Question 1

Bad debts expense is an estimated amount recorded in an adjusting entry.This estimate is necessary so we can record the cost of uncollectible accounts in the period relating to the sales that were recorded as earned.

Accepted Answer

Bad debts expense is indeed an estimated amount recorded in an adjusting entry to account for the possibility of uncollected accounts in the period of the related sales.

Question 2

After adjustment,the net realizable value of trade receivables reported on the statement of financial position reflects expected cash inflow from credit customers.

Accepted Answer

This statement is true. The net realizable value of trade receivables is calculated by subtracting the estimated allowance for doubtful accounts from the total accounts receivable. This adjustment reflects the expected cash inflow from credit customers, as it accounts for the anticipated losses from customers who are unlikely to pay.

Question 3

An entry to write off an uncollectible account does not change the net realizable value (book value)of trade receivables.

Accepted Answer

Writing off an uncollectible account only affects the allowance for doubtful accounts and the balance sheet presentation of accounts receivable. It does not change the net realizable value (book value) of trade receivables, because that value is calculated as the total amount of receivables minus the allowance for doubtful accounts. Writing off an uncollectible account decreases the allowance and decreases accounts receivable by the same amount, leaving the net realizable value unchanged.

Question 4

The lower the receivables turnover,the more effectively the company has managed their credit granting and collection activities.

Accepted Answer

The lower the receivables turnover, the less effectively the company has managed their credit granting and collection activities. A higher receivables turnover indicates that the company is collecting payments from customers more quickly, which is generally more efficient and preferable.

Question 5

If a cheque received from a customer that has been deposited by the seller is returned with the bank statement marked "not sufficient funds "(NSF),it would appear on the seller's bank statement reconciliation as a subtraction from the ending book balance of cash.

Accepted Answer

If a cheque received from a customer is returned as "not sufficient funds", it means the cheque is not valid and cannot be deposited. Hence, the seller would need to subtract the amount of the cheque from their ending book balance of cash while reconciling their bank statement. Therefore, the statement is true.

Question 6

The net realizable value of trade receivables can be computed by subtracting the balance in allowance for doubtful accounts from the balance in trade receivables.

Accepted Answer

The net realizable value of trade receivables is the amount expected to be collected from the customers after deducting the estimated bad debts. This can be computed by subtracting the balance in allowance for doubtful accounts from the balance in trade receivables. Therefore, the statement is true.

Question 7

The cash amount reported on the statement of financial position should include cash deposited and cash on hand (undeposited),and other instruments that meet the definition of a cash equivalent.

Accepted Answer

The statement of financial position should include all cash on hand and deposited, as well as any cash equivalents such as highly liquid investments that can be easily converted to cash.

Question 8

One technique to provide better control over credit and collections of receivables is to have those functions managed by the accounting department instead of the sales department.

Accepted Answer

By having the credit and collections functions managed by the accounting department, it can help ensure that proper procedures are in place for credit checks, timely invoicing, and follow-up on past due accounts. This can help minimize the risk of bad debt and improve cash flow. In contrast, when these functions are managed by the sales department, there may be a conflict of interest in terms of prioritizing sales over creditworthiness and timely collections.

Question 9

The receivable turnover ratio is computed by dividing net sales by net trade receivables at the end of the year.

Accepted Answer

The receivable turnover ratio is computed by dividing net sales by the average net trade receivables during the year, not just at the end of the year.

Question 10

It is possible for the allowance for doubtful accounts to have a debit or credit balance prior to the year-end adjustment.

Accepted Answer

The allowance for doubtful accounts is a contra asset account which means it has an opposite balance to the accounts receivable account. It is possible for the allowance account to have a debit or credit balance depending on the amount of estimated uncollectible accounts and the actual write-offs during the accounting period. If the estimated uncollectible accounts are greater than the actual write-offs, the allowance account will have a debit balance. If the actual write-offs are greater than the estimated uncollectible accounts, the allowance account will have a credit balance.

Question 11

When a net decrease in trade receivables for the period occurs,cash collected from customers exceeds revenue,and cash flows from operations increases.

Accepted Answer

A decrease in trade receivables means that less money is owed to the business from its customers. Cash collected from customers exceeding revenue implies that customers are paying their debts faster than the company is recognizing revenue from sales. This results in an increase in cash flow from operations as more cash is being generated from collections.

Question 12

T Co.'s reported a deduction from profit of ($2,781)in thousands for the change in trade receivables on their 2012 cash flow statement.This was caused by an increase in trade receivable from 2011 to 2012.

Accepted Answer

The deduction from profit ($2,781) due to the change in trade receivables indicates an increase in trade receivables from 2011 to 2012, which is consistent with the statement in the question. Therefore, the answer is true (A).

Question 13

The trade receivables turnover ratio reflects how many times average trade receivables were recorded and collected during the period.

Accepted Answer

The trade receivables turnover ratio measures how efficiently a company is managing its accounts receivable by calculating how many times it collects its average accounts receivable balance during a given period, such as a year. A higher turnover ratio indicates that the company is collecting its receivables more quickly, which is typically seen as a positive sign of financial health.

Question 14

When the bank returns a NSF (not sufficient funds)cheque to a depositor,that depositor should decrease the cash balance in its accounting system.

Accepted Answer

When a cheque is returned as NSF, it means that the bank was unable to honor the payment due to insufficient funds in the account of the person who wrote the cheque. Therefore, the depositor should decrease the cash balance in its accounting system to reflect the fact that the amount of the cheque is no longer available in its account.

Question 15

The reason that we must adjust revenue for the change in trade receivables to convert the figure to cash collected from customers is that trade receivables represent sales revenue not collected from customers at the beginning and end of the accounting year.

Accepted Answer

Trade receivables represent sales revenue that has not yet been collected from customers. We need to adjust revenue for the change in trade receivables to convert it to cash collected from customers because the change in trade receivables represents the sales revenue that was collected or not collected during the accounting year.

Question 16

Information gained from an aging analysis of trade receivables provides management with insights regarding future cash flows,losses due to uncollectible accounts,and the general effectiveness of the credit and collection activities of the entity.

Accepted Answer

An aging analysis of trade receivables helps management in understanding the timing of expected cash collections, identifying accounts that may be uncollectible, and evaluating the effectiveness of credit and collection activities. Therefore, the statement is true.

Question 17

Receivables turnover is computed as net credit sales divided by average net trade receivables.

Accepted Answer

This statement correctly describes the formula for calculating receivables turnover, which measures how many times a company's accounts receivable are collected during a given period.

Question 18

Cash is the most liquid of all assets,flowing continually into and out of a business.

Accepted Answer

Cash is considered the most liquid asset as it can easily be used to purchase goods and services or pay off debts. It is constantly flowing into and out of a business.

Question 19

The change in trade receivables is reported as a cash flow adjustment on the statement of cash flows under investing activities according to the indirect method.

Accepted Answer

The change in trade receivables is actually reported as a cash flow adjustment under operating activities according to the indirect method of preparing the statement of cash flows.

Question 20

Cash on hand (undeposited),cash deposited in banks,and postage stamps should be included in the cash balance reported on the statement of financial position.

Accepted Answer

Postage stamps are not considered cash or cash equivalents and should not be included in the cash balance on the statement of financial position.

Quiz 7: Reporting and Interpreting Cost of Goods Sold and Inventory