FinancialAccounting-OP_YioY6nY-118

Prévia do material em texto

TP3. 8.3 A manufacturing plant was finding a huge increase in the scrapping of raw materials. Its internal
controls were reviewed, and the plant appeared to be strong; segregation of duties was in place. As the
accountant was reconciling some inventory accounts, she found more than a normal amount of scrap tickets.
The tickets were for scrapping the same inventory part, signed by the same person, and the scrap was sold to
only one company. The inventory item was still being ordered, and only one supplier was used to purchase the
parts. After further investigation by the accountant, the company buying the inventory and the company
selling the inventory to the company had different names but shared the same address. Comment on what
went wrong. What happened to the internal controls the company had in place?
TP4. 8.3 The vice president of finance asks the accounts payable (AP) clerk to write a check in the name of
the president for $10,000. He and the president will sign the check (two signatures needed on a check of this
size). He further instructs the AP clerk not to disclose this check to her immediate supervisor. What should the
AP clerk do? Should she prepare the check? Should she inform her immediate supervisor? Discuss with
internal controls in mind.
TP5. 8.3 Even though technology has improved the internal control structure of a company, a supervisor
cannot depend totally on technology. Discuss other internal controls a supervisor needs to implement to
ensure a strong structure.
TP6. 8.6 A bank reconciliation takes time and must balance. An employee was struggling in balancing the
bank reconciliation. Her supervisor told her to “plug” (make an unsupported entry for) the difference, record
to Miscellaneous Expense, and simply move on. Discuss the internal controls problem with this directive.
TP7. 8.6 The bank reconciliation revealed that one deposit had cleared the bank two weeks after the date of
the deposit. Should this be of concern? Why, or why not?
576 Chapter 8 Fraud, Internal Controls, and Cash
This OpenStax book is available for free at http://cnx.org/content/col25448/1.4
Chapter Outline
9.1 Explain the Revenue Recognition Principle and How It Relates to Current and Future Sales and
Purchase Transactions
9.2 Account for Uncollectible Accounts Using the Balance Sheet and Income Statement Approaches
9.3 Determine the Efficiency of Receivables Management Using Financial Ratios
9.4 Discuss the Role of Accounting for Receivables in Earnings Management
9.5 Apply Revenue Recognition Principles to Long-Term Projects
9.6 Explain How Notes Receivable and Accounts Receivable Differ
9.7 Appendix: Comprehensive Example of Bad Debt Estimation
Why It Matters
Marie owns Skateboards Unlimited, a skateboard lifestyle shop offering a variety of skate-specific clothing,
equipment, and accessories. Marie prides herself on her ability to accommodate customer needs. One way she
accomplishes this goal is by extending to the customer a line of credit, which would create an account
receivable for Skateboards Unlimited. Even though she has yet to collect cash from her credit customers, she
recognizes the revenue as earned when the sale occurs. This is important, as it allows her to match her sales
correctly with sales-associated expenses in the proper period, based on the matching principle and revenue
recognition guidelines.
By offering credit terms, Skateboards Unlimited operates in good faith that customers will pay their accounts
in full. Sometimes this does not occur, and the bad debt from the receivable has to be written off. Marie
Figure 9.1 Skateboards Unlimited. Business success is realized with effective receivable management. (credit:
modification of “2013 Street Arts Festival” by Eli Christman/Flickr, CC BY 2.0)
9
Accounting for Receivables
typically estimates this write-off amount, to show potential investors and lenders a consistent financial
position. When writing off bad debt, Marie is guided by specific accounting principles that dictate the
estimation and bad debt processes. Skateboards Unlimited will need to carefully manage its receivables and
bad debt to reach budget projections and grow the business. This chapter explains and demonstrates
demonstrate the two major methods of estimating and recording bad debt expenses that Skateboards
Unlimited can apply under generally accepted accounting principles (GAAP).
9.1 Explain the Revenue Recognition Principle and How It Relates to Current
and Future Sales and Purchase Transactions
You own a small clothing store and offer your customers cash, credit card, or in-house credit payment options.
Many of your customers choose to pay with a credit card or charge the purchase to their in-house credit
accounts. This means that your store is owed money in the future from either the customer or the credit card
company, depending on payment method. Regardless of credit payment method, your company must decide
when to recognize revenue. Do you recognize revenue when the sale occurs or when cash payment is
received? When do you recognize the expenses associated with the sale? How are these transactions
recognized?
Accounting Principles and Assumptions Regulating Revenue Recognition
Revenue and expense recognition timing is critical to transparent financial presentation. GAAP governs
recognition for publicly traded companies. Even though GAAP is required only for public companies, to display
their financial position most accurately, private companies should manage their financial accounting using its
rules. Two principles governed by GAAP are the revenue recognition principle and the matching principle. Both
the revenue recognition principle and the matching principle give specific direction on revenue and expense
reporting.
The revenue recognition principle, which states that companies must recognize revenue in the period in
which it is earned, instructs companies to recognize revenue when a four-step process is completed. This may
not necessarily be when cash is collected. Revenue can be recognized when all of the following criteria have
been met:
• There is credible evidence that an arrangement exists.
• Goods have been delivered or services have been performed.
• The selling price or fee to the buyer is fixed or can be reasonably determined.
• There is reasonable assurance that the amount owed to the seller is collectible.
The accrual accounting method aligns with this principle, and it records transactions related to revenue
earnings as they occur, not when cash is collected. The revenue recognition principle may be updated
periodically to reflect more current rules for reporting.
