Question 1

A Company had net sales of $23,000 million, and its average account receivables were $5,700 million. Its accounts receivable turnover is 0.24.
Accounts Receivable Turnover = Net Sales/Average Accounts Receivable
Accounts Receivable Turnover = $23,000/$5,700 = 4.0

Accepted Answer

The calculation provided for accounts receivable turnover is incorrect. The correct calculation is: Accounts Receivable Turnover = Net Sales/Average Accounts Receivable = $23,000 million/$5,700 million = 4.04.

Question 2

After adjustment, the balance in the Allowance for Doubtful Accounts has the effect of reducing Accounts Receivable to its estimated realizable value.

Accepted Answer

This statement is true. The allowance for doubtful accounts is a contra asset account that is used to offset the balance in accounts receivable. It is an estimate of the amount of accounts receivable that will ultimately not be collected. By reducing the balance in accounts receivable to its estimated realizable value, the allowance for doubtful accounts is effectively reducing the overall value of accounts receivable on the balance sheet.

Question 3

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

Accepted Answer

The matching principle requires expenses to be matched with revenues in the period they are incurred, which is not achieved by the direct write-off method. Instead, the allowance method is preferred for large bad debts to properly match expenses with revenues.

Question 4

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

Accepted Answer

The direct write-off method records the loss when the account is determined to be uncollectible, rather than estimating the amount of potential bad debts and adjusting the accounts accordingly.

Question 5

The advantage of the allowance method of accounting for bad debts is that it identifies the specific customers who will not pay their bills.

Accepted Answer

The allowance method does not identify specific customers who will not pay their bills. Instead, it estimates the total amount of bad debts that are expected for a given period based on past experience and current economic conditions. This estimated amount is then recorded as an expense and a corresponding allowance for doubtful accounts is established on the balance sheet. Specific customers who do not pay their bills may be written off as uncollectible against the allowance account, but the allowance account does not specifically identify those customers.

Question 6

No attempt is made to estimate bad debts expense under the allowance method of accounting for uncollectible accounts receivable.

Accepted Answer

The allowance method requires estimating and recording bad debts expense based on the estimated percentage of accounts receivable that will not be collected.

Question 7

Companies use two methods to account for uncollectible accounts, the direct write-off method and the allowance method.

Accepted Answer

This statement is true. Companies have the option to use either the direct write-off method or the allowance method to account for uncollectible accounts.

Question 8

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

Accepted Answer

This is correct. The allowance method of accounting for uncollectible accounts involves estimating the amount of accounts receivable that are unlikely to be collected and recording this estimation as an expense in the Bad Debts Expense account, while also creating a contra asset account called Allowance for Doubtful Accounts that is credited for the same amount.

Question 9

The accounts receivable turnover indicates how often, on average, accounts receivable are received and collected during the period.

Accepted Answer

The accounts receivable turnover ratio is a measure of how efficiently a company collects its accounts receivable. It indicates how many times, on average, a company collects its accounts receivable balance during a specific period, usually one year.

Question 10

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

Accepted Answer

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

Question 11

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

Accepted Answer

This statement is true. The accounts receivable method can be used to estimate bad debts by either computing a percent uncollectible from the total accounts receivable or by aging the accounts receivable.

Question 12

The matching principle requires use of the allowance method of accounting for bad debts.

Accepted Answer

The matching principle requires that expenses be recognized in the same period as the related revenue. In the case of accounts receivable, the revenue is recognized at the time of sale, but there is a risk of not being paid. Therefore, the allowance method of accounting for bad debts is used to estimate and recognize the expense of uncollectible accounts in the same period as the related revenue. This is consistent with the matching principle.

Question 13

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.

Accepted Answer

The recovery of a bad debt would be recorded as a debit to Cash and a credit to Accounts Receivable, reducing the amount of the previously written off invoice.

Question 14

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

Accepted Answer

The allowance method involves estimating uncollectible accounts and recording them in the Allowance for Doubtful Accounts. When an account is deemed uncollectible, it is written off by debiting the Allowance for Doubtful Accounts and crediting the specific Accounts Receivable account.

Question 15

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

Accepted Answer

Installment accounts receivable refers to accounts receivable where the customer is making payments over a period of time, whereas aging of accounts receivable refers to the process of categorizing unpaid invoices by their age to assess the overall health of a company's accounts receivable.

Question 16

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

Accepted Answer

The direct write-off method does not adhere to the matching principle because it recognizes bad debts expense only when an account is deemed uncollectible, which may not be in the same period when the revenue was earned.

Question 17

A company had net sales of $550,000 and an average accounts receivable of $110,000. Its accounts receivable turnover equals 5.0.
Accounts Receivable Turnover = Net Sales/Average Accounts Receivable
Accounts Receivable Turnover = $550,000/$110,000 = 5.0

Accepted Answer

The accounts receivable turnover formula, Net Sales divided by Average Accounts Receivable, was correctly calculated using the given values, resulting in an accounts receivable turnover of 5.0. Therefore, the answer is A) True.

Question 18

The use of the direct write-off method is allowed under the materiality constraint.

Accepted Answer

The direct write-off method is allowed under the materiality constraint, which allows for the use of methods that are practical and cost-effective for small amounts that are not material to the financial statements.

Question 19

A high accounts receivable turnover in comparison with competitors suggests that the firm should tighten its credit policy.

Accepted Answer

A high accounts receivable turnover ratio means that the company is collecting its receivables quickly, which is generally a positive sign. Therefore, tightening the credit policy may not be necessary.

Question 20

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

Accepted Answer

The aging of accounts receivable involves classifying each account receivable by how long it is past its due date and estimating the percent of each uncollectible class. This is a common practice in accounting to assess the quality of a company's accounts receivable and to plan for potential bad debt expenses.

Quiz 7: Reporting and Analyzing Receivables

A Company had net sales of $23,000 million, and its average account receivables were $5,700 million. Its accounts receivable turnover is 0.24. Accounts Receivable Turnover = Net Sales/Average Accounts Receivable Accounts Receivable Turnover = $23,000/$5,700 = 4.0