Installment Sales Method

ShooterMcCFA

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This is the only recovery method I don’t understand, at all.
I will use the wikipedia example - which can be found at http://en.wikipedia.org/wiki/Installment_Sales_Method
2009 2010
Installment sales $1,200,000 $1,300,000
Cost on installment goods sold $840,000 $884,000
Gross profit $360,000 $416,000
Gross profit percentage 30% 32%
Cash collections
On 2009 installment sales $300,000 $600,000
On 2010 installments sales $340,000
I don’t understand why if Gross Profit Percentage is 30% (360K/1200K), why can’t I recognize all 30%? I know you have difficulties with cash collections from AR, but I’m confused as how you calculate what your current revenue and subsequent revenues will be. Is it 360K x 30%? If that’s 90K and every year I assume I’ll recognize 90K, then why doesn’t the second year (2010) follow that same pattern?.. ie 416K x 32%?
Please help. Thank you.
 
When using installment sales, profit is recognized when you collect cash.
example:
Selling price: 100k
COGS: 70k
Gross profit: 30k
Year 1 - collected 10k cash, gross profit = 10k/100k * 30k = 3k
Year 2 - collected 50k cash, gross profit = 50k/100k * 30k = 15k
Year 3 - collected 40k cash, gross profit = 40k/100k * 30k = 12k
 
I knew there was something dumb that I was missing.
Thanks. That makes sense!
 
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