Deck 7: Reporting and Analyzing Receivables

Question 1

Companies can report a credit card expense as a discount deducted from sales or as a selling expense.

Answer 1

True

Question 2

The formula for computing interest on a note is the principal of the note times the annual interest rate times time expressed in a fraction of year.

Answer 2

True

Question 3

Sellers generally prefer to receive notes receivable rather than accounts receivable when the credit period is long and the receivable is for a large amount.

Answer 3

True

Question 4

If a credit card sale is made,the seller will debit either Cash or Accounts Receivable when the sale occurs depending on the seller's arrangements with the credit card provider.

Question 5

The maturity date of a note refers to the date the note is signed.

Question 6

A promissory note is a written promise to pay a specified amount of money either on demand or at a definite future date.

Question 7

A company borrowed $1,000 by signing a six-month promissory note at 5% interest.The total amount of interest on this promissory note is $25.

Question 8

Accounts receivable occur from credit sales to customers.

Question 9

As long as a company accurately records total credit sales information,it is not necessary to have separate accounts for specific customers.

Question 10

The process of using accounts receivable as security for a loan is known as factoring accounts receivable.

Question 11

The party who borrows money and signs a promissory note is referred to as the payee.

Question 12

TechCom's customer RDA paid off an $8,300 balance on its account receivable.TechCom should record the transaction as a debit to Accounts Receivable-RDA and a credit to Cash.

Question 13

Receivables can be used to obtain cash by either selling them or using them as security for a loan.

Question 14

A company borrowed $5,000 by signing a three-month promissory note at 10%.The total interest on the note is $500.

Question 15

If the seller regularly offers customers such terms,installment accounts receivable are classified as current assets,even though the installment period is more than one year.

Question 16

The quality of receivables refers to the likelihood of collection without loss.

Question 17

A company factored $35,000 of its accounts receivable and was charged a 2% factoring fee.The journal entry to record this transaction would include a debit to Cash of $35,000,a debit to Factoring Fee Expense of $700,and a credit to Accounts Receivable of $35,700.

Question 18

If a customer owes interest on accounts receivable,the company should debit Interest Revenue and credit Accounts Receivable.

Question 19

Credit sales are recorded by crediting an account receivable for the specific customer who is making the purchase.

Question 20

With regard to accounts receivable,both GAAP and IFRS require the allowance method for uncollectibles (unless uncollectibles are immaterial).

Question 21

The accounts receivable turnover ratio indicates how often accounts receivable are received and collected during the period.

Question 22

When using the allowance method of accounting for uncollectible accounts,the recovery of a bad debt would be recorded as a debit to Cash and a credit to Bad Debts Expense.

Question 23

When using the allowance method of accounting for uncollectible accounts,the entry to record the bad debts expense is a debit to Bad Debts Expense and a credit to Accounts Receivable.

Question 24

The direct write-off method of accounting for bad debts records the loss from an uncollectible account receivable when the company determines it to be uncollectible.

Question 25

When using the allowance method of accounting for uncollectible accounts,the entry to write off Harold's uncollectible account is a debit to Allowance for Doubtful Accounts and a credit to Accounts Receivable- Harold.

Question 26

The accounts receivable turnover is calculated by dividing net sales by average accounts receivable.

Question 27

A company that has a high accounts receivable turnover in comparison with competitors should tighten its credit policy.

Question 28

There are two methods of accounting for uncollectible accounts: the direct write-off method and the allowance method.

Question 29

The advantage of the allowance method of accounting for uncollectible accounts is that it identifies the specific customers who do not pay their bills.

Question 30

The use of an allowance for bad debts is required under the materiality constraint.

Question 31

The matching principle requires use of the direct write-off method of accounting for bad debts.

Question 32

During a given year,a company had net sales of $500,000 and average accounts receivable of $80,000.Its accounts receivable turnover is equal to 6.25.

Question 33

The materiality constraint permits the use of the direct write-off method of accounting for uncollectible accounts when bad debts are very large in comparison to the company's other financial statement items such as sales and net income.

Question 34

Companies follow both the matching principle and the materiality principle when applying the direct write-off method.

Question 35

Under the allowance method of accounting for uncollectible accounts receivable,no estimate is made to predict bad debts expense.

Question 36

The accounts receivable method to estimate bad debts obtains the estimated balance in the Allowance for Doubtful Accounts in one of two ways: (1) the percent uncollectible from the total accounts receivable or (2) aging accounts receivable.

Question 37

Installment accounts receivable is another name for aging of accounts receivable.

Question 38

After adjustment,the allowance for doubtful accounts has the effect of reducing accounts receivable to its estimated realizable value.

