Sales
Sales revenue is the total of sales for the period. Sales should not be booked unless there is a high probability that the goods will not be returned and the customer will pay for them. Risk and benefit of ownership of the goods should have been transferred to the buyer in order to be considered a finished sale.
For example, it is common for publishers to sell books to bookstores under the provision that the bookstore may return unsold books. Under this circumstance it would not be proper to record all of the revenue from this type of sale. Companies are required to estimate an allowance for future returns on sales made during the reporting period. Most companies report net sales within the income statement, which is sales less this allowance and other sales discounts. The notes to the financial statements would typically have to be studied to see the estimated annual allowance.
Accounts receivable, a balance sheet item, should roughly move in tandem with sales. Accounts receivable is the credit extended to customers to purchase goods. Accounts receivable increasing at a faster rate than sales may point to more lenient change in a firm's credit policy toward customers, or a firm pushing unwanted products out to customers to boost short-term sales. The quarter-end period is a noteworthy time for companies to push this sales recognition frontier. Some firms have gone so far as to send unfinished, returned, and defective goods just to meet a sales growth objective. While outright fraud is difficult for an outsider to detect, a sudden increase in accounts receivable relative to sales is a warning flag that merits further investigation.
Not all cash received in connection with a sale can be booked as sales for a given reporting period. Firms must match up the sales revenue to the period in which the good or service is delivered. A magazine publisher that receives cash for a multi-year subscription should only count that portion of the subscription delivered during the current reporting period as sales, and establish a balance sheet liability titled unearned revenue for the remainder of the subscription. In subsequent periods, the appropriate portion of unearned revenue account can be converted into sales.
Trends in sales are extremely important in judging the current health and prospects of the firm.
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