Deck 8: Receivables

Question 1

Readers of financial statements must scrutinize the note disclosures,and the financing activities section of the cash flow statement,for evidence of dispositions of receivables that may be masking overly aggressive revenue recognition policies or bad receivables management.

Answer 1

True

Question 2

When establishing credit policies,companies choose what they believe is a profit-minimizing balance between the expected cost of credit sales and benefits of increased credit sales.

Answer 2

False

Question 3

Under the sales revenue approach,no bad debt expense is recorded when a specific account (known to be uncollectible)is written off.

Answer 3

True

Question 4

A change in the percentage rate used to estimate bad debts expense will have a negligible impact on reported earnings.

Question 5

The sales returns and allowances account is a contra-asset account.

Question 6

The net realizable value of accounts receivable is decreased when a bad debt is written off.

Question 7

Generally accepted accounting principles require that accounts receivable be carried on the balance sheet at their net realizable value as opposed to their face amount.

Question 8

An aging of accounts receivable is a determination of how long each receivable has been on the books.

Question 9

Research has found that companies "manage" earnings by increasing the bad debt provision when earnings are otherwise low,and decreasing the bad debt provision when earnings are high.

Question 10

Receivables that result from transactions other than trade receivables,if material,are separately disclosed on the balance sheet.

Question 11

Authoritative accounting literature provides little guidance regarding revenue recognition when a sales agreement contains conditions that may allow the buyer to return the product.

Question 12

Under the sales revenue approach to estimating uncollectible accounts receivable a percentage of gross uncollectible accounts receivable is determined to establish the bad debts expense.

Question 13

In U.K.financial reports,receivables are called "creditors."

Question 14

Determining whether the allowance for uncollectibles is adequate requires judgment.

Question 15

Net realizable value equals the sales price minus reasonable further costs to both make the item ready to sell and to sell it.

Question 16

Ignoring estimated future returns and allowances has a trivial effect on income when the amount of actual returns and allowances does not vary greatly from year to year.

Question 17

In practice,no end-of-period accrual is typically made for future returns and allowances.

Question 18

When sales returns occur,they are debited to the sales account.

Question 19

The gross accounts receivable approach is consistent with the accrual accounting philosophy of recording estimated bad debt expense when the sale was made.

Question 20

When firms sell receivables,the receivables number reported in the ending balance sheet only includes the remaining receivables and will overstate the true growth in receivables over the period.

Question 21

Bill and hold sales should never be booked as revenue before shipment occurs.

Question 22

Shipments to a company's distributors should normally be treated as sales when they occur.

Question 23

When a firm does not adopt the fair value option,it still must disclose the fair value of its accounts receivable.

Question 24

If the fair value option is not elected,the company must still disclose the fair value of its all of its notes receivable.

Question 25

Receivables growth could exceed sales growth because the firm allows its customers more time to pay.

Question 26

If the fair value option is elected,the carrying value of a note receivable would reflect general changes in interest rates and changes in the creditworthiness of the lender.

Question 27

Interest must be accounted for on all long-term notes receivable whether the interest rate is stated or not.

Question 28

In a bill and hold sale,the company recognizes revenue and the associated account receivable,but does not ship the product to the customer until later.

Question 29

While collectibility of receivables requires forecasts which could later prove to be inaccurate,typical audit procedures of the current period will ensure that extreme overstatement of net receivables is rare.

Question 30

When a company factors its receivables with recourse,the company cannot be required to pay the factor if a customer's account proves uncollectible.

Question 31

Interest must be imputed when the stated rate is lower than the prevailing borrowing rate at the time of the transaction.

Question 32

Firms record accounts and notes receivable at net realizable value because that is the only option GAAP permits.

Question 33

An increase in receivables growth exceeding sales growth could indicate aggressive revenue recognition policies.

Question 34

Firms may choose the fair value option for either a single financial instrument or a group of financial instruments.

Question 35

Many receivables recognition irregularities can be discovered by tracking the relationship between changes in sales and changes in receivables.

Question 36

When sales growth exceeds receivables growth,this could be an indication of aggressive revenue recognition policies.

Question 37

For long-term credit sales transactions utilizing notes receivable,interest income is recorded each period over the note's term to maturity using the prevailing borrowing rate in effect at the end of each reporting period.

Question 38

When accounts receivables growth exceeds sales growth,it indicates an aggressive revenue recognition policy or some other accounting irregularity.

Question 39

Companies occasionally adopt "aggressive" revenue recognition practices which then generate significant returns in later periods.

Question 40

Interest must be imputed whenever the stated rate is not the same as the prime rate of interest at the time of the transaction.

