Sales returns affect net cash collections when a customer has the right to return a product for a refund, and the firm can reasonably estimate the amount of returns at the time of sale, U.S.GAAP and IFRS
A)require that the firm use the allowance method to estimate and recognize the effects of returns.
B)the selling firm debits a revenue contra account for expected returns to reduce current period revenues to the estimated amount that will not be returned.
C)require that the firm measures revenues based on the amount of cash it expects to collect from current period sales.
D)preclude revenue recognition when customers have the right to return goods unless the firm can reasonably estimate the amount of returns.
E)all of the above

Question

Quizplus · Accepted Answer

Under both U.S. GAAP and IFRS, when a firm can reasonably estimate the amount of product returns, it must recognize these returns at the time of sale. This involves using the allowance method (A), debiting a revenue contra account to reflect expected returns and thus adjusting revenues (B), and measuring revenues based on the cash expected to be collected (C). Both standards also require that firms can only recognize revenue when they can reasonably estimate returns (D), ensuring that recognized revenue reflects the actual economic reality.

Sales Returns Affect Net Cash Collections When a Customer Has