Amplificación de Fragmento de Antocianidin Sintasa por PCR

Like warranties and bad debts, product returns are a risky future cost companies incur to reduce customer preference risk and increase current sales. Also, similar to bad debts and warranties, revenue recognition on product sales must be deferred at the time of sale if returns can not be estimated reliably and when returns can be estimated reliably, an allowance must be maintained.

Accounting for product returns is also similar to the accounting for bad debts and warranties in that the allowance is used during the reporting period and replenished at the end of the period. However, the entries are quite different than those for bad debts and warranties, and there are several variations depending on whether:

• revenues associated with returned products have been deferred or alternatively, have been recognized,

• customers have paid for returned products and are due a refund or, alternatively, have not yet paid and their receivables are forgiven, • the company reports the allowance for product returns as a contra

asset to accounts receivable or, alternatively, reports it as a liability, • the company maintains separate allowances for revenues and

inventoried costs or, alternatively, nets these allowances into a single allowance.

The entries for situations where products are returned after revenues have been recognized are quite different from those where products are returned when revenues are deferred — have yet to be recognized. However, you should not have difficulty with the other variations once you see a few illustrations. For this reason, rather than put you to sleep going through all of these variations, the examples in this section assume: • Customers have not yet paid when they return products, so their

receivables are forgiven. If they had already paid, they would receive a cash refund. Thus, cash would decrease (be credited) rather than receivables.

• The company uses separate allowances for revenues and inventoried costs associated with returns. It is straightforward to net the

allowances into a single allowance once you know the entries for separate allowances.

• The allowances are liabilities rather than contra assets. The entries are identical for these two alternatives and it is very easy to understand how to derive one balance-sheet-equation entry once you know the

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As products are returned during the period, companies use return allowances to offset the net effect of giving customers refunds (or forgiving receivables) and reinstating returned products to inventory. Income is not affected by these entries in the same ways it is not affected when companies write off bad debts or incur costs associated with warranty claims. Rather, similar to bad debts and warranties, the income effects of product returns are recognized through adjusting entries at the end of reporting periods.

There are three issues that cause product return allowances to be more complicated than those for warranties and bad debts:

1. Companies can report return allowances as liabilities or contra assets. 2. There are two return allowances rather then one (unless the two are

netted, which tends to complicate rather then simplify matters). 3. Returns associated with deferred revenues affects one of these

allowances but not the other.

To the lay a foundation for the following entries, we will briefly discuss each of these issues.

Allowance can be a Liability or Contra Asset

Conceptually, the allowance for returns is a liability, representing a company’s legal obligation to honor its sales agreement with customers by accepting returned products. However, in situations where return periods ends before most customers are expected to pay their bills, companies generally net the returns allowance “liability” against accounts receivable as a contra asset.

To understand the intuition here, consider what happens when a

customer returns a product prior to paying for the product. The company meets its obligation to the customer by taking back the product and forgiving the receivable. The receivable is never collected. In anticipation of these situations, the company creates an allowance for doubtful accounts that includes expected product returns and expected bad debts associated with credit risk. More generally, the allowance for doubtful accounts can pertain to both bad debts and product returns or just to bad debts.

Reporting the returns allowance as a contra asset rather than a liability is an example of a more general concept called netting assets and

liabilities because doing so shrinks the balance sheet and reduces financial leverage. Instead, it mandates _{reporting assets and liabilities at gross}

amounts.

The exception to this general rule occurs when the assets and liabilities are with the same party or group — such as customers — and will be settled at the same time. When these conditions are met, assets and liabilities can be netted with the net effect being reported as an asset or liability depending on the relative sizes of the netted items. This exception applies to returns allowances and receivables when customers (as a group) generally return products before paying bills.

Two allowances

To understand why two allowances are used for product returns, consider what happens when customers return products. The customer gives the company the product, which is returned to inventory, and the company either gives the customer a cash refund or forgives a receivable. Hence, the two allowances are the revenue portion of the returns allowance and the inventoried cost portion of the returns allowance.

