Question 1

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

Accepted Answer

Installment accounts receivable refers to accounts where payments are made in multiple installments, while aging of accounts receivable refers to the process of tracking and categorizing outstanding receivables by age. These two terms do not refer to the same thing.

Question 2

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

Accepted Answer

The materiality principle allows the use of the direct write-off method when bad debts are insignificant, not when they are very large.

Question 3

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

Accepted Answer

The entry to record the bad debts expense under the allowance method is a debit to Bad Debts Expense and a credit to Allowance for Doubtful Accounts, not directly to Accounts Receivable.

Question 4

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

Accepted Answer

This is the correct entry to write off an uncollectible account using the allowance method.

Question 5

The use of an allowance for bad debts is required under the materiality principle.

Accepted Answer

The use of an allowance for bad debts is required under the matching principle, not the materiality principle. The allowance for bad debts is used to estimate the amount of uncollectible accounts receivable and record them as an expense in the same period in which the related revenue was recognized, which is in accordance with the matching principle.

Question 6

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 previously written off would be recorded as a debit to Cash and a credit to Accounts Receivable. This is because the original entry for the bad debt expense would have already reduced the balance in the allowance account, so there would be no need to credit Bad Debts Expense again.

Question 7

During a given year,Compaq had net sales of $32,000 million and average account receivables were $6,850 million.Its accounts receivable turnover is equal to 0.21.

Accepted Answer

$32,000/$6,850 = 4.7

Question 8

When a company has 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 indicates that the company is collecting its receivables quickly, which is a positive sign. It does not necessarily mean that the company should tighten its credit policy. In fact, it could mean that the company has a strong credit policy that allows it to collect its receivables promptly.

Question 9

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

Accepted Answer

The aging of accounts receivable process involves both classifying each account by how long it is past its due date and estimating the amount that is uncollectible.

Question 10

The accounts receivable turnover ratio indicates how often account receivables are received and collected during the period.

Accepted Answer

The accounts receivable turnover ratio is calculated by dividing net credit sales by the average accounts receivable balance during the period. It indicates how many times on average the accounts receivable balance is collected and received during the period. Therefore, the answer is true.

Question 11

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

Accepted Answer

This is the correct formula for calculating accounts receivable turnover.

Question 12

After adjustment,the allowance for doubtful accounts has the effect of reducing accounts receivable to its estimated realizable value.

Accepted Answer

The purpose of the allowance for doubtful accounts is to reflect the estimated amount of accounts receivable that is unlikely to be collected. Therefore, once the allowance is adjusted, it reduces the accounts receivable balance to its estimated realizable value.

Question 13

Under the allowance method of accounting for uncollectible accounts receivable,no estimate is made to predict bad debts expense.

Accepted Answer

The allowance method of accounting for uncollectible accounts receivable does involve making an estimate to predict bad debts expense. This estimate is usually based on historical data and other factors such as economic conditions and the creditworthiness of customers. The estimated bad debts expense is then recorded by creating an allowance for doubtful accounts, which is a contra-asset account that reduces the accounts receivable balance to its net realizable value.

Question 14

The advantage of the allowance method of accounting for uncollectible accounts is that it identifies the specific customers who do not pay their bills.

Accepted Answer

The advantage of the allowance method is that it matches estimated losses from uncollectible accounts with the revenue recognized in the same accounting period. It does not specifically identify individual customers who do not pay their bills.

Question 15

The matching principle requires use of the direct write-off method of accounting for bad debts.

Accepted Answer

The matching principle requires that expenses be matched to the revenues they help generate, but the direct write-off method of accounting for bad debts does not accomplish this matching. The allowance method is more commonly used to estimate bad debts and satisfy the matching principle.

Question 16

During a given year,a company had net sales of $500,000 and average accounts receivable of $80,000.Its accounts receivable turnover is equal to 6.25.

Accepted Answer

$500,000/$80,000 = 6.25

Question 17

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 can choose between these two methods to account for uncollectible accounts. The direct write-off method involves writing off individual uncollectible accounts as they are deemed uncollectible, while the allowance method involves estimating and setting aside a reserve for potential uncollectible accounts.

Question 18

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

Question 19

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

Accepted Answer

The direct write-off method does not match expenses with revenues and does not consider materiality, so it does not follow either principle.

Question 20

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

Accepted Answer

The direct write-off method writes off the uncollectible account receivable when it is determined to be uncollectible, rather than estimating a bad debt expense and creating a reserve for bad debts.

Quiz 7: Reporting and Analyzing Receivables