Question 41

A securitization entity is a trust or corporation that is legally distinct from the transferor and may be created solely for the purpose of undertaking securitization transactions.

Question 42

When a company sells its accounts receivable to a factor with recourse,it records a recourse obligation on its books.

Question 43

Under current U.S.and IFRS guidance,most securitization entities will stay on the balance sheet.

Question 44

In a transaction where the transferor surrenders control over its receivables,the transaction is treated as a collateralized borrowing and any gain or loss is recognized in earnings.

Question 45

Securitization occurs when receivables are bundled together and sold or transferred to another organization that issues securities which are not collateralized by the transferred receivables.

Question 46

Factoring can either be with,or without,recourse.

Question 47

Factoring without recourse means that the company must buy back any bad receivables from the factor.

Question 48

A restructuring of debt constitutes a troubled debt restructuring if the creditor,for legal or economic reasons related to the debtor's financial difficulties,grants a concession to the debtor that it would otherwise not consider.

Question 49

Because the securitization entity's credit rating is based on the quality of the transferred receivables,it will be the same as the rating of the transferor's general debt.

Question 50

A troubled debt restructuring can only be accomplished through a continuation with modification of debt terms where the original loan is cancelled and a new loan agreement is signed.

Question 51

Mortgage applications fraud played a role in the recent economic crisis.

Question 52

When a company accepts credit cards (e.g.,VISA or MasterCard)it engages in a form of factoring.

Question 53

Securitizations have always been carefully designed to enable the transferor to consolidate the securitization entity.

Question 54

The only condition required for control over receivables to be surrendered is that the transferred assets should be beyond the reach of the transferor and its creditors.

Question 55

A firm's financial statements can be dramatically affected when the firm is required to consolidate securitization entities that had previously been off-balance sheet.

Question 56

In a troubled debt restructuring,GAAP restructuring gains and losses are equal to real economic gains and losses for the companies involved.

Question 57

Subprime loans can be securitized as part of a general portfolio of loans.

Question 58

Per current GAAP,the sponsor of a securitization entity may be required to treat a securitization as a collateralized borrowing instead of a sale.

Question 59

In a troubled debt restructuring,there is a lack of symmetry in the financial reporting of the borrower and lender.

Question 60

Accelerating cash collection on notes receivable by assigning or selling them is referred to as discounting.

Question 61

Net realizable value of receivables is gross receivables minus

A)bad debt expense and sales returns.
B)bad debt expense and estimated returns and allowances.
C)estimated uncollectibles,and estimated returns and allowances.
D)proven uncollectibles and estimated returns and allowances.

Question 62

When a specific account receivable is written off,the entry

A)increases net income.
B)decreases net income.
C)can either decrease or increase net income.
D)has no effect on net income.

Question 63

International financial reporting standards require firms to report short-term receivables at fair value and to disclose their net realizable value in the notes to the financial statements.

Question 64

Echo Company's 2014 beginning and ending accounts receivable balances were $72,500 and $41,250 respectively.During 2014,the company's sales (all on credit)amounted to $857,250.Per Echo's 2014 cash flow statement,$873,500 was collected from customers while $18,750 related to uncollectible accounts was listed among the "non-cash expenses." If Echo's beginning balance in the allowance for uncollectibles was $17,600,the ending balance in this account must be

A)$15,000.
B)$21,350.
C)$36,350.
D)The required "allowance for uncollectibles" balance cannot be determined from the data given.

Question 65

The sales returns and allowances account is

A)a contra-asset account.
B)a contra-revenue account.
C)on the balance sheet.
D)on the statement of shareholders' equity.

Question 66

Lenders are willing to restructure a customer's loan to help the customer resolve present financial difficulties and stay in business and also because lenders often receive more through restructuring than they would get from foreclosure.

Question 67

The matching principle requires that bad debts be treated as an expense in the year

A)the sale is made.
B)the customer files bankruptcy.
C)in which the debt becomes six months past due.
D)a court declares it to be uncollectible.

Question 68

IFRS only explicitly covers troubled debt restructurings from the lender's perspective.

Question 69

Under IFRS,firms may elect the fair value option only in cases where it eliminates an accounting mismatch or when a group of assets is managed and evaluated using fair values.