The _{revenue portion of the returns allowance} represents the gross cost of expected returns – the foregone revenues that will be realized by paying refunds or forgiving receivables associated with expected future returns. Here, to facilitate the discussion, we will assume the revenue portion of the returns allowance is a liability rather than a contra asset.

The inventoried cost portion of the returns allowance, when no revenues have been deferred, represents the foregone cost of sales (inventoried costs) associated with the expected future returns. Alternatively stated, it is the gross benefits the company expects to receive when customers return products – the returned products measured at their inventoried costs. Here we assume the inventoried cost portion of the returns allowance is a contra liability rather than a contra-contra asset. Notably, when revenues have been deferred, no inventoried cost portion of the returns allowance is needed because there is no need to reinstate inventories when products with deferred revenues are returned. When companies defer revenues, they continue to recognize the related inventories on their balance sheets even though they have delivered products to customers, classifying them as segregated delivered inventories associated with deferred revenues. Thus, if customers return products when revenue is still deferred, there is no need to reinstate the products to inventories — they are already there. They just need to be reclassified from segregated inventories to finished goods inventories.

Importantly, the gross benefits are the same when companies defer revenues, but the inventoried cost portion of the allowance does not include all of these benefits. In particular, it does not include the inventoried costs associated with products expected to be returned when revenues are deferred.

The reinstated inventory is recorded at the lower of its inventoried cost when it was sold or its replacement cost on the date it is returned — what it would cost the company to produce or otherwise acquire comparable inventory on the return date. If the replacement cost is lower than the original inventoried cost, the return can be recorded at the original inventoried costs, as illustrated in the examples, with a follow-up impairment entry to write the inventory down to its replacement cost. For this reason, to simplify the subsequent discussion and examples, we will assume replacement costs are the same as the original inventoried costs in this chapter.

We are also going to ignore restocking fees customers might incur when they return products. When there are restocking fees or when customers otherwise receive partial refunds, customers essentially share the risk associated with returns. As a result the net cost associated with refunds, discussed below, is smaller and a smaller allowance is needed.

To summarize, given the above assumptions, the net cost of a product return is the foregone gross margin on the sale: foregone revenue (sales price) less foregone cost of sales (measured at inventoried costs). Stated alternatively, the company’s net obligation to customers who are eligible to return products in the future is its expected gross obligation to them as a group — the estimated future refunds or forgiven receivables, measured at sales prices (foregone revenues) — less the benefits it expects to

receive from them — the returned products, measured at their expected inventoried costs (foregone cost of sales). For companies not deferring revenue, this net obligation to customers is the net product return allowance it reports as a liability on its balance sheet (or net contra asset when allowances are classified this way).

Deferred Revenues Issues

Two features of deferred revenues accounting affect product return entries: First, as indicated above, the inventoried cost portion of the returns allowance does not include inventoried costs associated with future returns for which revenue is expected to still be deferred when the products are returned.

Second, the SEC has indicated the deferred revenue liability should represent revenues expected to be recognized in the future and thus

should be reported net of expected returns and price discounts. As we shall see, this is accomplished by decreasing deferred revenues for expected future returns and increasing the revenue portion of the allowance for bad debts.

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The entries recorded when products are returned depend on whether revenue has been recognized on the returned product or deferred. Here is a broad overview of the entries, which will be illustrated in the example that follows.

When revenues have previously been recognized:

• Decrease (debit) the revenue portion of the returns allowance for the revenue associated with the returned product.

• Decrease (credit) cash or accounts receivable for the revenue associated with the returned product, depending on whether the customer receives a refund or a forgiven receivable.

• Decrease (credit) the inventoried cost portion of the returns allowance for the inventoried costs associated with the returned product.

• Increase (debit) finished goods inventory for the inventoried costs associated with the returned product.

