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