Chapter 6 ideas

Gross Profit (Gross Margin, Gross Profit Margin) = Net Sales - Cost of Sales

Credit Card Sales 3% discount:

• Sales Revenue $3000
• Less: Credit Card Discount (3% x 3000) = $90
• Net Sales = $2910

Sales Discount to Business

• 2/10, n/30
• 2 % discount if pay in 10 days
• n = net (Total sales less returns)
• 30 = maximum credit period

Question to take or not for the discount

• 2/10, n/30 for $100 sales

• amount saved / amount paid = interest rate for 20 days
• 2/98 = 2.04% for 20 days

• annual interest rate is = interest rate for 20 days x 365 days / 20 days
• 2.04% x 365 days / 20 days = 37.23 %

• As long as the bank's interest rate is less than the interest rate that associated with failing to take cash discounts, the customer will save by taking the cash discount.

Sales Return and Allowances

• 50 pairs shoes sales and return 10 pairs
• Sales revenue = $2000
• Less: Sales return and allowances (0.25 x $2000) = $500
• Net sales ( report to income statement) = $1500

Net Sales:

• Sales revenue = $6000
• Less: Credit card discount (a contra-revenue) $90
• Sales discount (a contra-revenue) $20
• Sales return and allowances (a contra-revenue) $500
• Net sales = $5390

Gross Profit Percentage:

• Gross Profit Percentage = Gross Profit / Net sales

Measure and Reporting Receivables

Accounting for Bad debts

Control over Accounts Receivable to optimize bad debts:

• Require approval of customers' credit history by a person independent of the sales
• Age account receivable periodically and contact customers with overdue payments
• Reward both sales and collections personal for speedy collections so that they work as a team

Receivables Turnover

• Receivables Turnover = Net Sales / Average Net Trade Accounts Receivable
• Average Collection Period = 365 / Receivable Turnover

Chapter 4 ideas

Adjusting Entries:

• Because recording these and similar activities daily is often very costly, most company wait until the end of the period to make adjustments to record related revenue and expenses in the correct period.

At the end of the period:

• Adjusting Revenues and Expenses
• Preparing Financial Statements
• Closing the Books

Accounting Cycle:

• During the period: Analyze, Record, Post
• At the end of the period: Adjust
• Prepare, Disseminate
• Close

Unadjusted Trial Balance:

• is a list of individual accounts in one column, usually in financial statement order, with their ending debit or credit balance in the next two columns.

Contra-Account:

• is an account that is an offset, or reduction of, the primary account.

Deferred revenues:

• When cash is received prior to earning a revenue by delivering goods or performing services, the company records a journal entry.
• During the period: Cash (+A) and Unearned fee revenue (+L)
• End of period: Unearned fee revenue (-L) and Fee revenue (+R, +SE)

Accrued Revenues:

• When revenues are earned but not yet record at the end of accounting period because cach changes hands after service in preformed or goods delivered.
• End of period: Interest receivable (+A) and interest revenue(+R, +SE)
• Next period: Cash (+A) and Interest receivable (-A)
• Example: Interest Receivable / Rent Receivable
• Adjusting Entry: Asset (Up) and Revenue (Up)

Deferred Expenses:

• When cash is paid prior incurring an expense, the company records a journal entry to debit an asset account and credit cash.
• During the period: Prepaid insurance(+A) and Cash (-A)
• End of period: Insurance expense (+E, -SE) and Prepaid insurance (-A)
• Expense (Up) and Asset (Dn)

Accrued Expenses:

• When expenses are incurred in the current period but not billed or paid for until the next period.
• End of period: Wages expense(+E, -SE) and Wages payable(+L)
• Next period: Wages payable(-L) and Cash (-A)
• Expense (Up) and Liability (Up)

Net Profit Margin = Revenues - Cost - Expenses

Net Gross Margin = Revenue - Cost

Net Income = Revenues - Expenses

Assets = Liabilities + Stockholders' Equity

Earnings per Share = Net Income Available to the Common Stockholders

/ Weighted Average Number of Shares of Common Stock Outstanding during the period