2026 upcoming midterm exam prep on demand recording chpter 1,2,3,4,5 and 11 COMM 217 Concordia Unive

2026 upcoming midterm exam prep on demand recording chpter 1,2,3,4,5 and 11 COMM 217 Concordia University

Table of Contents 1.

INTRODUCTION TO FINANCIAL ACCOUNTING 1.1.

1.2.

2.

FINANCIAL STATEMENTS 2.1.

2.2.

2.3.

3.

4.2.

4.3.

4.4.

Accrual Basis vs Cash Basis Accounting Adjusting Journal Entries Financial Statements Closing Entries

CASH FLOW STATEMENT 5.1.

6.

Financial Accounting Basics – Summary

ADJUSTING-ENTRIES AND THE YEAR-END PROCESS 4.1.

5.

The Statement of Financial Position The Statement of Earnings (Income Statement) Accounts

TRANSACTION ANALYSIS 3.1.

4.

What is Financial Accounting?

Characteristics and Assumptions of Accounting Information

Cash Flow Statement

REVENUE RECOGNITION, RECEIVABLES AND BAD DEBT 6.1.

6.2.

6.3.

6.4.

6.5.

6.6.

Revenue Recognition Contra-Revenues and Net Sales Bad Debt Percentage of Receivables Method Percentage of Sales Method Receivables Turnover Ratio and Average Collection Period

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Bank Reconciliation

1. INTRODUCTION TO FINANCIAL ACCOUNTING 1.1

What is Financial Accounting?

1 .1 .1

Financial accounting is the eld of accounting concerned with the summary, analysis and reporting of nancial transactions related to a business.

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1 .1 .2

The Four Basic Financial Statements Statement of Financial Position (Balance Sheet) ● Reports assets, liabilities and shareholders’ equity (

nancial position).

● Information pertains to a speci c point in time (snapshot)

Statement of Earnings (Income Statement) ● Reports revenues, expenses and net income (pro t) ● Information pertains to a time period (month, quarter, year)

Statement of Changes in Equity ● Reports all changes to shareholders’ equity accounts. ● Information pertains to a time period (month, quarter, year)

Cash Flow Statement ● Reports the in ows and out ows of cash that are related to operating, investing, and

nancing

activities. ○ Operating activities: Directly related to generating earnings ○ Investing activities: Acquisitions or sales of the company’s ○ Financing activities: Directly related to the

xed assets or investments

nancing of the company, includes payments and

collections from investors or creditors (banks)

1.2

Characteristics and Assumptions of Accounting Information

1 .2 .1

Accounting Information Characteristics

For accounting information to meet its objective of providing useful information, certain characteristics or rules must be respected: ● Relevance ○ Information is considered relevant if it can in uence a decision. ○ Material Amounts ■ If a transaction involves an amount that is signi cantly low such that it cannot affect a

decision, these amounts are considered immaterial and not relevant.

■ Only material amounts can affect a decision. ● Faithful Representation ○ The information provided in the

nancial statements must re ect the actual condition of the

business, not merely was is legally visible. ○ Information must be complete, neutral (unbiased), and free from material error. ● Comparability ○ The

nancial statements of a company must be comparable to previous years’ statements,

as well as the statements of other companies, this is achieved by using similar and consistent accounting methods.

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● Veri ability ○ Information presented in the

nancial statements is veri able if independent accountants

can agree on the nature and amount of the accounts and transactions. ● Timeliness ○ Information should be made available to decision makers in time to be considered, otherwise it is irrelevant. ● Understandability ○ The quality of the information that enables users to comprehend its meaning. Clear and

concise classi cation and presentation of information enhances this characteristic. ● The Cost Constraint ○ The cost of producing the

nancial information should be less than the bene t it will

contribute to the organization.

1 .2 .2

Accounting Assumptions

In addition to the characteristics used in creating the nancial statements, there are 4 assumptions when reading a company’s nancial records: ● The Separate-Entity Assumption ○ This assumption states that the activities of the business must be accounted for separately

from the activities of its owners.

