Question 1

If a company is having difficulty collecting their accounts receivable, which of the following statements would be true?

Accepted Answer

An increasing average collection period indicates that the company is taking longer to collect their accounts receivable, which is a sign of difficulty in collections. The accounts receivable turnover ratio measures how many times a company can collect its average accounts receivable balance during a period, so if they are having difficulty collecting, this ratio would be decreasing. The current ratio and quick ratio measures a company's liquidity and ability to pay its short-term obligations, but do not directly relate to accounts receivable collection.

Question 2

Cash management is a balancing act for companies.Explain the problems associated with having too much or too little cash.What are the tools available to management to help them achieve the correct balance?

Accepted Answer

The answer of Cash management is a balancing act for...

Question 3

A) Explain how management can use the estimate for the allowance for uncollectibles to create a hidden reserve.
B) Why would management want to create a hidden reserve? 
C) Why is it difficult for users to detect hidden reserves?

Accepted Answer

The answer of A) Explain how management can use the...

Question 4

Which of the following is the average collection period of accounts receivable?

Accepted Answer

The average collection period of accounts receivable is calculated by dividing 365 days by the accounts receivable turnover ratio. This formula gives the average number of days it takes a company to collect its receivables.

Question 5

Rand Construction Inc uses the aging method to estimate bad debts.During 2014, before recording its adjusting entries, the firm wrote off $2,000 of accounts receivable, leaving a $400 credit in its allowance for doubtful accounts.After the write-offs, based on historical experience and a careful review of the company's receivables, the company's accountant prepared the following aging schedule: $$\begin{array} { l r r } 
\text { Age } & \text { Amount } & \text { Estimated uncollectible } \
\hline \text { Not past due } & \$ 40,000 & 2 \% \
1 - 30 \text { days overdue } & 18,000 & 6 \% \
\text { Over 30 days } & 4,000 & 20 \%
\end{array}$$ Required:
A) What is the bad debt expense for 2014?
B) After recording the bad debt expense what is the final balance in the allowance for doubtful accounts? C) At what amount would the accounts receivable be shown on the balance sheet?

Accepted Answer

The answer of Rand Construction Inc uses the aging method...

Question 6

You have invested $50,000 in the start-up of your friend's biotech business.He has offered you the following three repayment options.Interest rates are currently at 8%.Which one do you prefer? Support your answer.Are there any other factors you would like to consider?
A) A $75,000 lump sum payment in 5 years.B) 10 years of monthly payments of $725.
C) Monthly payments of $500 for 20 years and a final single payment of your full $50,000.

Accepted Answer

The answer of You have invested $50,000 in the start-up...

Question 7

On December 31, 2014, Fraser Co.sold cars to Center City for its transit system for $5,000,000.Center City is going to pay the amount in full in 5 years, on January 2, 2020.They are not going to pay any interest during the 5 years or at the end.The current rate of interest on similar loans is 10%.
Required:
A) How much revenue would Fraser record for the sale on December 31, 2014?
B) What will be the amount and classification of the receivable on the December 31, 2014 balance sheet? C) What will be the financing income from the sale over the time that the receivable is outstanding?
D) How much interest revenue will be recorded in 2015?
E) What will be the amount and classification of the receivable on the December 31, 2019 balance sheet?

Accepted Answer

The answer of On December 31, 2014, Fraser Co.sold cars...

Question 8

Which of the following investments would you prefer? Support your answer.
A) A $10,000 savings bond that grows at the rate of 6% per year compounded semi-annually, for 5 years.
B) One lump sum payment of $5,000 now plus another $5,000 after 2 years.You estimate you could invest the first payment at 5% and the second one at 6%.
C) A single payment of $13,500 in 5 years.

Accepted Answer

The answer of Which of the following investments would you...

Question 9

St.John's Inc.reported accounts receivable on January 1, 2013, of $500,000 and on December 31, 2013, of $550,000.Sales for the year were $4,000,000.What is their average collection period of accounts receivable for the year?

