Question 1

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 2

Under the allowance method for uncollectible accounts, Bad Debts Expense is debited when an account is deemed uncollectible and must be written off.

Accepted Answer

The answer of Under the allowance method for uncollectible accounts,...

Question 3

Only large companies need to be concerned with a system of internal control.

Accepted Answer

All companies, regardless of size, should have a system of internal control in place to ensure the accuracy and reliability of their financial reporting and to prevent fraud and errors. It is important for small businesses to have proper controls in place from the start to promote a culture of integrity and accountability.

Question 4

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 under the allowance method 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.

Question 5

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 at the end of the accounting year.

Accepted Answer

Trade receivables represent unpaid sales revenue at the end of the accounting period. Therefore, to convert sales revenue to cash collected from customers, we must adjust revenue for the change in trade receivables.

Question 6

Companies who offer credit terms should require approval of customers' credit history by the sales manager of the account.

Accepted Answer

Credit approval is typically a function of the credit department or credit manager, not the sales manager, to ensure an objective assessment of the customer's creditworthiness.

Question 7

It is possible for the allowance account to have a debit balance before the adjusting entry is recorded.

Accepted Answer

The allowance account may have a debit balance before an adjusting entry is made if the company has estimated that there will be more bad debts than there actually are. This results in an overestimation of the allowance for doubtful accounts, resulting in a debit balance in the allowance account.

Question 8

Net realizable value is determined by adding the Allowance for Doubtful Accounts to Trade Accounts Receivable.

Accepted Answer

Net realizable value is calculated by subtracting the allowance for doubtful accounts from trade accounts receivable, not by adding them together.

Question 9

The percentage of credit sales method for estimating bad debt expense is based on the assumption that the amount of bad debts is a function of the ending balance in accounts receivable.

Accepted Answer

The percentage of credit sales method for estimating bad debt expense is based on the assumption that the amount of bad debts is directly related to the volume of credit sales, not the ending balance in accounts receivable.

Question 10

An effective control activity results when at least two individuals are assigned to one cash drawer so that each can serve as check on the other.

Accepted Answer

An effective control activity typically involves assigning only one individual to a cash drawer to ensure clear accountability and simplify the tracing of any discrepancies or errors.

Question 11

The percentage of credit sales method for estimating bad debt expense is based on the assumption that the amount of bad debts is a function of the total sales made on credit.

Accepted Answer

The percentage of credit sales method assumes that a certain percentage of credit sales will result in bad debts. This percentage is then applied to the total credit sales made during the period to estimate the amount of bad debt expense.

Question 12

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

Accepted Answer

The lower the receivables turnover, the less effective the company has managed their credit granting and collection activities. A higher receivables turnover indicates that customers are paying their debts more quickly, which reflects good credit management by the company.

Question 13

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 account is used as a starting point for the calculation of the estimated uncollectible accounts. The adjustment is then made based on the aging analysis of the accounts receivable.

Question 14

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 15

Analyzing the accounts receivable turnover is important in assessing the short-term liquidity of an organization.

Accepted Answer

Accounts receivable turnover measures how quickly a company collects cash from its sales and indicates how efficiently the company is managing its receivables. A higher turnover rate indicates that a company is collecting payments more quickly and has better liquidity in the short-term. Therefore, analyzing the accounts receivable turnover is important in assessing the short-term liquidity of an organization.

Question 16

Allowance for Doubtful Accounts is a contra account that is deducted from Trade Accounts Receivable on the statement of ﬁnancial position.

Accepted Answer

Allowance for Doubtful Accounts is a contra account that is deducted from Trade Accounts Receivable on the statement of financial position, which makes the statement accurate.

Question 17

The Allowance for Doubtful Accounts is a liability account.

Accepted Answer

The Allowance for Doubtful Accounts is actually a contra asset account, which reduces the balance of the Accounts Receivable asset account. It is not a liability account.

Question 18

Companies who offer credit terms should require approval of customers' credit history by a person independent of the sales and collection functions.

Accepted Answer

This helps to prevent bias in the approval process and minimize the risk of extending credit to customers who may have a history of delinquency or default.

Question 19

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 20

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

Accepted Answer

Allowance for Doubtful Accounts is credited when an estimate is made for future uncollectible accounts, not when an account is specifically determined to be uncollectible. When an account is deemed uncollectible, the specific amount is written off against the Allowance for Doubtful Accounts.

Quiz 6: Merchandising Operations and the Multistep Income Statement