Question 1

A company regularly sells its receivables to a factor who assesses a 2% service charge on the amount of receivables purchased.Which of the following statements is true for the seller of the receivables?
A)The loss section of the income statement will increase each time receivables are sold.
B)The credit to Accounts Receivable is less than the debit to Cash when the accounts are sold.
C)Operating expenses will increase each time accounts are sold.
D)The other expenses section of the income statement will increase each time accounts are sold.

Accepted Answer

The service charge is considered an operating expense, so each time receivables are sold, operating expenses will increase.

Question 2

The sale of receivables by a business
A)indicates that the business is in financial difficulty.
B)is generally the major revenue item on its income statement.
C)is an indication that the business is owned by a captive finance company.
D)can be a quick way to generate cash for operating needs.

Accepted Answer

Selling receivables is a common practice for businesses to quickly generate cash to meet immediate operating needs, rather than an indication of financial difficulty or ownership by a captive finance company.

Question 3

Selling accounts receivables to factors and allowing credit terms such as 2/10, n/30
A)represent common business practices.
B)represent ways to accelerate receivables collections.
C)result in collections that are less than the gross accounts receivable.
D)All of these answer choices are correct.

Accepted Answer

Selling accounts receivables to factors and offering credit terms like 2/10, n/30 are common practices to accelerate cash flow, and they typically result in receiving less than the gross accounts receivable due to discounts or fees.

Question 4

Gipson Furniture factors $700,000 of receivables to Kwik Factors, Inc.Kwik Factors assesses a 3% service charge on the amount of receivables sold.Gipson Furniture factors its receivables regularly with Kwik Factors.What journal entry does Gipson make when factoring these receivables?

Accepted Answer

The answer of Gipson Furniture factors $700,000 of receivables to...

Question 5

ABC Company accepted a national credit card for a $9,000 purchase.The cost of the goods sold is $7,200.The credit card company charges a 3% fee.What is the impact of this transaction on net operating income?
A)Increase by $1,746.
B)Increase by $1,800.
C)Increase by $1,530.
D)Increase by $8,730.

Accepted Answer

The answer of ABC Company accepted a national credit card...

Question 6

The accounts receivable turnover
A)is computed by dividing net credit sales for the accounting period by the cash realizable value of accounts receivable on the last day of the accounting period.
B)can be used to compute the average collection period.
C)is a method of evaluating the solvency of net accounts receivable.
D)is only important to internal users of accounting information.

Accepted Answer

The accounts receivable turnover ratio is used to measure how efficiently a company collects its receivables. It can be used to compute the average collection period by dividing the number of days in the period by the turnover ratio.

Question 7

If a company sells its accounts receivables to a factor
A)the seller pays a commission to the factor.
B)the factor pays a commission to the seller.
C)there is a gain on the sale of the receivables.
D)the seller defers recognition of sales revenue until the account is collected.

Accepted Answer

When a company sells its accounts receivables to a factor, the seller typically pays a commission to the factor for this service. The factor then takes on the responsibility of collecting the receivables.

Question 8

A captive finance company refers to
A)a finance company that is owned by individuals who borrow money from the company.
B)finance companies that won't allow early repayment of loans.
C)a company that is wholly owned by another company and provides financing to purchasers of its owner company's goods.
D)any company that issues a major credit card.

Accepted Answer

A captive finance company is a subsidiary that provides financing to customers buying the parent company's products, helping to facilitate sales.

Question 9

Windsor Corporation sells its goods on terms of 2/10, n/30.It has an accounts receivable turnover of 6.What is its average collection period (days)?
A)90
B)40
C)61
D)48

Accepted Answer

The average collection period is calculated as 365 divided by the accounts receivable turnover. So, 365 / 6 = 60.83, which rounds to 61 days.

Question 10

A company sells $800,000 of accounts receivable to a factor for cash, incurring a 2% service charge.The entry to record the sale should not include a
A)debit to Interest Expense for $16,000.
B)debit to Cash for $784,000.
C)debit to Service Charge Expense for $16,000.
D)credit to Accounts Receivable for $800,000.

Accepted Answer

Interest Expense is not involved in the transaction; the service charge is recorded as Service Charge Expense.

Question 11

In the table below the information for four companies is provided. Assuming all four companies are in the same industry, which company appears to have the greatest likelihood of paying its current obligations? A)Martin B)Lewis C)Danforth D)Garner

Accepted Answer

The answer of In the table below the information for...

Question 12

YZ Company accepted a national credit card for a $10,000 purchase.The cost of the goods sold is $8,000.The credit card company charges a 3% fee.What is the impact of this transaction on net operating income?
A)Increase by $1,940.
B)Increase by $2,000.
C)Increase by $1,700.
D)Increase by $9,700.

Accepted Answer

The net operating income increases by the sales revenue minus the cost of goods sold and the credit card fee: $10,000 - $8,000 - ($10,000 * 3%) = $1,700.

Question 13

Simonic Retailers accepted $80,000 of Citibank Visa credit card charges for merchandise sold on July 1.Citibank charges 4% for its credit card use.The entry to record this transaction by Simonic Retailers will include a credit to Sales Revenue of $80,000 and a debit to (or debits to)
A)Cash $76,800 and Service Charge Expense $3,200.
B)Accounts Receivable $76,800 and Service Charge Expense $3,200.
C)Cash $76,800 and Interest Expense $3,200.
D)Accounts Receivable $80,000.