■ Mark should not use the company credit card to rent a car on his family vacation. ● The Unit of Measure Assumption ○ This assumption states that accounting information is reported in the national currency. ● The Continuity Assumption (Going Concern) ○ This assumption states that a business is assumed to continue to operate for the

foreseeable future. ● The Historical Cost Principle ○ Assets are required to be reported in the books at the historical (original) cost that was paid

for the asset, ignore market value.

■ A building was purchased in 1989 for $50,000; although this building can be sold today

for $450,000, in the company’s books it will remain reported at $50,000.

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2. FINANCIAL STATEMENTS 2.1

The Statement of Financial Position

2 .1 .1

The balance sheet, also known as the statement of nancial position, is the third of the four major nancial statements. It is an important tool used by investors and other stakeholders to get a good look at the company's operations. ● It is a snapshot at a single point in time of the company's assets, liabilities, and shareholders'

equity. ● Gives interested parties an idea of the company's

nancial position.

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2 .1 .2

Assets ● Economic resource controlled by the company. ● Can be used to provide future economic bene t. ● Assets are classi ed based on their liquidity

a. Assets that will be liquidated (used) within 12 months are called current-assets b. Assets that will be liquidated (used) in a period longer than 12 months are called noncurrent assets ● There are

ve categories of assets:

a. Cash and cash equivalents b. Receivables c. Inventories d. Prepaid expenses e. Property, plant, and equipment.

2 .1 .3

Liabilities ● Obligations that a company must honor ○ Can be debt that needs to be repaid in cash or in other forms like with goods and services. ● Liabilities are classi ed based on their maturity. ○ Liabilities that are due within 12 months are called current-liabilities. ○ Liabilities that are due in more than 12 months are called non-current liabilities.

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2 .1 .4

Shareholders’ Equity ● The value of the company’s retained earnings (reinvested pro ts) and all of the investments

made by the company’s owners (shareholders). ● Can be seen as the net worth of the company

Contributed Capital ● The value of the assets invested in the company by its owners or shareholders in exchange for

ownership (shares). ● Also called Share Capital or Common Shares ● Account balance = # of issued shares x Average issue price per share ● Increases when shares issued ● Decreases when shares are repurchased ● Typically use the account titled Common shares when recording transactions.

Retained Earnings ● Pro ts reinvested in the company increase retained earnings. ● Pro ts taken out of the company and given to shareholders are called dividends, this

decreases retained earnings.

2 .1 .5

The Accounting Equation ● Describes who has rights to the company's assets

a. Assets can be divided between credits (liabilities) and owners (equity) ● Describes how assets are purchased

a. Can be purchased using debt (liabilities) or purchased by owners (equity).

ASSETS = LIABILITIES + SHAREHOLDERS’ EQUITY

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2 .1 .6

Double-Entry Accounting System ● Based on the accounting equation ● Every transaction must affect at least two accounts. ● Accounting equation should always remain balanced.

2.2

The Statement of Earnings (Income Statement )

2 .2 .1

The income statement is the rst of the four major nancial statements and its primary purpose is to show how much money the business earned (or lost) during the given accounting period.

Key Elements of an Income Statement ● Report the net income or loss over a speci c period ● List the revenues and expenses that occurred over the period ● Separates operating activities from non-operating activities ● Measures income in steps:

1. Gross Pro t: Income from sales after deduction only the direct costs (COGS) of producing or purchasing the goods sold.

2. Operating income: Income earned from the primary operations of the business.

3. Earnings before Tax: Income earned from both operating and non-operating activities, before income taxes.

4. Net Income: Total income earned after income taxes.

5. Earnings per Share: Net income expressed on a per share basis.

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2 .2 .2

Revenues

Revenues are fees or income earned in exchange for goods, services, and other activities the business participates in.

Operating Revenues

Operating revenue is generated by a company's primary business activities. Examples ● Sales revenue ● Service revenue

Non-Operating Revenues

Non-operating revenue is revenue generated by activities outside of a company's primary operations. ● Interest revenue ● Rent revenue ● Dividend revenue ● Gains from disposition of assets ● Gains from settlement of liabilities

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Contra-Revenues

Accounts that decrease the amount of revenue actually collected by the company. ● Sales discounts ● Sales returns and allowances

2 .2 .3

Expenses

Expenses are fees and costs incurred by the business for the goods and services used to generate revenues.