When revenues have not been recognized (are deferred):

• Decrease (debit) the revenue portion of the returns allowance for the revenue associated with the returned product. (This is the same as above and thus does not depend on whether revenues have been deferred or previously recognized when products are returned.) • Decrease (credit) cash or accounts receivable for the revenue

associated with the returned product, depending on whether the customer receives a refund or a forgiven receivable. (This part of the entry also does not depend on whether revenues have been deferred or previously recognized when products are returned.)

• Decrease (credit) segregated delivered inventories associated with deferred revenues for the inventoried costs associated with the returned product. (This is the only part of the entry depending on whether revenues have been recognized or deferred when products are returned.)

• Increase (debit) finished goods inventory for the inventoried costs associated with the returned product. (This part of the entry

also does not depend on whether revenues have been deferred or previously recognized when products are returned.)

Example

Assumptions

• ABC Company classifies the net allowance for product returns as a liability and maintains separate revenue and inventoried cost portions.

• ABC had not yet collected any cash from customers who returned products during 2007. Receivables balances were forgiven in exchange for returned products.

• The replacement costs of products returned during 2007 were the same as the original inventoried costs recognized when the products were sold.

• At January 1, 2007, the revenue and inventoried costs portions of the allowance are $125 and $20, respectively, with the revenue portion split as follows:

 $100 associated with products expected to be returned after

revenue has been recognized.

 $25 associated with products expected to be returned before

revenue is recognized (and thus is deferred)

• During 2007, customers return products for which $150 of revenues and $30 of costs of sales have previously been recognized.

• During 2007, customers return products associated with $40 of deferred revenues and $8 of inventoried costs.

• On December 31, 2007, ABC expects customers to return products in the future currently associated with $60 of the deferred revenues recognized on its balance sheet.

• On December 31, 2007, ABC expects customers to return products in the future associated with $200 of previously recognized revenues and $40 of previously recognized cost of sales (inventoried costs). • ABC uses the accounts at the top of the next page:

Abbreviation Account

AR accounts receivable (gross)

FGI finished goods inventory

SDelInv segregated delivered inventories related to deferred revenues

Drev deferred revenue liability

RetAlRev Returns allowance: revenues portion

RetAlInv Returns allowance: inventoried cost portion (contra liability)

CGS cost of good sold

SalesRet sales returns (contra revenue)

ASSETS

LIABILITIES

TEMPORARY OWNERS' EQUITY

Required

(a) Record the 2007 product returns for which revenues had previously been recognized when products were returned.

(b) Describe in general terms how the entry in part (a) directly affects ABC’s balance sheet, income statement, and statement of cash flows. (c) Record the 2007 product returns for which revenues were deferred

when products were returned.

(d) Describe in general terms how the entry in part (c) directly affects ABC’s balance sheet, income statement, and statement of cash flows. (e) Complete the table at the top of the next page to determine the

adjustments needed to ensure the correct ending balances in the portions of the return allowance associated with revenues and inventoried costs.

(f) Record the adjusting entry to replenish the allowances.

(g) Describe in general terms how the entry in part (f) directly affects ABC’s balance sheet, income statement, and statement of cash flows. Solution

Part (a) — Returns Entry: Revenue Recognized

To facilitate the discussion, we are going to parse this entry into two parts: what the company gives the customer — forgives a receivable — and what the customer gives the company — the product.

Forgiving the receivable:

Inventoried cost portion Associated with recognized revenues Associated with deferred revenues Associated with recognized revenues only Beginning balances

Products with recognized revenues returned Products with deferred revenues returned Trial balances

Target balances Required adjustments

Allowance for Returns

Revenues portion + AR = + RetAlRev + - $150 = + - $150 Debit Credit RetAlRev $150 AR $150 or

Reinstating the returned product to inventories:

+ FGI = - RetAlInv + + $30 = - - $30 Debit Credit FGI $30 RetAlInv $30 or

Combining the above entries, we see the net effect of the return:

+ AR + FGI = + RetAlRev - RetAlInv + - $150 + + $30 = + - $150 - - $30

Debit Credit RetAlRev $150

FGI $30

AR $150

RetAlInv $30

Part (b) — Returns Entry Effects: Revenue Recognized

Balance Sheet

• Assets decrease by $120, with a $150 receivables decrease offset by a $30 inventories increase. This $120 net decrease in assets reflects the realized customer preference risk associated with the return — foregone gross margin on a prior sale.

