only when both tests are met. Sometimes accountants must exercise judgment in deciding when the recognition criteria are met
What happens if revenue on onesale""isearned over a long period of time, forexample, on a long-term contract?Generally,the revenue from a long-termcontract should be recognized as the workon that contract is performed- For example, if one-fourth of the work iscompleted inthefirst year, one-fourth oftherevenue shouldberecognized
What happens if revenue on one “sale” is earned over a long period of time, for example, on a long-term contract? Generally, the revenue from a long-term contract should be recognized as the work on that contract is performed. – For example, if one-fourth of the work is completed in the first year, one-fourth of the revenue should be recognized
Measurementof SalesRevenueCash Sales and Credit SalesMerchandise Returns,Allowances,andDiscounts
Measurement of Sales Revenue Cash Sales and Credit Sales Merchandise Returns,Allowances,and Discounts
The revenue is measured in terms of the present cashequivalent value ofthe asset receivedA cash sale increases Sales Revenue, and increasesCash. A credit sale on open account is recordedmuchlike a cash saleexceptthatAccountsReceivable is increased instead of CashIn fact, the realizable value of a credit sale is oftenless than that of a cash sale. Because some accountsreceivablemayneverbecollected
The revenue is measured in terms of the present cash equivalent value of the asset received . A cash sale increases Sales Revenue, and increases Cash. A credit sale on open account is recorded much like a cash sale except that Accounts Receivable is increased instead of Cash. In fact, the realizable value of a credit sale is often less than that of a cash sale. Because some accounts receivable may never be collected
Merchandise Returns and AllowancesWhat happens when sales are recognized at thepoint of sale and a customer returns the goods thatwere sold?Sales returns - products returned to the seller bythe purchaser for various reasons-These are purchase returns from the customer'sperspective
Merchandise Returns and Allowances What happens when sales are recognized at the point of sale and a customer returns the goods that were sold? Sales returns - products returned to the seller by the purchaser for various reasons •These are purchase returns from the customer’s perspective