Accepted Answer

Average collection period = (Accounts receivable / Average daily sales)
Average accounts receivable = (Beginning accounts receivable + Ending accounts receivable) / 2
= ($500,000 + $550,000) / 2 = $525,000
Average daily sales = Annual sales / 365 = $4,000,000 / 365 = $10,958.90
Average collection period = ($525,000 / $10,958.90) = 47.87 or approximately 48 days. Therefore, the best choice is C.

Question 10

The current ratio and quick ratio for the food retailing industry are typically the lowest ratios when compared to the same ratios of other industries.Does this mean the food retailing industry is illiquid? What factors could lead to the low ratios? (Be specific to the industry.)

Accepted Answer

The answer of The current ratio and quick ratio for...

Question 11

Teed's Contracting Company bought a new excavator on January 1, 2013.The company paid $10,000 down and signed a note receivable for the balance.The note required four annual cash payments of $18,000; the market interest rate is 8 percent
Required:
A) At what amount will the equipment be recorded on the balance sheet for 2013? 
B) How much was the interest expense for 2013?
C) What is the total amount of interest Teed's will pay on the machine?

Accepted Answer

The answer of Teed's Contracting Company bought a new excavator...

Question 12

Abitibi Ltd is trying to obtain a loan from the bank to help finance its growing sales.After meeting with the bank, the sole owner of Abitibi, Abby Thibault, has come to you for help."The bank said it will lend up to 75% of all receivables less than 60 days and has asked to see my aging schedule, whatever that is.They also wanted to know how I estimate bad debts and I told them 'I don't have to estimate, when I stop trying to collect, I just reverse the sale.' The bank told me to get some advice and to come back next week.I am not sure what they want or what I did wrong."
Required:
A) Explain to Abby what the bank wants.
B) Why would the bank care how she records bad debts?
C) What is wrong with her current method of recording bad debt expenses? D) What other methods are there of recording bad debts?
E) What would you recommend she do?

Accepted Answer

The answer of Abitibi Ltd is trying to obtain a...

Question 13

Which of the following is the accounts receivables turnover ratio?

Accepted Answer

The accounts receivables turnover ratio is calculated by dividing credit sales by the average accounts receivable. Option C is the only one that matches this formula. Options A and D are close, but they are missing the denominator (either credit sales or sales). Option B is the inverse of option A and doesn't relate to the calculation of the turnover ratio.

Question 14

You are organizing a Pub Night at your school.You are going to sell beer for $2 and pop and chips for $1 each.Four people will be working behind the bar, and they have all assured you that because the prices are easy to remember and easy to add they will be able to handle collecting the cash and serving of the drinks and chips.They suggested that you give them each a $20 float of loonies and toonies to have in their pockets for change.
Required:
Critique the proposed system and suggest improvements in the way the Pub Night could operate.

Accepted Answer

The answer of You are organizing a Pub Night at...

Question 15

If management decided to create a hidden reserve to make the company look more profitable by increasing the allowance for uncollectibles, what would be the effect on the current ratio and quick ratio? 
$\begin{array}{ll}
&\text { Current } & \text { Quick } \
&\text { Ratio } & \text { Ratio } \
A.&\text { Increase } & \text { Increase } \
B.&\text { Increase } & \text { Decrease } \
C.&\text { Decrease } & \text { Increase } \
D.&\text { Decrease } & \text { Decrease }
\end{array}$

Accepted Answer

Increasing the allowance for uncollectibles reduces current assets (specifically accounts receivable), which decreases both the current ratio and the quick ratio, as both ratios are dependent on the value of current assets.

Question 16

Hopewell's accounts receivable turnover ratio is 6.5, and their credit terms are 60 days.Which of the following statements is true?

Accepted Answer

A receivables turnover ratio of 6.5 indicates that Hopewell is collecting their receivables 6.5 times per year. Since their credit terms are 60 days, this indicates that they are collecting their receivables in an average of 56 days (365/6.5). Since this is faster than their credit terms of 60 days, it indicates that Hopewell is collecting faster than their credit terms. Therefore, the correct answer is A. They do not necessarily need to offer discounts or increase their allowance for uncollectibles based on this information.

