Question 1

The sale or transfer of accounts receivable in order to raise funds is called

Accepted Answer

Factoring involves selling accounts receivable to a third party (known as a factor) in exchange for immediate cash. This allows the company to raise funds without taking out a loan or issuing stock.

Question 2

Selling accounts receivables to factors and allowing credit terms such as 2/10, n/30

Accepted Answer

Selling accounts receivables to factors allows for faster access to cash and reduces the risk of bad debt. Allowing credit terms such as 2/10, n/30 is a common business practice to incentivize customers to pay quickly and can accelerate receivable collections. However, taking advantage of the discount may result in collections that are less than the gross accounts receivable.

Question 3

Factoring arrangements

Accepted Answer

Factoring arrangements are ways for businesses to accelerate their receivable collections. This involves selling their invoices to a third party, known as a factor, who then takes responsibility for collecting the payment from the debtor. This allows the business to receive cash upfront for their outstanding invoices, rather than waiting for payment from their customers. Factoring arrangements typically involve a fee or commission charged by the factor, but this cost is often outweighed by the benefits of improved cash flow and reduced risk of bad debts.

Question 4

The financial statements of the Melton Manufacturing Company reports net sales of $300,000 and accounts receivable of $50,000 and $30,000 at the beginning of the year and end of year, respectively. What is the average collection period for accounts receivable in days?

Accepted Answer

Average Collection Period = (Accounts Receivable / Net Sales) x Number of Days in the Period

Number of Days in the Period = 365 days

Accounts Receivable at the beginning of the year = $50,000

Accounts Receivable at the end of the year = $30,000

Average Accounts Receivable = (Beginning Accounts Receivable + Ending Accounts Receivable) / 2
= ($50,000 + $30,000) / 2
= $40,000

Net Sales = $300,000

Average Collection Period = ($40,000 / $300,000) x 365 days 
= 48.7 days (rounded to one decimal place)

Therefore, the best choice is B, which is 48.7.

Question 5

In the table below the information for four companies is provided.  Assuming all four companies are in the same industry, which company appears to have the greatest likelihood of paying its current obligations?

Accepted Answer

The answer of In the table below the information for...

Question 6

Windsor Corporation sells its goods on terms of 2/10, n/30. It has an accounts receivable turnover of 8. What is its average collection period (days)?

Accepted Answer

Accounts receivable turnover = net credit sales / average accounts receivable
8 = net credit sales / (accounts receivable / 365)

We know the discount period is 10 days, so the remaining days for the full credit period is 20 days.

Let's assume the net credit sales is $80, then the accounts receivable is $10 (2% of $80) less than the net credit sales.
So, net credit sales = $80, accounts receivable = $70, and the average collection period would be:

365 * (accounts receivable / net credit sales) = 365 * (70/80) = 320.75

Therefore, the average collection period is 321 days which is closest to 46 days (option C).

Question 7

YZ Company accepted a national credit card for a $7,500 purchase. The cost of the goods sold is $6,000. The credit card company charges a 3% fee. What is the impact of this transaction on net operating income?

Accepted Answer

The 3% fee charged by the credit card company is calculated as 3% of the $7,500 purchase, which equals $225. This $225 fee is a cost incurred by YZ Company and reduces their net operating income. However, the $6,000 cost of the goods sold should also be taken into account. Therefore, the impact on net operating income can be calculated as follows:

Net sales = $7,500
Cost of goods sold = $6,000
Credit card fee = $225

Gross profit = net sales - cost of goods sold = $1,500
Operating expenses = credit card fee = $225
Net operating income = gross profit - operating expenses = $1,275

Therefore, the transaction will increase the net operating income by $1,275. The closest option to this answer choice is C.

Question 8

Simonic Retailers accepted $90,000 of Citibank Visa credit card charges for merchandise sold on July 1. Citibank charges 4% for its credit card use. The entry to record this transaction by Simonic Retailers will include a credit to Sales Revenue of $90,000 and a debit(s) to

Accepted Answer

The answer of Simonic Retailers accepted $90,000 of Citibank Visa...