Cost of Goods Sold

Cost of goods sold (Cost of sales) represents all the expenses directly incurred in order to bring a product or service to market. ● Cost of purchasing merchandise from suppliers. ● Cost of manufacturing merchandise (materials, labour and overhead).

Operating Expenses

Operating expenses are the indirect costs incurred by a business to bring its products and services to market. ● Salaries and wages expense ● Supplies expense ● Rent expense ● Depreciation expense ● Marketing expense

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Non-Operating Expenses

Non-operating expenses are the costs incurred that are not related to normal business operations.

Also called Other expenses. ● Interest expense ● Income tax expense ● Losses from disposition of assets ● Losses from settlements of liabilities

2 .2 .4

Net Income ● The net amount earned or lost by a company during an accounting period. ● It is one of most important

gures since the primary purpose of a business it to increase the

wealth of it owners, which is typically done by turning a pro t. ● Also called Pro t (Loss), Net Earnings

Income Tax Expense

The portion of the company's earnings before tax that must be paid to tax agencies.

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Earnings Per Share ● Pro t or Loss earned on a per share basis ● Investors care most about this number

2.3

Accounts

2 .3 .1

Accounts

Accounts are the building blocks of nancial reporting. They are used to sort and store transactions affecting a particular part of the company's ledger.

Example: The cash account is used to record every transaction that increases or decreases the

company's cash.

There are 5 broad categories of accounts: ● Assets ● Liabilities ● Shareholders' Equity ● Revenues ● Expenses

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LIST OF COMMON ACCOUNT NAMES

3. TRANSACTION ANALYSIS 3.1

Financial Accounting Basics – Summary

3 .1 .1

What is an account?

A record in the general ledger and nancial statements of a business that is used to collect and store debit and credit amounts. For example, the Cash account is where every transaction involving cash is recorded. A business has many accounts and account classi cations.

What are Debits and Credits?

Debits and credits are accounting entries that either increase or decrease an accounting. ● Debits are positioned to the left in an accounting entry ● Credits are positioned to the right in an accounting entry

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What is a T-Account?

A T-account is a graphic representation of an account. Debit entries are entered on the left and credit entries are entered on the right.

Example: T-Accounts

A company begins the year with $2,000 in cash. Throughout the year, the company spends $35,000 in cash and at the end of the year there is $5,000 in the cash account. How much cash was received?

Show your work using a t-account.

3 .1 .2

Types of Accounts

There are 5 main categories of accounts, and can either be natural debits or natural credits. ● Natural Debit: Account that is increased with a debit and decreased with a credit. ● Natural Credit: Account that is increased with a credit and decreased with a debit.

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What is a transaction? ● A business event having a monetary impact on the

nancial statements of a business.

● Must involve at least two accounts, but can involve more.

For example: On March 15, ABC Inc sells $5,000 of merchandise to a customer in exchange for cash.

3 .1 .3

What is a Journal Entry? ● A journal entry is used to record a business transaction in the accounting records of a business. ● In a journal entry, debit accounts are written

rst and to the left, followed by credit accounts to

the right. ● There can be many debits and credits but there must be at least one of each. ● The total of the debits should always equal the total of the credits

Some Examples

1. On March 15, ABC Inc sells $5,000 of merchandise to a customer in exchange for cash.

Mar 15

Cash (Asset +)

5,000

Sales Revenue (Revenue +)

5,000

2. On September 17, ABC Inc repays a $2,000 bank loan plus $200 of interest.

Sep 17

Loan Payable ( Liability - )

2,000

Interest Expense ( Expense + )

200

Cash ( Asset - )

2,200

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3 .1 .4

Example: Journal Entries

You were hired as an accountant for SOS Electronics in December 2021. SOS sells high-end consumer electronics to retail stores across Canada and provides IT services to those retailers as well which it classi es as Sales to simplify its accounting. SOS is a public corporation listed on the Toronto Stock Exchange (TSX) and on January 1st 2021 had 80,000 outstanding shares. SOS’s scal year ends December 31. You are hired to replace the company’s old accountant who was red last week when management realized that he had not recorded any transactions after the end of October. SOS’s unadjusted trial balance on October 31, 2021 is shown:

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A review of SOS’s documents reveals the following items: ● November 1st, sold merchandise costing $5,000 to a customer for $20,000. The sale was on

account. ● November 1st, borrowed $200,000 from TD Bank and signed a 5-year note for that borrowing.

