Question 1

A company's number of days to collect is higher than the length of credit period.Analysts might conclude:

Accepted Answer

By comparing the number of days to collect to the length of credit period,analysts can gain a sense of whether customers are complying with the stated policy.Managers inside a company watch this closely,and so do investors and creditors on the outside.If customers appear to be disregarding the stated credit period,it may be a sign they are dissatisfied with the product or service they bought.If the company's payment terms have been relaxed,the length of the credit period and the number of days to collect would both increase.If the company's payment terms have been tightened,the length of the credit period and the number of days to collect would both decrease.The method used to estimate uncollectibles will not impact the length of the credit period nor the number of days to collect.

Question 2

Momentum Products Inc.just recorded an adjusting journal entry for the current year's estimate of bad debts.Assuming all else is equal,this adjusting journal entry will cause:

Accepted Answer

The journal entry includes a debit to Bad Debt Expense,which increases expenses and decreases (rather than increases)net income.The entry also includes a credit to Allowance for Doubtful Accounts,a contra-asset account,which decreases net accounts receivable.The accounts receivable turnover ratio is calculated by dividing net sales revenue by average net receivables.Since this entry decreases average net receivables,the receivables turnover ratio will increase.

Question 3

A company decides to start allowing its customers to pay with national credit cards and PayPal.This decision would:

Accepted Answer

National credit card companies and PayPal pay the seller within one to three days of the sale,which speeds up cash collection,If customers can pay by credit card or use PayPal instead of writing checks,losses from customers' bad checks would be reduced.

Question 4

What does a low receivable turnover ratio indicate?

Accepted Answer

A low receivables turnover ratio indicates that the process of selling and collecting cash from credit sales is being made less frequently,resulting in more time between the credit sale and its collection.This generally means that less cash is available for business operations.

Question 5

Which of the following statements about the interpretation of the receivables turnover ratio is not correct?

Accepted Answer

Analysts watch for changes in the receivables turnover ratio because a sudden decline (rather than a sudden increase)may mean that a company is recording sales of merchandise that customers are likely to return later.

Question 6

Which of the following statements about the receivables turnover analysis is correct?

Accepted Answer

The receivables turnover ratio measures the number of times receivables turn over during the period.The higher the ratio,the faster the collection of receivables.Accounts receivable would increase (rather than decrease)as companies sell on credit and decrease when (rather than increase)when payments are collected.The days to collect ratio is calculated by dividing 365 by the receivables turnover ratio;as a result,the days to collect ratio would decrease (rather than increase)when the receivables turnover increases.

Question 7

A scenario under which a company's credit sales are increasing and its accounts receivable turnover is decreasing might suggest:

Accepted Answer

Analysts watch for changes in the receivables turnover ratio because a sudden decline may mean that a company is recording sales of merchandise that customers are likely to return later.It also may mean that the company is selling to less financially secure customers or is allowing customers more time to pay their accounts to entice them to buy as much as possible-a practice known as channel stuffing.

Question 8

Receivables might be sold ("factored")to:

Accepted Answer

Factoring is an arrangement where receivables are sold to another company (called a factor)for immediate cash (minus a factoring fee).

Question 9

If your company factors its accounts receivable,it:

Accepted Answer

The way this factoring arrangement works is that your company receives cash for the receivables it sells to the factor (minus a factoring fee)and the factor then has the right to collect the outstanding amounts owed by the your customers.

Question 10

Bolster Soda had an accounts receivable turnover ratio of 9.9 this year and 11.0 last year.Castor Soda had a turnover ratio of 9.3 this year and 9.3 last year.This implies:

Accepted Answer

It is better to have a higher receivables turnover ratio (which means faster the collection of receivables. )Bolster's receivables turnover ratios were better than Castor's for both years.

Question 11

Katy Company uses the allowance method.Katy writes off a customer account balance when it becomes clear that the particular customer will never pay.How will this write-off affect the company's net income and accounts receivable turnover ratio?

Accepted Answer

When the allowance method is used and a customer account is written off,a decrease is recorded in Accounts Receivable,which would be offset by a decrease in the contra-account,Allowance for Doubtful Accounts.A write-off does not affect revenues,expenses,or net income.The accounts receivable turnover ratio is calculated by dividing net sales revenue by average net receivables.Since net receivables are not affected by a write-off,this ratio would not be impacted.

Question 12

A high receivables turnover ratio is a sign of a company's:

Accepted Answer

A higher receivables turnover ratio means faster (better)turnover.

Question 13

The receivables turnover ratio gives information on:

Accepted Answer

The receivables turnover ratio indicates how many times,on average,this process of selling and collecting is repeated during the period.The higher the ratio,the faster the collection of receivables.

Question 14

Foothill Construction uses the allowance method for bad debts.If management is overly pessimistic about its ability to collect customer accounts,the company will overstate Bad Debt Expense and:

Accepted Answer

If Bad Debt Expense is overstated,then net income will be understated.The days to collect ratio measures the average number of days from sale on account to collection.If the company is overly pessimistic about its ability to collect,it follows that the number of days to collect will decrease (since it will take shorter than expected to collect receivables).

Question 15

Companies A and B both report net income growth of 12% per year.Company A has a receivables turnover ratio of 5.6,which is lower than last year.Company B has a receivables turnover ratio of 11.3,which is higher than last year.All other things being equal:

Accepted Answer

It is better to have a higher receivables turnover ratio (which means faster the collection of receivables. )Company B has the better turnover ratio when compared to Company A,so this suggests that Company B is more effectively managing its receivables.

Question 16

An arrangement where receivables are sold to another company for immediate cash is called:

Accepted Answer

Factoring is an arrangement where receivables are sold to another company (called a factor)for immediate cash (minus a factoring fee).

Question 17

Which of the following statements about receivables turnover analysis is correct?

Accepted Answer

The receivable turnover ratio determines the average number of times the process of selling and collecting occurs during the period.This ratio often varies across industries.A low (rather than not high)turnover ratio may suggest the company is allowing too much time for customers to pay.The days to collect ratio is calculated by dividing 365 by the receivables turnover ratio.

Question 18

All other things being equal,a company is better off when its receivable turnover ratio:

Accepted Answer

It is better to have a higher receivables turnover ratio (which means faster the collection of receivables)and a lower number of days to collect (which means a shorter time to collect).

Question 19

Which of the following situations depicts the best receivables management?

Accepted Answer

Good receivables management occurs when the receivables turnover is increasing and the number of days to collect is decreasing.The more frequently that receivables are turning over,the more frequently the receivables are being collected.A lower the days to collect means that a company is collecting its receivables more quickly.

Question 20

Assume ABC sells its receivables to another company for immediate cash on a regular basis.How should the factoring fee be reported in the income statement?

Accepted Answer

Companies that regularly sell receivables report the cost of factoring on the income statement as a selling expense.

Quiz 8: Receivables,Bad Debt Expense,and Interest Revenue