For example, a landscaping company signs a $600 contract with a customer to provide landscaping services for
the next six months (assume the landscaping workload is distributed evenly throughout the six months). The
customer sets up an in-house credit line with the company, to be paid in full at the end of the six months. The
landscaping company records revenue earnings each month and provides service as planned. To align with
the revenue recognition principle, the landscaping company will record one month of revenue ($100) each
month as earned; they provided service for that month, even though the customer has not yet paid cash for
the service.
578 Chapter 9 Accounting for Receivables
This OpenStax book is available for free at http://cnx.org/content/col25448/1.4
Let’s say that the landscaping company also sells gardening equipment. It sells a package of gardening
equipment to a customer who pays on credit. The landscaping company will recognize revenue immediately,
given that they provided the customer with the gardening equipment (product), even though the customer
has not yet paid cash for the product.
Accrual accounting also incorporates the matching principle (otherwise known as the expense recognition
principle), which instructs companies to record expenses related to revenue generation in the period in which
they are incurred. Theprinciple also requires that any expense not directly related to revenues be reported in
an appropriate manner. For example, assume that a company paid $6,000 in annual real estate taxes. The
principle has determined that costs cannot effectively be allocated based on an individual month’s sales;
instead, it treats the expense as a period cost. In this case, it is going to record 1/12 of the annual expense as a
monthly period cost. Overall, the “matching” of expenses to revenues projects a more accurate representation
of company financials. When this matching is not possible, then the expenses will be treated as period costs.
For example, when the landscaping company sells the gardening equipment, there are costs associated with
that sale, such as the costs of materials purchased or shipping charges. The cost is reported in the same
period as revenue associated with the sale. There cannot be a mismatch in reporting expenses and revenues;
otherwise, financial statements are presented unfairly to stakeholders. Misreporting has a significant impact
on company stakeholders. If the company delayed reporting revenues until a future period, net income would
be understated in the current period. If expenses were delayed until a future period, net income would be
overstated.
Let’s turn to the basic elements of accounts receivable, as well as the corresponding transaction journal
entries.
E T H I C A L C O N S I D E R A T I O N S
Ethics in Revenue Recognition
Because each industry typically has a different method for recognizing income, revenue recognition is
one of the most difficult tasks for accountants, as it involves a number of ethical dilemmas related to
income reporting. To provide an industry-wide approach, Accounting Standards Update No. 2014-09 and
other related updates were implemented to clarify revenue recognition rules. The American Institute of
Certified Public Accountants (AICPA) announced that these updates would replace U.S. GAAP’s current
industry-specific revenue recognition practices with a principle-based approach, potentially affecting
both day-to-day business accounting and the execution of business contracts with customers.[1] The
AICPA and the International Federation of Accountants (IFAC) require professional accountants to act
with due care and to remain abreast of new accounting rules and methods of accounting for different
transactions, including revenue recognition.
The IFAC emphasizes the role of professional accountants working within a business in ensuring the
quality of financial reporting: “Management is responsible for the financial information produced by the
company. As such, professional accountants in businesses therefore have the task of defending the
quality of financial reporting right at the source where the numbers and figures are produced!”[2] In
accordance with proper revenue recognition, accountants do not recognize revenue before it is earned.
Chapter 9 Accounting for Receivables 579
Short-Term Revenue Recognition Examples
As mentioned, the revenue recognition principle requires that, in some instances, revenue is recognized
before receiving a cash payment. In these situations, the customer still owes the company money. This money
owed to the company is a type of receivable for the company and a payable for the company’s customer.
A receivable is an outstanding amount owed from a customer. One specific receivable type is called accounts
receivable. Accounts receivable is an outstanding customer debt on a credit sale. The company expects to
receive payment on accounts receivable within the company’s operating period (less than a year). Accounts
receivable is considered an asset, and it typically does not include an interest payment from the customer.
Some view this account as extending a line of credit to a customer. The customer would then be sent an
invoice with credit payment terms. If the company has provided the product or service at the time of credit
extension, revenue would also be recognized.
For example, Billie’s Watercraft Warehouse (BWW) sells various watercraft vehicles. They extend a credit line to
customers purchasing vehicles in bulk. A customer bought 10 Jet Skis on credit at a sales price of $100,000. The
cost of the sale to BWW is $70,000. The following journal entries occur.
C O N C E P T S I N P R A C T I C E
Gift Card Revenue Recognition
Gift cards have become an essential part of revenue generation and growth for many businesses.
Although they are practical for consumers and low cost to businesses, navigating revenue recognition
guidelines can be difficult. Gift cards with expiration dates require that revenue recognition be delayed
until customer use or expiration. However, most gift cards now have no expiration date. So, when do you
recognize revenue?
Companies may need to provide an estimation of projected gift card revenue and usage during a period
based on past experience or industry standards. There are a few rules governing reporting. If the
company determines that a portion of all of the issued gift cards will never be used, they may write this
off to income. In some states, if a gift card remains unused, in part or in full, the unused portion of the
card is transferred to the state government. It is considered unclaimed property for the customer,
meaning that the company cannot keep these funds as revenue because, in this case, they have reverted
to the state government.
1 American Institute of Certified Public Accountants (AICPA). “Revenue from Contracts with Customers.” Revenue Recognition. n.d.
https://www.aicpa.org/interestareas/frc/accountingfinancialreporting/revenuerecognition.html
2 International Federation of Accountants (IFAC). “Roles and Importance of Professional Accountants in Business.” n.d. https://www.ifac.org/
news-events/2013-10/roles-and-importance-professional-accountants-business
580 Chapter 9 Accounting for Receivables
This OpenStax book is available for free at http://cnx.org/content/col25448/1.4
	Chapter 9. Accounting for Receivables
	Table of Contents
	Why It Matters*
	9.1. Explain the Revenue Recognition Principle and How It Relates to Current and Future Sales and Purchase Transactions*