The note carries a 9% interest rate. Principal and interest are due at maturity. ● November 2nd, issued 4,000 new shares for $50 per share. ● November 6th, paid $6,000 in advance in rent for the months of November, December and

January. ● November 18th, purchased on account $25,000 of merchandise from one of its suppliers. ● November 22nd, collected $10,000 from customers’ accounts. ● December 1st, paid employees $30,000 for November salaries. ● December 1st, the company rents out a portion of its warehouse to an unrelated business for

$1,000 per month starting today. ● December 1st, lent an employee $60,000 to be repaid in 6 months, the loan carries an interest

rate of 10%. ● December 2nd, received and paid bill of $2,000 from a marketing agency. ● December 5th, delivered half the services to the customers that had prepaid in August. ● December 7th, a $1.30 per share dividend was declared. ● December 9th, collected $17,000 from customers for services to be rendered in 2018. ● December 12th, purchased $20,000 of supplies, paid in cash. ● December 13th, hired a new of

ce manager who will earn $50,000 per year.

● December 17th, purchased new of ce equipment for $150,000. Paid half in cash and signed a

note to repay the rest before the end of the year. ● December 20th, paid the dividends.

● December 21st, paid the remaining balance for the of ce equipment.

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4. ADJUSTING-ENTRIES AND THE YEAR-END PROCESS 4.1

Accrual Basis vs Cash Basis Accounting

4 .1 .1

Accrual Basis Accounting ● Recognizes revenues when they are earned ● Recognizes expenses when they incurred or used ● This method is the widely used in

nancial accounting as it is required under IFRS and GAAP

Cash Basis Accounting ● Recognizes revenues when cash is received ● Recognizes expenses when cash is paid ● This method is mainly used by small businesses and personal

nance

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The Fiscal Year

Unlike the calendar year, a company can choose their year on any day of the year. The scal year represents a year for tax and accounting purposes. ● Can be any day of the year but companies should be consistent each year ● All accounts must be up to date at the end of the ● Adjusting journal entries and

year

scal year

nancial statements are prepared on the last day of the scal

4.2

Adjusting Journal Entries

4 .2 .1

What is an Adjusting Entry? ● Prepared at the end of an accounting period ● Record revenues and expenses that have occurred but have not yet been recorded.

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Contra-Assets ● Related to, and subtracted from, another asset. ● Accounts that are classi ed as assets but carry a negative balance. ○ This means that as the contra-asset increases in value, the related asset decreases in

value. ● There are 2 contra-assets to get to know: ○ Accumulated depreciation: decreases the value of a long-term

xed asset.

○ Allowance for doubtful accounts: decreases the value of accounts receivables.

4.3

Financial Statements

4 .3 .1

Statement of Financial Position (Balance Sheet)

The balance sheet, also known as the statement of nancial position, is the third of the four major nancial statements. It is an important tool used by investors and other stakeholders to get a good look at the company's operations. ● It is a snapshot at a single point in time of the company's assets, liabilities, and shareholders'

equity. ● Gives interested parties an idea of the company's nancial position.

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4 .3 .2

Statement of Earnings (Income Statement)

The income statement is the rst of the four major nancial statements and its primary purpose is to show how much money the business earned (or lost) during the given accounting period. ● Reports the net income or loss over a speci c period ● List the revenues and expenses that occurred over the period

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EPS =

Net Income Average number of outstanding common shares

4.4

Closing Entries

4 .4 .1

Temporary and Permanent Accounts

In nancial reporting, certain accounts are labeled as temporary accounts while other are permanent accounts. Understanding this concept is crucial for completing the accounting cycle.

