Question 1

If the terms are 3/15, n/45 on a credit sale, the customer will save 3% of the invoice price by paying at least 30 days before the credit period ends.

Accepted Answer

If the customer pays at least 30 days before the credit period ends, they will be within the 3/15 terms and qualify for the 3% discount.

Question 2

The percentage of trade receivables basis of estimating uncollectible accounts ignores the existing balance in the allowance account when the bad debts adjusting entry is recorded.

Accepted Answer

The percentage of trade receivables basis of estimating uncollectible accounts takes into account the existing balance in the allowance account when the bad debts adjusting entry is recorded. This is because the existing balance represents the amount already estimated for uncollectible accounts, and the adjusting entry should reflect any additional amount that needs to be added to the allowance account.

Question 3

The lower the receivables turnover, the more effectively the company has managed their credit granting and collection activities.

Accepted Answer

The receivables turnover ratio measures how quickly a company collects money from its customers. A higher receivables turnover indicates that a company is collecting its outstanding debts more quickly, which is generally seen as a positive sign of effective credit management. Therefore, the lower the receivables turnover, the less effectively the company has managed their credit granting and collection activities.

Question 4

The sales returns and allowances account should be reported as a deduction from sales revenue because it is a contra revenue account.

Accepted Answer

The sales returns and allowances account is a contra revenue account, meaning it reduces the overall revenue earned by a company. As such, it should be reported as a deduction from sales revenue on the income statement.

Question 5

Control over cash disbursements is improved if all expenditures are paid by cheque or through use of electronic funds transfers.

Accepted Answer

This is because when payments are made by cheque or through electronic funds transfers, there is a clear record of the transaction which can be tracked and audited. This helps to prevent fraud and ensure that cash is used only for authorized expenditures.

Question 6

Control activities are most effective when several people are responsible for a given task.

Accepted Answer

Control activities are most effective when there is clear delineation of responsibilities and accountability for a given task. Having too many people responsible for a single task can result in confusion and a lack of accountability, making it less effective.

Question 7

The responsibility for keeping the records for an asset should be separate from the physical custody of that asset.

Accepted Answer

This is a basic principle of internal control, as it reduces the risk of fraud and errors by ensuring that the same person is not responsible for both recording and handling assets. Separation of duties is an important aspect of maintaining the integrity of financial reporting and safeguarding assets.

Question 8

Managers, analysts, and creditors use this gross profit percentage to assess the effectiveness of the company's product development, marketing, and production strategy.

Accepted Answer

The gross profit percentage is a key financial metric used by managers, analysts, and creditors to evaluate a company's performance in terms of its product development, marketing, and production strategies. It represents the percentage of revenue that remains after deducting the cost of goods sold, and is a measure of how efficiently the company is utilizing its resources to generate profits. A higher gross profit percentage is generally seen as a positive sign, indicating that the company is able to sell its products at a higher markup and/or is able to manage its costs effectively.

Question 9

Bad Debts Expense is a contra account for Trade Accounts Receivable.

Accepted Answer

Bad Debts Expense is an expense account that represents the cost of accounts receivable that are not expected to be collected, while a contra account specifically for accounts receivable is the Allowance for Doubtful Accounts, which reduces the total accounts receivable balance.

Question 10

The reason that we must adjust revenue for the change in trade receivables to convert the figure to cash collected from customers is that trade receivables represent sales revenue not collected from customers at the beginning and end of the accounting year.

Accepted Answer

Trade receivables represent credit sales that have not been collected by the end of the accounting period. Thus, in order to convert revenue to cash collected from customers, we need to adjust for the change in trade receivables.

Question 11

For most merchandisers and manufacturers, the required revenue recognition point is the time of shipment or delivery of goods.

Accepted Answer

This statement is true. For most merchandisers and manufacturers, the revenue recognition point is the time of shipment or delivery of goods. This is in accordance with generally accepted accounting principles (GAAP) and International Financial Reporting Standards (IFRS). However, there are certain situations where revenue recognition may occur before or after shipment/delivery, such as long-term contracts or consignment sales.

Question 12

Outstanding cheques that appear on a bank reconciliation are those cheques written during the current and previous periods that have not yet cleared the bank during the current period.

Accepted Answer

Outstanding cheques are those cheques that have been written but have not yet cleared the bank during the current period. They include cheques written in the current and previous periods.

Question 13

Allowance for Doubtful Accounts is credited when an account is determined to be uncollectible.

Accepted Answer

Allowance for Doubtful Accounts is credited when estimating future uncollectible accounts, not when a specific account is determined to be uncollectible. When an account is deemed uncollectible, the specific allowance is debited, and the accounts receivable is credited to write off the account.

Question 14

The trade receivable turnover ratio is computed by dividing net sales by net trade receivables at the end of the year.

Accepted Answer

The trade receivable turnover ratio is computed by dividing net credit sales by the average trade receivables, not just the end-of-year figure.

Question 15

Sales returns and allowances should be deducted from sales revenue when computing net sales.

Accepted Answer

Sales returns and allowances are reductions in sales revenue, therefore they should be deducted from sales revenue to arrive at the net sales figure.

Question 16

Under the aging method of estimating the allowance for doubtful accounts, the balance in the allowance account must be considered prior to adjusting for estimated uncollectible accounts.

Accepted Answer

Under the aging method, the existing balance in the allowance for doubtful accounts is used as a starting point for estimating the amount of additional uncollectible accounts. Therefore, it must be considered prior to making adjustments for estimated uncollectible accounts.

Question 17

The gross profit percentage is computed by taking operating profit divided by net sales.

Accepted Answer

The gross profit percentage is computed by taking gross profit divided by net sales.

Question 18

The Allowance for Doubtful Accounts is a liability account.

Accepted Answer

The Allowance for Doubtful Accounts is a contra-asset account, not a liability account. It is used to reduce the value of accounts receivable, which is an asset account.

Question 19

A bank reconciliation compares the ending cash balance in the company's records to the ending cash balance reported by the bank on the monthly bank statement.

Accepted Answer

A bank reconciliation is a process of comparing the company's cash balance in its books to the ending cash balance reported by the bank on the monthly bank statement. The purpose of this reconciliation is to identify any discrepancies between the two balances and make necessary corrections.

Question 20

Under the allowance method for uncollectible accounts, the recovery of an account receivable results in a credit to the Bad Debt Expense account.

Accepted Answer

The recovery of an account receivable previously written off under the allowance method for uncollectible accounts results in a debit to the Accounts Receivable account and a credit to the Allowance for Doubtful Accounts account. It does not affect the Bad Debt Expense account.

Quiz 7: Reporting and Interpreting Cost of Goods Sold and Inventory