Question 9

In the table below the information for four companies is provided.  If Garner's net credit sales are $290,000, what are its average net accounts receivable?

Accepted Answer

The answer of In the table below the information for...

Question 10

All of the following statements are true regarding the average collection period except:

Accepted Answer

The average collection period should generally be less than the credit term period, as a longer average period suggests that customers are taking longer to pay their debts. This can indicate potential cash flow problems for the company.

Question 11

The financial statements of the Phelps Manufacturing Company reports net sales of $500,000 and accounts receivable of $80,000 and $40,000 at the beginning of the year and end of year, respectively. What is the accounts receivable turnover for Phelps?

Accepted Answer

The answer of The financial statements of the Phelps Manufacturing...

Question 12

If a retailer regularly sells its receivables to a factor, the service charge of the factor should be classified as a(n)

Accepted Answer

Selling expenses include all direct and indirect costs associated with the selling process, including the service charge of a factor when a retailer sells its receivables. This is because factoring is often used as a means to accelerate cash flow and manage receivables, which are directly related to the sales process.

Question 13

The financial statements of the Nelson Manufacturing Company reports net sales of $300,000 and accounts receivable of $50,000 and $30,000 at the beginning of the year and end of year, respectively. What is the accounts receivable turnover for Nelson?

Accepted Answer

The answer of The financial statements of the Nelson Manufacturing...

Question 14

ABC Company accepted a national credit card for a $7,000 purchase. The cost of the goods sold is $5,600. The credit card company charges a 3% fee. What is the impact of this transaction on net operating income?

Accepted Answer

The cost of goods sold is $5,600. The credit card company charges a 3% fee on the $7,000 purchase, which is $210. Therefore, the revenue from the sale is $6,790 ($7,000 - $210). The impact on net operating income would be an increase of $1,190 ($6,790 - $5,600).

Question 15

The accounts receivable turnover

Accepted Answer

The accounts receivable turnover can be used to compute the average collection period by dividing the number of days in the accounting period by the accounts receivable turnover. Option A is incorrect because the accounts receivable turnover is computed by dividing net credit sales by the average accounts receivable balance. Option C is incorrect because the accounts receivable turnover is a measure of how quickly a company is collecting its outstanding receivables, not a measure of solvency. Option D is incorrect because the accounts receivable turnover is important to both internal and external users of accounting information.

Question 16

A popular variation of the accounts receivable turnover is the

Accepted Answer

The popular variation of the accounts receivable turnover is the average collection period, which measures the number of days it takes for a company to collect its outstanding accounts receivable balance. It is calculated by dividing the number of days in a year by the accounts receivable turnover ratio. A lower average collection period is preferable as it indicates that a company is collecting its accounts receivables more efficiently.

Question 17

A company sells $900,000 of accounts receivable to a factor for cash less a 2% service charge. The entry to record the sale should not include a

Accepted Answer

The 2% service charge is not considered interest expense, so there should not be a debit to Interest Expense for $18,000. Choices B, C, and D are correct entries to record the sale of accounts receivable for cash less a 2% service charge.

Question 18

The financial statements of the Belfry Manufacturing Company reports net sales of $500,000 and accounts receivable of $80,000 and $40,000 at the beginning of the year and end of year, respectively. What is the average collection period for accounts receivable in days?

Accepted Answer

The answer of The financial statements of the Belfry Manufacturing...

Question 19

Leary Corporation had net credit sales during the year of $900,000 and cost of goods sold of $540,000. The balance in receivables at the beginning of the year was $120,000 and at the end of the year was $180,000. What was the accounts receivable turnover?

Accepted Answer

The answer of Leary Corporation had net credit sales during...

Question 20

The sale of receivables by a business

Accepted Answer

Selling receivables can be a quick way for a business to generate cash to meet its operating needs. It does not necessarily indicate financial difficulty or ownership by a captive finance company, and it is not typically the major revenue item on the income statement.

Quiz 8: Reporting and Analyzing Receivables