Temporary Accounts ● Reset back to a zero balance at the end of the accounting period ● Includes all revenues, expenses and dividends declared

Permanent Accounts ● Accounts balance at the end of an accounting period are carried over into the following period ● Includes all assets, liabilities, and shareholders' equity account

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4 .4 .2

Four Closing Entries

1. Close revenues and contra-revenues to Income Summary 2. Close expenses to Income Summary 3. Close Income Summary to Retained Earnings 4. Close Dividends Declared to Retained Earnings

4 .4 .3

Example

You were hired as an accountant for SOS Electronics in December 2021. SOS sells high-end consumer electronics to retail stores across Canada and provides IT services to those retailers as well which it classi es as Sales to simplify its accounting. SOS is a public corporation listed on the Toronto Stock Exchange (TSX) and on January 1st 2021 had 80,000 outstanding shares. SOS’s scal year ends December 31.

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A review of SOS’s documents reveals the following items: ● November 1st, borrowed $200,000 from TD Bank and signed a 5-year note for that borrowing.

The note carries a 9% interest rate. Principal and interest are due at maturity. ● November 6th, paid $6,000 in advance in rent for the months of November, December and

January. ● December 1st, the company rents out a portion of its warehouse to an unrelated business for

$1,000 per month starting today. ● December 1st, lent an employee $60,000 to be repaid in 6 months, the loan carries an interest

rate of 10%. ● December 12th, purchased $20,000 of supplies, paid in cash.

Below is additional information available on December 31st2021. ● December salaries totalled $35,000 and will be paid on January 1st 2021. ● A physical count of supplies reveals that there are $10,000 of supplies on hand. ● The company determines that $15,000 of its trade receivables are likely to not be collected. ● Depreciation expense for the last two months of 2021 are $12,000 for Furniture and

Equipment; and $10,000 for Buildings. ● The company has provided a customer with $20,000 of tech support services that has not

been recorded or paid. ● The tenant in the warehouse has not yet paid the rent for December. ● The company is subject to a 30% tax rate

Prepare all necessary adjusting journal entries on December 31, 2021.

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4 .4 .4

Example: Financial Statements

You were hired as an accountant for SOS Electronics in December 2021. SOS sells high-end consumer electronics to retail stores across Canada and provides IT services to those retailers as well which it classi es as Sales to simplify its accounting. SOS is a public corporation listed on the Toronto Stock Exchange (TSX) and on January 1st 2021 had 80,000 outstanding shares. SOS’s scal year ends December 31.

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Requirements

1. Prepare the income statement 2. Prepare the statement of nancial position 3. Calculate the following ratios assuming the company’s total assets were $2,500,000 at December 31, 2020. a. Current ratio b. Debt-to-equity ratio c. Total asset turnover ratio d. Return on assets e. Return on equity

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5. CASH FLOW STATEMENT 5.1

Cash Flow Statement

5 .1 .1

The Cash Flow Statement

The cash ow statement is the last of the major nancial statements and its purpose is to detail the in ows and out ows of cash during the reporting period.

About the Statement ● Three categories: Operating, Investing, and Financing Activities ● Only concerned with cash

ows

● Used to explain the change in Cash, Cash equivalents and short-term investments

Operating Activities ● Activities affecting cash related to the company's day-to-day operations. ● Transactions affecting current assets and current liabilities (except dividends payable)

Investing Activities ● Non-operating activities related to the purchase and sale of long-term assets

Financing Activities ● Non-operating activities related to long-term liabilities and equity

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5 .1 .2

Operating Activities (Direct Method)

The direct method of preparing the operating activities section of the cash ow statement uses actual in ows and out ows of cash to determine the amount of cash generated by a business's primary operations.

Important Formulae Cash collected from customers = Net Sales + Change in Unearned Revenue – Change in Accounts

Receivable Purchases = Cost of Goods Sold + Change in Inventory Cash paid to suppliers = Purchases – Change in Accounts Payable Cash paid to employees = Salaries and Wages Expense – Change in Salaries and Wages Payable Cash paid operating expenses = Operating Expenses – Change in Accrued Liabilities Cash paid for interest = Interest Expense – Change in Interest Payable Cash paid for income taxes = Income tax expense – Change in income tax payable

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5 .1 .3

Operating Activities (Indirect Method)

The indirect method is the more widely used format for determining operating cash ows. Net income is adjusted to determine net cash from operations.