Question 70

Smith Company is a manufacturer of medical devices and has an excellent quality control department,thus defective product returns are rare.In 2014,Smith reported sales of $276,344,000.The company did,however,have two returns in 2014 related to the wrong product model being shipped.Smith's 2014 journal entry to record a $37,500 return from Foxtrot Medical would be

A) DR Sales returns and allowances $\quad$ 37,500
CR Accounts receivable-Foxtrot Medical $\quad$ 37,500
B) DR Sales returns and allowances $\quad$ 37,500
CR Allowance for Sales Returns and Allowances $\quad$ 37,500
C) DR Sales $\quad$ 37,500
CR Accounts receivable-Foxtrot Medical $\quad$ 37,500
D) DR Sales returns expense $\quad$ 37,500
CR Accounts receivable-Foxtrot Medical $\quad$ 37,500

Question 71

Edsel Inc. has the following unadjusted year end trial balance information available for 2014:
$$\begin{array} { l r } \text { Cash sales } & \$ 400,000 \\\text { Credit sales } & 600,000 \\\text { Ending accounts receivable balance } & 180,000 \\\text { Ending allowance for uncollectibles } & 1,500 \\\text { Estimated uncollectibles } & 2 \%\end{array}$$

-If Edsel uses the gross accounts receivable approach for estimating bad debt expense,the income statement will show an expense of

A)$2,100.
B)$3,600.
C)$5,100.
D)$8,500.

Question 72

XYZ Co.'s 2015 ratio of allowance for uncollectibles to gross receivables has declined from the ratio at the end of 2014.To evaluate whether the reduction in XYZ's ratio is reasonable,an analyst should

A)compare the ratio to other firms in XYZ's industry.
B)look for additional discussion in XYZ's annual report.
C)listen to the analyst earnings briefing.
D)do all of these.

Question 73

Management must periodically assess the reasonableness of the allowance for uncollectibles if it uses the

A)direct write-off method.
B)percent of sales method only.
C)percent of gross receivables method only.
D)percent of sales or the percent of gross receivables methoD.

Question 74

Securitization entities generally stay on the balance sheet under both IFRS and current U.S.GAAP.

Question 75

Edsel Inc. has the following unadjusted year end trial balance information available for 2014:
$$\begin{array} { l r } \text { Cash sales } & \$ 400,000 \\\text { Credit sales } & 600,000 \\\text { Ending accounts receivable balance } & 180,000 \\\text { Ending allowance for uncollectibles } & 1,500 \\\text { Estimated uncollectibles } & 2 \%\end{array}$$

-If Edsel uses the sales revenue approach for estimating bad debt expense,the allowance for uncollectibles account after the proper adjustments to the accounts are recorded,should show a balance of

A)$11,500.
B)$13,500.
C)$15,500.
D)$21,500.

Question 76

The allowance for uncollectibles account is

A)added to gross accounts receivable.
B)added to net accounts receivable.
C)subtracted from gross accounts receivable.
D)subtracted from net account receivable.

Question 77

An analyst notes that ABC Inc.'s allowance for uncollectible accounts as a percentage of year-end accounts receivable has changed.Which of the following would be a plausible explanation for the change?

A)ABC's management expects a default rate on outstanding receivables different than that which has occurred in prior years.
B)ABC's management is using bad debt accruals to "manage" earnings.
C)The company ages its receivables and the distribution of accounts receivable over the various age categories is different than in prior years.
D)All of these are plausible reasons for the noted change.

Question 78

Edsel Inc. has the following unadjusted year end trial balance information available for 2014:
$$\begin{array} { l r } \text { Cash sales } & \$ 400,000 \\\text { Credit sales } & 600,000 \\\text { Ending accounts receivable balance } & 180,000 \\\text { Ending allowance for uncollectibles } & 1,500 \\\text { Estimated uncollectibles } & 2 \%\end{array}$$

-If Edsel uses the gross accounts receivable approach for estimating bad debt expense,the allowance for uncollectibles account after the proper adjustments to the accounts are recorded,should show a balance of

A)$2,600.
B)$3,600.
C)$5,600.
D)$6,200.

Question 79

Research evidence suggests that

A)companies increase bad debt expense when earnings are otherwise low and then decrease the expense when earnings are high.
B)companies reduce bad debt expense when earnings are otherwise low and then increase the expense when earnings are high.
C)there is no correlation between bad debt expense and earnings levels.
D)a company's ratio of allowance for uncollectibles to gross receivables should always be close to the average for its industry.

Question 80

Edsel Inc. has the following unadjusted year end trial balance information available for 2014:
$$\begin{array} { l r } \text { Cash sales } & \$ 400,000 \\\text { Credit sales } & 600,000 \\\text { Ending accounts receivable balance } & 180,000 \\\text { Ending allowance for uncollectibles } & 1,500 \\\text { Estimated uncollectibles } & 2 \%\end{array}$$

-If Edsel uses the sales revenue approach for estimating bad debt expense,the income statement should show an expense of

A)$10,000.
B)$12,000.
C)$14,000.
D)$20,000.