Accepted Answer

Simonic Retailers will receive cash of $76,800 after Citibank's 4% service charge ($80,000 x 4% = $3,200). Therefore, the entry will debit Cash for $76,800 and Service Charge Expense for $3,200.

Question 14

Receivables might be sold to
A)lengthen the cash-to-cash operating cycle.
B)take advantage of deep discounts on the cash realizable value of receivables.
C)generate cash quickly.
D)finance companies at an amount greater than cash realizable value.

Accepted Answer

Selling receivables allows a company to generate cash quickly. This can help improve cash flow and provide funds for operations, investments, or paying off debt. Lengthening the cash-to-cash operating cycle, taking advantage of deep discounts, and financing companies at an amount greater than cash realizable value are not typical reasons for selling receivables.

Question 15

Factoring arrangements
A)are ways to accelerate receivable collections.
B)involve no commissions or service charges because the factor is guaranteed collections on the due date.
C)are generally used by businesses that are insolvent.
D)are mainly used in the fast food industry.

Accepted Answer

Factoring arrangements are financial transactions where a business sells its accounts receivable to a third party (a factor) at a discount to accelerate cash flow and improve liquidity.

Question 16

In the table below the information for four companies is provided.  If Garner's net credit sales are $435,000, what are its average net accounts receivable?
A)$17,262
B)$30,000
C)$63,075
D)$109,620

Accepted Answer

The answer of In the table below the information for...

Question 17

All of the following statements are true regarding the average collection period except: A)it is a popular variant of the accounts receivable turnover. B)it is used to assess the effectiveness of a company's credit and collection policies. C)it should generally exceed the credit term period. D)its increase may suggest a decline in the financial health of customers.

Accepted Answer

The average collection period should generally not exceed the credit term period, as this would indicate that customers are taking longer to pay than the terms allow, which could be a sign of inefficiency in collections or financial issues with customers.

Question 18

Leary Corporation had net credit sales during the year of $1,200,000 and cost of goods sold of $720,000.The balance in accounts receivable at the beginning of the year was $120,000 and at the end of the year was $180,000.What was the accounts receivable turnover?
A)8.0
B)10.0
C)6.7
D)4.8

Accepted Answer

The accounts receivable turnover is calculated as net credit sales divided by the average accounts receivable. Average accounts receivable is ($120,000 + $180,000) / 2 = $150,000. Thus, the turnover is $1,200,000 / $150,000 = 8.0.

Question 19

If a retailer regularly sells its receivables to a factor, the service charge of the factor should be classified as a(n)
A)operating expense.
B)interest expense.
C)other expense.
D)contra asset.

Accepted Answer

The service charge for selling receivables to a factor is considered a cost of doing business and is classified as an operating expense.

Question 20

The sale or transfer of accounts receivable in order to raise funds is called
A)pledging.
B)factoring.
C)leasing.
D)collateralizing.

Accepted Answer

Factoring is the sale or transfer of accounts receivable in order to raise funds.

Quiz 8: Reporting and Analyzing Receivables

A company regularly sells its receivables to a factor who assesses a 2% service charge on the amount of receivables purchased.Which of the following statements is true for the seller of the receivables?

The sale of receivables by a business

Selling accounts receivables to factors and allowing credit terms such as 2/10, n/30

Gipson Furniture factors $700,000 of receivables to Kwik Factors, Inc.Kwik Factors assesses a 3% service charge on the amount of receivables sold.Gipson Furniture factors its receivables regularly with Kwik Factors.What journal entry does Gipson make when factoring these receivables?

ABC Company accepted a national credit card for a $9,000 purchase.The cost of the goods sold is $7,200.The credit card company charges a 3% fee.What is the impact of this transaction on net operating income?

The accounts receivable turnover

If a company sells its accounts receivables to a factor

A captive finance company refers to

Windsor Corporation sells its goods on terms of 2/10, n/30.It has an accounts receivable turnover of 6.What is its average collection period (days) ?

A company sells $800,000 of accounts receivable to a factor for cash, incurring a 2% service charge.The entry to record the sale should not include a

In the table below the information for four companies is provided. Assuming all four companies are in the same industry, which company appears to have the greatest likelihood of paying its current obligations?

YZ Company accepted a national credit card for a $10,000 purchase.The cost of the goods sold is $8,000.The credit card company charges a 3% fee.What is the impact of this transaction on net operating income?

Simonic Retailers accepted $80,000 of Citibank Visa credit card charges for merchandise sold on July 1.Citibank charges 4% for its credit card use.The entry to record this transaction by Simonic Retailers will include a credit to Sales Revenue of $80,000 and a debit to (or debits to)

Receivables might be sold to

Factoring arrangements

In the table below the information for four companies is provided. If Garner's net credit sales are $435,000, what are its average net accounts receivable?

All of the following statements are true regarding the average collection period except:

Leary Corporation had net credit sales during the year of $1,200,000 and cost of goods sold of $720,000.The balance in accounts receivable at the beginning of the year was $120,000 and at the end of the year was $180,000.What was the accounts receivable turnover?

If a retailer regularly sells its receivables to a factor, the service charge of the factor should be classified as a(n)

The sale or transfer of accounts receivable in order to raise funds is called