Adjustments to Net Income ● Add back non-cash items like depreciation expense and amortization expense ● Reverse gains and losses from non-operating activities ○ Add back losses ○ Subtract gains ● Adjust for changes in working capital ○ Subtract increases to working capital ■ Increase in current assets ■ Decrease in current liabilities ○ Add decreases to working capital ■ Decrease in current assets ■ Increase in current liabilities

What it looks like

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5 .1 .4

Investing Activities

The investing activities section lists all the cash transactions related to the purchase or sale or longterm assets.

Carrying Value vs Sale Price vs Cash Proceeds ● Carrying value is the book value of the asset after depreciation ○ For assets that do not depreciate, carrying value is equal to original cost ● Sale price is the amount the asset is sold for. ○ Carrying value + Gain on sale ○ Carrying value - Loss on sale ● Cash proceeds is the actual cash in ow from the sale only this ends up on the cash ow

statement

Purchases ● Only cash out ows from purchases appear on the cash ● If the method of payment is not speci ed, assume cash.

What it looks like

ow statement.

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5 .1 .5

Financing Activities

The nancing activities section lists the cash transactions related to long-term liabilities and equity.

These are the activities that the company underwent in order to raise money to nance the growth of the business.

Borrowings and Long-term Debt ● Repayments that were made in cash. ● New debt that was received in cash.

Shares ● Cash received in exchange for shares ● Cash spent to repurchase shares

Dividends ● Cash paid in dividends.

What it looks like

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5 .1 .6

Complete Cash Flow Statement

Combining the three section of the cash ow statement ful lls to goal of determining the net change in cash and short-term investments during the reporting period.

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Quality of Earnings Ratio

This quality of earnings ratio is a pro tability ratio that measures if a company's pro ts are high quality. High quality earnings are earnings generated from the companies main business and can be repeated year-after-year.

Interpreting the ratio ● Ratio > 1: The company's generating more high quality income. ● Ratio < 1:The company's generating more low quality income.

High Quality Earnings ● Earnings from operations ● Can be repeated year-after-year

Low Quality Earnings ● Pro ts from non-operating activities ○ Example: Sale of

xed assets and redemption of bonds

● Can not be reproduced year-after-year

5 .1 .7

Capital Expenditure Ratio

The capital expenditure ratio measures the company's ability to nance the purchase of xed assets using cash from operations.

What are Capital Expenditures? ● Cash spent on xed assets (property, plant and equipment). ● Located in the investing activities section of the cash

ow statement.

Interpreting the Ratio ● Ratio > 1: This means the company can afford to pay for its capital expenditures using cash

generated by its operations. ● Ratio < 1: This means the company cannot afford to pay for its capital expenditures using

cash generated by its operations and would require non-operating sources of cash.

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Free Cash Flow

The free cash ow tells us if a company is generating enough cash from its operations to nance its capital expenditures and dividends.

Interpreting Free Cash Flow ● Positive: This means the company can afford its capital expenditures and dividends using

cash generated by its operations. ○ Sign of a nancial strength ● Negative: This means the company relies on non-operating cash ows to pay for capital

expenditures and dividends. ○ This is not sustainable in the long-run ○ Possibly a sign of

nancial weakness

5 .1 .8

Example: Cash Flow Statement Indirect Method

The following information is available for SOS, Inc. for the year ended December 31st, 2021

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Additional Information: ● Purchased Equipment for $1,400,000 paying 80% in cash and issuing common shares for the

balance. ● Sold equipment and received $260,000 cash ● Issued an additional $62,800 of common shares for cash(other than the ones mentioned in the

rst bullet point) ● Sold long-term investments costing $100,000 for $4,000 less than their cost. ● Declared and paid a dividend of $50,000 ● Purchased another long term investment costing $180,000 ● Repaid $120,000 of long term notes payable back to RBC

Required:

a. Prepare a complete statement of cash ows for the year ended December 31, 2021 using the indirect method b. Prepare the Operating Activities section of the statement of cash ows under the direct method. c. Compute the quality of earnings ratio and comment on the results. d. Compute the capital expenditure ratio and comment on the results. e. Compute and interpret the free cash ow.