Question 39

The aging of accounts receivable involves classifying each account receivable by how long it is past its due date and estimating the amount that is uncollectible.

Question 40

During a given year,Compaq had net sales of $32,000 million and average account receivables of $6,850 million.Its accounts receivable turnover is equal to 0.21.

Question 41

Acme Company has an agreement with a major credit card company that calls for cash to be received immediately upon deposit of Acme customers' credit card sales receipts.The credit card company receives 3.5% of card sales as its fee.If Acme has $2,000 in credit card sales,which of the following statements are true?

A)Acme debits Cash $2,000.
B)Acme debits Cash $1,930.
C)Acme debits Accounts Receivable - Credit Card Co $2,000.
D)Acme debits Accounts Receivable - Credit Card Co $1,930.
E)Acme credits Sales $1,930.

Question 42

A company has sales of $350,000 and estimates that 0.5% of its sales are uncollectible.The company's reported amount of bad debts expense is $1,750.

Question 43

A credit sale of $2,500 to a customer would result in a:

A)Debit to the Accounts Receivable account in the general ledger and a debit to the customer's account in the accounts receivable ledger.
B)Credit to the Accounts Receivable account in the general ledger and a credit to the customer's account in the accounts receivable ledger.
C)Debit to the Accounts Receivable account in the general ledger and a credit to the customer's account in the accounts receivable ledger.
D)Credit to the Accounts Receivable account in the general ledger and a debit to the customer's account in the accounts receivable ledger.
E)Credit to Sales and a credit to the customer's account in the accounts receivable ledger.

Question 44

The person who signs a note receivable and promises to pay the principal and interest is the:

A)Maker.
B)Payee.
C)Holder.
D)Receiver.
E)Owner.

Question 45

The matching principle requires that accrued interest on outstanding notes receivable be recorded at the end of each accounting period.

Question 46

The aging method of determining bad debts expense is based on the knowledge that the longer a receivable is past due,the lower the likelihood of collection.

Question 47

A payee of a note will always honor a note and pay it in full.

Question 48

The accounting principle that requires financial statements (including notes) to report all relevant information about the operations and financial condition of a company is called:

A)Relevance.
B)Full disclosure.
C)Evaluation.
D)Materiality.
E)Matching.

Question 49

It is never good practice to accept a note receivable in exchange for an overdue account receivable.

Question 50

A maker who dishonors a note is one who does not pay it upon maturity.

Question 51

A company received a $1,000,90-day,10% note receivable.The journal entry to record receipt of the note would include a debit to Notes Receivable.

Question 52

The practice of placing dishonored notes receivable into accounts receivable keeps only notes that have not matured in the Notes Receivable account.

Question 53

The percent of accounts receivable method for bad debts estimation uses only income statement account balances to estimate bad debts.

Question 54

A dishonored note receivable is usually reclassified as an account receivable.

Question 55

When a company holds a large number of notes receivable,it sometimes sets up a controlling account and a subsidiary ledger for notes.

Question 56

A company has $80,000 in outstanding accounts receivables and it uses the allowance method to account for uncollectible accounts.Experience suggests that 5% of outstanding receivables are uncollectible.The current credit balance (before adjustments) in the allowance for doubtful accounts is $600.The journal entry to record the adjustment to the allowance account includes a debit to Bad Debts Expense for $4,000.

Question 57

Ace Credit Card Company agrees to transfer cash to Seller Company immediately upon deposit of that company's credit card sales receipts.Ace charges a 2% fee for all credit card sales.If Seller Company deposits $57,300 credit card sales receipts,which of the following statements are true?

A)Ace will receive $56,154 cash from Seller Company.
B)Seller Company will receive cash $56,154 from Ace.
C)Ace will receive $57,300 cash from Seller Company.
D)Seller Company will receive $57,300 cash from Ace.
E)Ace will pay Seller Company a $1,146 credit card fee.

Question 58

The percent of sales method of estimating bad debts is focused more on realizable value of accounts receivable than matching.

Question 59

The percent of sales method for estimating bad debts assumes that a given percentage of a company's credit sales for the period are uncollectible.

Question 60

A promissory note received from a customer in exchange for an account receivable:

A)Is a cash equivalent for the recipient.
B)Is an account receivable for the recipient.
C)Is a note receivable for the recipient.
D)Is a short-term investment for the recipient.
E)Is a note payable for the recipient.

Question 61

The matching principle requires:

A)That expenses be ignored if their effect on the financial statements are less important than revenues to the financial statement user.
B)The use of the direct write-off method for bad debts.
C)The use of the allowance method of accounting for bad debts.
D)That bad debts be disclosed in the financial statements.
E)That bad debts not be written off.