Question 17

The December 31, 2013, unadjusted trial balance of Torengat Ltd contained the following balances: $$\begin{array} { l c } 
\text { Accounts receivable } & \$ 200,000 \
\text { Allowance for uncollectibles } & \$ 12,000 \mathrm { CR } \
\text { Net credit sales } & \$ 700,000
\end{array}$$ Additionally, the firm has given up trying to collect a $9,500 receivable from a customer who recently declared bankruptcy.Torengat's management has not yet written off the amount but intends to do so before the books are closed for the year.
Required:
A) Provide the entry for the write-off.The company does not use the direct write-off method.
B) i) Provide the entry to record the bad debt expense for 2013 assuming the firm uses the percentage-of-credit sales method for recording bad debt expense.On average Torengat has experienced a 4% rate of uncollectible accounts over the past 5 years.
ii) What would be the final balances in accounts receivable and the allowance for uncollectibles accounts?
iii) At what value would accounts receivable be shown on the balance sheet?
C) i) Provide the entry to record the bad debt expense for 2013 assuming that after the firm recorded the $9,500 of write-offs, it determined that 18% of its remaining accounts receivable would be uncollectible under the aging method.
ii) What would be the final balances in accounts receivable and the allowance for uncollectibles accounts?
iii) At what value would accounts receivable be shown on the balance sheet?

Accepted Answer

The answer of The December 31, 2013, unadjusted trial balance...

Question 18

North Rustico Inc.'s average collection period for accounts receivable is 5.5.If credit sales were $1,200,000 and ending accounts receivable were $200,000, what would be the opening accounts receivable balance?

Accepted Answer

The average collection period is the average number of days it takes for a company to collect its accounts receivable. The formula to calculate the average collection period is: (Ending Accounts Receivable / Credit Sales) * 365. Given that North Rustico Inc.'s average collection period is 5.5 days, credit sales are $1,200,000, and ending accounts receivable is $200,000, we can rearrange the formula to solve for the opening accounts receivable balance. First, calculate daily sales: $1,200,000 / 365 = $3,287.67. Then, since the collection period is 5.5 days, the amount of sales collected in that period is $3,287.67 * 5.5 = $18,082.69. If ending accounts receivable is $200,000, to find the opening balance, we add the sales during the collection period to the ending balance, which gives us $218,082.69. However, since this option is not available and considering the calculation approach might have been misunderstood, the correct answer involves understanding that the opening balance plus sales minus collections equals the ending balance. Without direct information on collections or a straightforward way to calculate the opening balance from the given data, the correct answer is derived from understanding the relationship between these variables and the average collection period. The correct calculation involves understanding the formula for the average collection period and its application to finding the opening balance, which was not accurately represented in the initial explanation.

Question 19

St.John's Inc.reported accounts receivable on January 1, 2013, of $500,000 and on December 31, 2013, of $550,000.Sales for the year were $4,000,000.What is their accounts receivable turnover ratio for the year?

Accepted Answer

Accounts receivable turnover ratio = Sales / Average accounts receivable
Average accounts receivable = (Beginning accounts receivable + Ending accounts receivable) / 2
Average accounts receivable = ($500,000 + $550,000) / 2 = $525,000
Accounts receivable turnover ratio = $4,000,000 / $525,000 = 7.6 times

Question 20

High River Computing began operations on January 1, 2013.The following information was taken from the financial statements prepared at the end of its first fiscal year, December 31, 2013. $$\begin{array} { l r } 
\text { Cash } & \$ 6,750 \
\text { Accounts receivable } & 126,000 \
\text { Inventory } & 459,000 \
\text { Prepaid expenses } & 4,450 \
\text { Accounts payable } & 118,600 \
\text { Short-term bank loan } & 50,000 \
\text { Sales } & 1,135,000 \
\text { Credit sales } & 800,450
\end{array}$$ Required:

Accepted Answer

The answer of High River Computing began operations on January...

Quiz 6: Cash, Receivables, and the Time Value of Money