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6. REVENUE RECOGNITION, RECEIVABLES AND BAD DEBT 6.1

Revenue Recognition

6 .1 .1

Revenue is recognized when the following conditions are met: ● The seller has transferred to the buyer the signi cant risks and rewards of owning the goods ● The seller retains no control over the goods sold ● The amount of revenue earned can be measured reliably ● It is probable that the economic bene t (payment) will be received by the seller ● The cost incurred or to be incurred can be measured reliably

Revenue Recognition with Shipping Terms

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6.2

Contra-Revenues and Net Sales

6 .2 .1

Contra-Revenues

Accounts that decrease the amount of revenue collected from customers. ● Credit card discounts ● Sales discounts ● Sales returns and allowances

Credit Card Discounts ● Fees incurred by merchant (seller) when a customer pays with a credit card like MasterCard,

VISA, American Express, etc. ● Percentage deducted from the sale amount and kept by the credit card provider. ● Recorded as a cash sale by the seller because the cash is received from the credit card

provider.

Example: Provided a service to a customer for $1,000, the customer paid with their credit card. The

credit card company takes a 3% fee on all credit card transactions.

6 .2 .2

Sales Discounts ● Discount given to a customer for paying their account within the discount period. ● Discount only recorded if a customer receives the discount, not at the time of the original sale.

Example: Customer purchased merchandising for $5,000 with the terms 2/10, net/30. The cost of the

merchandise was $1,000 and the customer returned after 3 days to pay their account.

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Sales Returns and Allowances ● Used to record returns from customers. ● Returns always recorded at the original sale price ○ Refund is given if the customer has already paid ○ Credit is given (reduction of account) if the customer has not paid yet. ● Merchandise returned to inventory and COGS cancelled only if the merchandise is not defective

and can be resold.

Example: Customer returns $2,000 worth of merchandise for a refund. The merchandise had

originally cost the company $500.

6 .2 .3

Net Sales ● Actual sales amount after deducting contra-revenue accounts. ● Represents the real amount of revenue earned by the company.

Gross Pro t Margin ● Measures how effective management is at selling goods and services for more than it cost to

purchase of produce them. ● Measures how much gross pro t is generated from every sales dollar. ● The higher the ratio is the better.

Gross Profit Net Sales

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6.3

Bad Debt

6 .3 .1

When customers can purchase goods and services on an open account (account receivable), the company creates the risk of some customers not paying their balances, this is called bad debt.

Allowance for Doubtful Accounts (AFDA) ● Contra-asset to accounts receivable ○ Reduces the net realizable value of accounts receivable. ● Represents the portion of receivables that the company estimates it will not collect.

6 .3 .2

Bad Debt Expense Estimate

The expense that represents additions to the company’s doubtful accounts (AFDA).

Writing-off Uncollectible Accounts ● Closing an account that is deemed to be de nitely uncollectible (100% probability of not

collecting). ● Reduces AFDA and accounts receivable

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Recoveries ● Collection from customers that were previously written-off ● Recovery recorded in 2 entries: ○ First entry: reverses the write-off ○ Second entry: records the collection in cash

6 .3 .3

Example: Journal Entries

Prepare the following journal entries for ABC Corporation: ● Jan 4: Sold 50 units of merchandise to Smith LLC for $100 each. The terms were FOB shipping

point and 2/30 n/30. The items were shipped on January 7th by UPS at a cost of $100. The customer received the goods on January 10th. ● Jan 15: Smith LCC returned 5 units and paid the remaining balance in full. ● Feb 11: Smith LLC returned another 8 units. ● Feb 12: Sold 100 units of merchandise to Brown Corp for $120 each. The terms were FOB

destination and 2/10 n/30. The goods were shipped the same day at a cost of $80 and the customer received them on February 18th. ● Feb 18: Purchased 1,000 units of merchandise for $10 each from Gomez Inc The purchase was

paid by e-transfer and the good were shipped under the terms FOB shipping point and the cost of shipping was $150. ● Mar 6: Sold 40 units of merchandise to Orange Corp for $30 each who elected to pay with his

