· 1

CORPORATE FINANCIAL REPORTING

7 – Reporting Revenue & Receivables

Revene & Receivables

REVENUE CRITERIA FORACCRUAL BASIS

In chapter 4, we condensed the 4 SEC criteria into two criteria:

1. The company has received a measurable asset from the customer and

2. The revenue is earned - meaning that the company has done what the customer is paying it to do. 2Revenue & Receivables

METHODS USED TO RECOGNIZE REVENUES / EXPENSES

Cash basisAccrual basis

Installment sales methodCost recovery

Percentage completionCompleted contract

3Revenue & Receivables

RACTEE STEREO SALES COMPANY

You are the CFO of Ractee Stereo Sales Company. You sell me a stereo system for $10,000. The system cost you $6,000; you paid for the system this year. I promise to pay you: in 2011: 2,000 in 2012: 3,000 in 2013: 5,000 total 10,000 (plus interest, of course, but

we will ignore that interest)

4Revenue & Receivables

RACTEE CONSTRUCTION COMPANY

Our construction company gets a contract to build a tunnel to Winter Park, Colorado.

The contract price is $18,000; our engineers estimate it will cost us $12,000 over 3 years to build

Results: Year We Collect We Spend 2011 3,000 4,000 2012 5,000 6,000 2013 10,000 2,000

5Revenue & Receivables

RECEIVABLES

Hard core stuff – “revenue adjustments”

bad debtssales returns

sales discounts

6Revenue & Receivables

RECEIVABLES - BAD DEBTS

Primarily two ways to account for bad debts: - the direct write-off method - the “allowance” - percentage of credit sales method

- aging method7Revenue & Receivables

BAD DEBTS - THE DIRECT METHODWhat will appear in F/S?

2011: Sales on account: $100,000 Collect from customers: $80,000

2012: Sales on account: 150,000 Collect from customers: $110,000 Customer owing us $5,000 from 2011 calls and says “Sorry - bye, bye.” 8Revenue & Receivables

BAD DEBTS - THE ALLOWANCE METHOD - What will appear in F/S?

2011: Sales on account: $100,000 Collect from customers: $80,000

2012: Sales on account: 150,000 Collect from customers: $110,000 Customer owing us $5,000 from 2011 calls and says “Sorry - bye, bye.” 9Revenue & Receivables

RECEIVABLES - SALES RETURNSWhat will appear in F/S?

Our company makes sales on account of $100,000 in December 2011. Our past experience is that .2% of sales are returned the next month.

10Revenue & Receivables

ACCELERATING COLLECTIONS OF RECEIVABLES (Monetizing)

FactoringBorrowSecuritize

11Revenue & Receivables

QUESTIONS

?

12Revenue & Receivables