• Liabilities decrease by $120, with a $150 decrease in the revenue portion of the allowance offset by a $30 decrease in the inventoried cost portion (its contra liability). This $120 decrease in liabilities signifies ABC has met an obligation to a customer by accepting the returned product in exchange for forgiving a receivable.

• Owners’ equity is not affected by the entry, at least directly. Similar to writing off bad debts, using the allowances during the reporting period does not directly affect owners’ equity. Moreover, if the return was anticipated earlier when the allowances were replenished at the end of the prior period, it is already reflected in owners’ equity. By contrast, if the return was not anticipated in the allowance, it will affect owners’ equity when the allowance is replenished at the end of the current period.

Income Statement

• No direct effect.

Statement of Cash Flows

• There is no income effect and no cash-flow effect, but the following reconciling adjustments offset each other:

 $150 increase in receivables adjustment (this asset decreased)  $30 decrease in the inventories adjustment (this asset increased)  $120 decrease in accrued liabilities or other liabilities, reflecting

the net decrease in the returns allowances ($150 decrease in the revenues portion less a $30 decrease in the inventoried cost portion).

or

Part (c) — Returns Entry: Revenue Deferred

Once again, to facilitate the discussion, we are going to parse this entry into two parts: what the company gives the customer — forgives a receivable — and what the customer gives the company — the product. The entry associated with forgiving the receivable is the same as it is when a customer returns a product where revenue has been recognized. The entry associated with the returned product differs. When revenues have already been recognized, the returned product is reinstated to inventory. However, if revenue is still deferred when the product is returned, the inventoried costs are reclassified from segregated inventories to finished goods inventories.

Forgiving the receivable:

+ AR = + RetAlRev + - $40 = + - $40 Debit Credit RetAlRev $40 AR $40 or Reclassifying segregated inventories:

+ FGI + SDelInv = + + $8 + - $8 = Debit Credit FGI $8 SDelInv $8 or Net effect of the return:

+ AR + FGI + SDelInv = + RetAlRev

+ - $40 + + $8 + - $8 = + - $40 Debit Credit RetAlRev $40 FGI $8 AR $40 SDelInv $8

Part (d) — Returns Entry Effects: Revenue Deferred

Balance Sheet

• Assets decrease by the $40 receivables decrease. There is no net effect on inventories.

• Liabilities decrease by the $40 decrease in the revenue portion of the allowance.

Income Statement

• No direct effect.

Statement of Cash Flows

• There is no income effect and no cash-flow effect, but the following reconciling adjustments offset each other:

 $40 increase in receivables adjustment (this asset decreased)  $40 decrease in accrued liabilities or other liabilities, reflecting

the decrease in the revenue portion of the returns allowances. Part (e) — Determining the allowance adjustments

There are two keys to understanding the adjustments to the allowances: • Split the revenue portion of the allowance into two parts: the part

associated with products returned when revenues are deferred and the part associated with products returned when revenues have previously been recognized.

• Base the allowances on the end-of-period revenue status of previously sold products still within the return period (and thus can be returned in the future):

 The ending balance in the deferred revenue part (of the revenue

portion of the returns allowance) should reflect the expected returns associated with the deferred revenues liability at the end of the period. This will ensure the deferred revenue liability reported on the balance sheet satisfies the SEC requirement it be net of expected returns and thus reflects revenues expected to be recognized in the future.

 The ending balance in the previously recognized revenue part (of

the revenue portion of the returns allowance) should reflect the expected returns associated with revenues recognized prior to the end of the period.

You might be thinking there is a disconnect here: The allowances are determined based on the revenue status of products at the end of the period, but are used up based on the revenue status when products are returned. No problem: the adjusting entries at the end of the next period

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