MasterCard. ABC Corporation’s payment processing charges the company a 3% fee for all credit card transactions. ● Apr 7: Accepted Cheng Corp’s Inc.’s 3-month note for a sale made last year. The customer had

experienced cash ow issues due to the pandemic and has asked ABC Corporation to grant a payment extention. Under the new terms, the customer is required to pay back their entire balance of $20,000 on July 7th, the interest rate on the note is 8% starting today. ● May 11: Received a letter from Armco Inc. stating that the company had declared bankruptcy.

Immediately wrote off their $6,000 account receivable. ● Apr 12: Received a payment of $5,000 from Blue n Inc. This customer’s account had been

previously written off.

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6.4

Percentage of Receivables Method

6 .4 .1

This method is used to estimate the company’s doubtful accounts by taking a percentage of the accounts receivables.

Aging of Receivables ● Older accounts receivables have a higher probability of not paying. ● Probabilities of not collecting are determined by the company and are different for every

company.

Estimating Bad Debt Expense ● Amount needed to reach the desired ending balance from the unadjusted balance. ● Unadjusted balance is found using the previous AFDA, write-offs and recoveries in the current

period.

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6.5

Percentage of Sales Method

6 .5 .1

This method estimates the bad debt expense for the year as a percentage of net credit sales.

Net Credit Sales ● Sales made on account ● Amount after deducting discounts and returns ● If credit sales aren’t given, use sales.

Determining Ending AFDA

Bad debt expense is added to unadjusted balance

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6.6

Receivables Turnover Ratio and Average Collection Period

6 .6 .1

Receivables Turnover Ratio ● Liquidity ratio ● Measures a company’s ability to collect from customers ● Higher is better ○ High ratio means the company collects often ○ Collecting often is a sign of strong liquidity

Net Credit Sales Average Net Accounts Receivable

Average Collection Period ● Average number of days it takes to collect from a customer. ● Lower is better ● Ideal collection period is longer than the discount period but lower than the credit term.

365 Receivables Turnover Ratio

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6 .6 .2

Example: Revenue recognition and bad debt

On December 31, 2020 Mazza Inc had the following accounts receivable:

Additional Information ● During the year, the company wrote off old customer accounts totaling $50,000 and recovered

written off accounts totaling $10,000. ● Net credit sales in 2020: $10,000,000 ● Accounts receivable, January 1: $1,200,000 ● Allowance for doubtful accounts, January 1: $46,000 ● All sales are on account and given the terms 3/15, n/45 Requirements

a. Record all necessary transactions at the end of the year. b. Compute the receivables turnover ratio and the average age of receivables

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6.7

Bank Reconciliation

6 .7 .1

The process of comparing the ending balances of the bank statement and the company’s books to determine the actual amount of cash the company has, because these two balances typically do not match.

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6 .7 .2

Example: Bank Reconciliation

The cash account for SOS Corp shows a ledger balance of $2,946.90. on June 30, 2021. The bank statement as at that date indicates a balance of $3,412.50. When the statement was compared with the cash records, the following was found: ● The company was charged $50 in service fees in April. ● Outstanding cheques totaled $895.60. ● The bank incorrectly charges the company’s account the monthly service charge twice. ● Upon reviewing the bank statement, the company noticed it had received a $1,000 e-transfer

from a customer. The money was automatically deposited into the company’s account. ● The company earned $70 of interest during the month on its bank balance. ● The bank statement included a memo from the bank stating that a $300 cheque received from

a customer had been returned as NSF. ● In reviewing the company’s general ledger, the manager noticed that the bookkeeper had

incorrectly recorded a cash sale as $100, when it was in fact $1,000. ● On June 30th in the afternoon, a sale was made to a customer for $2,000. The customer paid by

cheque, but the manager did not have time to deposit it before the end of the day, the cheque will be deposited on July 1st. a.

Prepare a bank reconciliation on June 30th, 2021

b.

Prepare all necessary journal entries

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track to

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