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!