Question 1

The gross amount of accounts receivable should be reﬂected on the balance sheet; this is what the company expects to collect in cash

Accepted Answer

The gross amount of accounts receivable is the total amount owed by customers, but the balance sheet typically reflects the net amount, which is the gross amount minus any allowance for doubtful accounts, representing what the company expects to collect in cash.

Question 2

Managers, analysts, and creditors use gross proﬁt percentage to assess the effectiveness of the company's product development, marketing, and production strategy.

Accepted Answer

Gross profit percentage is a common measure used by managers, analysts, and creditors to evaluate a company's operations and overall financial performance. It helps to determine whether a company is generating enough revenue from the sale of its products or services to cover its production costs and other expenses related to marketing and development. By analyzing gross profit percentage over time, stakeholders can assess the effectiveness of a company's strategies and make decisions about investing or lending accordingly.

Question 3

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

Accepted Answer

The allowance method adheres to the matching principle by estimating and matching bad debt expense to the revenues it helped generate within the same accounting period.

Question 4

An amount receivable from an insurance company for damaged inventory would be classiﬁed as a trade receivable.

Accepted Answer

An amount receivable from an insurance company for damaged inventory is not a trade receivable since it does not arise from the sale of goods or services in the normal course of business. It would typically be recorded as an insurance receivable or a non-trade receivable.

Question 5

It is important to record sales returns and allowances in a separate account so that management can determine the volume of returns and allowances in order to measure the quality of their products.

Accepted Answer

By recording sales returns and allowances separately, management can accurately calculate the amount of products that are being returned or adjusted due to quality issues or other factors. This information is important in evaluating the overall performance and success of the company's products.

Question 6

The gross proﬁt percentage measures the ability to charge premium prices and produce goods and services at lower cost.

Accepted Answer

Gross profit percentage is calculated as (Gross Profit / Revenue) x 100%. It indicates how much profit a company is making after deducting the cost of goods sold. A higher gross profit percentage shows that the company is able to charge a premium price for its products or services and/or produce them at a lower cost.

Question 7

If the terms are 3/15, n/45 on a credit sale, the customer will save 3% of the invoice price by paying at least 30 days before the credit period ends.

Accepted Answer

If the customer pays at least 30 days before the credit period ends, he/she will get a discount of 3% on the invoice price. This means the effective cost of the sale for the customer will be (100% - 3%) = 97% of the invoice price. Therefore, if the customer takes advantage of this discount, he/she will save 3% of the invoice price.

Question 8

The sales returns and allowances account should be reported as a deduction from sales revenue because it is a contra revenue account.

Accepted Answer

The sales returns and allowances account represents returns or discounts given to customers, which decreases the overall sales revenue. It is considered a contra revenue account and should be reported as a deduction from sales revenue on the income statement.

Question 9

Uncollectible accounts must be estimated because it is not possible to know which accounts will not be collected.

Accepted Answer

Uncollectible accounts cannot be identified on an individual basis, so an estimate of the total amount of uncollectible accounts must be made. This estimate is based on historical data, industry trends, and current economic conditions.

Question 10

Both credit card discounts and cash discounts can be recorded either as contra revenues or as expenses.

Accepted Answer

Both credit card discounts and cash discounts are examples of discounts offered to customers. These discounts can be recorded as contra revenues, reducing the amount of revenue recorded, or as expenses, increasing the cost of goods sold or operating expenses. The choice of how to record them will depend on the company's accounting policies and practices.

Question 11

The gross proﬁt percentage is computed by taking operating proﬁt divided by net sales.

Accepted Answer

The gross profit percentage is computed by taking (net sales - cost of goods sold) divided by net sales, not by operating profit divided by net sales.

Question 12

Under the allowance method for uncollectible accounts, the entry to write off an uncollectible account only involves statement of ﬁnancial position accounts.

Accepted Answer

The entry to write off an uncollectible account involves both statement of financial position accounts and income statement accounts. The statement of financial position accounts affected are Accounts Receivable and Allowance for Doubtful Accounts, while the income statement account affected is Bad Debt Expense.

Question 13

Sales returns and allowances should be deducted from sales revenue when computing net sales.

Accepted Answer

Sales returns and allowances represent refunds and discounts given to customers for returned or unsatisfactory merchandise. These deductions should be made to accurately reflect the actual amount of revenue earned by the company, referred to as net sales.

Question 14

An aging of trade accounts receivable schedule is based on the premise that the longer the period an account remains unpaid, the greater the probability that it will eventually be collected.

Accepted Answer

An aging of trade accounts receivable schedule is based on the premise that the longer the period an account remains unpaid, the greater the probability that it will not be collected.

Question 15

One characteristic of a note receivable is a deﬁnite future date known as the maturity date.

Accepted Answer

This statement is true. The maturity date of a note receivable is the date on which the principal and any interest is due to be paid in full.

Question 16

While sales discounts and credit card discounts can only be treated as contra revenues, sales returns and allowances are treated as either a contra revenue or a selling expense.

Accepted Answer

Sales returns and allowances are typically treated as contra revenue accounts, not as selling expenses. They are used to reduce the gross revenue to reflect the actual revenue earned after accounting for returns and allowances.

Question 17

Many merchants accept credit cards for the sale of goods because it can increase the number of customers.

Accepted Answer

Accepting credit cards can provide customers with a more convenient payment option and may attract more customers who prefer to use credit cards rather than cash or checks.

Question 18

MP Co.'s gross proﬁt percentage decreased from 59.2% in 20X2 to 58.3% in 20X3. This means that MP Co.'s cost of goods sold as a percentage of sales has decreased.

Accepted Answer

A decrease in gross profit percentage indicates that cost of goods sold as a percentage of sales has increased, not decreased.

Question 19

Under the allowance method for uncollectible accounts, bad debts expense is recorded when an individual customer defaults.

Accepted Answer

Under the allowance method, bad debts expense is estimated and recorded based on the total credit sales for the period, not when an individual customer defaults. The purpose of the allowance method is to recognize potential bad debts and adjust the accounts receivable balance accordingly. When a specific customer's account is determined to be uncollectible, it is written off as a bad debt against the allowance account previously established.

Question 20

Trade receivables which are more than one-year old are normally transferred to non-current receivables.

Accepted Answer

The answer of Trade receivables which are more than one-year...

Quiz 6: Merchandising Operations and the Multistep Income Statement