Question 62

A company receives a 6.2%,60-day note for $9,650.The total amount of cash due on the maturity date is:

A)$598.30.
B)$99.72.
C)$9,650.00.
D)$10,248.30.
E)$9,749.72.

Question 63

Dell reported net sales of $8,739 million and average accounts receivable of $864 million.Its accounts receivable turnover is:

A)0.9
B)10.1
C)36.1
D)50.0
E)3,686.0

Question 64

If the credit balance of the Allowance for Doubtful Accounts account exceeds the amount of a bad debt being written off,the entry to record the write-off against the allowance account results in:

A)An increase in the expenses of the current period.
B)A reduction in current assets.
C)A reduction in equity.
D)No effect on the expenses of the current period.
E)A reduction in current liabilities.

Question 65

A company receives a 7.5%,six-month note for $8,900.The total interest due on the maturity date is:

A)$66,750.00.
B)$4,005.00.
C)$2,002.50.
D)$667.50.
E)$333.75.

Question 66

A company has net sales of $870,000 and average accounts receivable of $174,000.What is its accounts receivable turnover for the period?

A)0.2
B)5.0
C)20.0
D)73.0
E)1,825.0

Question 67

A company had an accounts receivable turnover ratio of 12 and net sales of $744,000 for a given period.What was the average amount of accounts receivables for this period?

A)$8,928,000
B)$62,000
C)$4,380
D)$169.86
E)Average accounts receivable cannot be determined from this information.

Question 68

A Company sold $10,000 of its accounts receivable and was charged a 2% factoring fee.How should the company record this transaction in the journal?

A)
B)
C)
D)
E)

Question 69

On October 29 of the current year,a company concluded that a customer's $4,400 account receivable was uncollectible and that the account should be written off.What effect will this write-off have on this company's net income and total assets assuming the allowance method is used to account for bad debts?

A)Decrease in net income; no effect on total assets.
B)No effect on net income; no effect on total assets.
C)Decrease in net income; decrease in total assets.
D)Increase in net income; no effect on total assets.
E)No effect on net income; decrease in total assets.

Question 70

The maturity date of a note receivable:

A)Is the day of the credit sale.
B)Is the day the note was signed.
C)Is the day the note is due to be paid.
D)Is the date of the first payment.
E)Is the last day of the month.

Question 71

A company had an accounts receivable turnover ratio of 8 and net sales of $600,000 for a given period.What was the average accounts receivable amount for this period?

A)$4,800,000.
B)$2,919.99.
C)$205.48.
D)$75,000.
E)Average accounts receivable cannot be determined from this information.

Question 72

A company receives a 10%,90-day note for $1,500.The total interest due upon the maturity date is:

A)$37.50.
B)$150.00.
C)$75.00.
D)$50.00.
E)$87.50.

Question 73

The quality of receivables refers to:

A)The creditworthiness of sellers.
B)The speed of collection.
C)The likelihood of collection without loss.
D)Sales turnover.
E)The interest rate.

Question 74

Pepsi's accounts receivable turnover was 9.9 for this year and 11.0 for last year.Coca-Cola's turnover was 9.3 for this year and 9.3 for last year.These results imply that:

A)Coke has the better turnover for both years.
B)Pepsi has the better turnover for both years.
C)Coke's turnover is improving.
D)Coke's credit policies are too loose.
E)Coke is collecting its receivables more quickly than Pepsi in both years.

Question 75

A 90-day note issued on April 20 has a maturity date of:

A)July 17.
B)July 18.
C)July 19.
D)July 20.
E)July 21.

Question 76

The materiality constraint:

A)States that an amount can be ignored if its effect on financial statements is unimportant to the user's business decisions.
B)Requires use of the allowance method for bad debts.
C)Requires use of the direct write-off method.
D)States that bad debts not be written off.
E)Requires that expenses be reported in the same period as the sales they helped produce.

Question 77

The buyer who pays cash for an account receivable is referred to as a:

A)Payor.
B)Pledgor.
C)Factor.
D)Payee.
E)Pledgee.

Question 78

The interest accrued on $3,600 at 7% for 60 days is:

A)$36.
B)$42.
C)$252.
D)$180.
E)$420.

Question 79

The accounts receivable turnover is calculated by:

A)Dividing net sales by average accounts receivable.
B)Dividing net sales by average accounts receivable and multiplying by 365.
C)Dividing average accounts receivable by net sales.
D)Dividing average accounts receivable by net sales and multiplying by 365.
E)Dividing net income by average accounts receivable.

Question 80

A promissory note:

A)Is a short-term investment for the maker.
B)Is a written promise to pay a specified amount of money at a certain date.
C)Is a liability to the payee.
D)Is another name for an installment receivable.
E)Cannot be used in payment of an account receivable.