Question 1

The allowance for doubtful accounts is a contra-asset account.
BT: Knowledge

Accepted Answer

The allowance for doubtful accounts is a contra-asset account because it is a reduction to the total amount of accounts receivable, which is an asset account.

Question 2

If the receivables turnover ratio rises significantly,the increase may be a signal that the company is extending credit to high-risk borrowers or allowing an overly generous repayment schedule.
BT: Comprehension

Accepted Answer

A rising receivables turnover ratio typically indicates that a company is collecting its receivables more quickly, suggesting efficient credit and collection processes, not necessarily extending credit to high-risk borrowers.

Question 3

Direct write-off method violates the matching principle.
BT: Knowledge

Accepted Answer

The direct write-off method does not match expenses with revenues in the same accounting period, which violates the matching principle. Under this method, bad debts are only recognized when they actually occur, instead of estimating the amount of potential bad debts and recording them as an expense in the same period in which the corresponding revenue is recognized. This can lead to a distortion of the company's financial statements and is generally not allowed under Generally Accepted Accounting Principles (GAAP). The allowance method is a more accurate way of accounting for bad debts that complies with the matching principle.

Question 4

The smaller the receivables turnover ratio the larger the days to collect measure will be.
BT: Comprehension

Accepted Answer

A smaller receivables turnover ratio indicates that receivables are being collected more slowly, which results in a larger number of days to collect.

Question 5

The allowance for doubtful accounts is not used in the direct write off method.
BT: Knowledge

Accepted Answer

The direct write off method does not use the allowance for doubtful accounts, but instead recognizes the bad debt expense at the point when a customer's account is determined to be uncollectible and is written off.

Question 6

In normal circumstances,the allowance for doubtful accounts for a company should be a fairly consistent percentage of gross accounts receivable.
BT: Knowledge

Accepted Answer

This statement is true. The allowance for doubtful accounts is set up to account for potential bad debts, and as such should be a consistent percentage of the company's gross accounts receivable to maintain accurate financial records.

Question 7

Companies of similar size operating in the same country tend to have similar receivables turnover ratios.
BT: Comprehension

Accepted Answer

The statement is not necessarily true as companies may have different credit policies and customer bases, leading to variation in their receivables turnover ratios even if they are of a similar size and operate in the same country.

Question 8

The two methods of accounting for bad debts that are acceptable under GAAP are the allowance method and the direct write-off method.
BT: Comprehension

Accepted Answer

The answer of The two methods of accounting for bad...

Question 9

When the allowance method is used,the journal entry to write-off an uncollectible account does not change the amount reported as net accounts receivable on the balance sheet.
BT: Comprehension

Accepted Answer

This statement is true. The allowance method involves creating an allowance for doubtful accounts to anticipate uncollectible accounts, and the write-off of an uncollectible account reduces the allowance, not the net accounts receivable reported on the balance sheet.

Question 10

The amount of the principal of a notes receivable depends on the maturity date.
BT: Comprehension

Accepted Answer

The amount of the principal of a notes receivable is determined at the time the note is created, not based on the maturity date. The maturity date determines when the principal and any interest accrued will be due and payable.

Question 11

Analysts often interpret a sudden decline in the receivables turnover ratio as a signal of a developing problem.
BT: Comprehension

Accepted Answer

A sudden decline in the receivables turnover ratio means that the company is taking more time to collect its receivables, which could indicate potential issues such as customers defaulting on payments or poor credit policies. Therefore, analysts often view this decline as a sign of a developing problem.

Question 12

Companies do not need to explain to financial statement users how uncollectable receivables are accounted for because they do not need this information.
BT: Knowledge

Accepted Answer

Companies should disclose their accounting policies for uncollectable receivables in their financial statements to help users understand how the company estimates and records bad debts. This information is important for assessing the company's credit risk and financial health.

Question 13

Under the aging of accounts receivable method,bad debt expense is calculated and then added to the beginning balance in the allowance for doubtful accounts.
BT: Comprehension

Accepted Answer

The answer of Under the aging of accounts receivable method,bad...

Question 14

The receivables turnover ratio is calculated using the average net accounts receivable.
BT: Knowledge

Accepted Answer

The receivables turnover ratio is calculated by dividing net credit sales by the average net accounts receivable.

Question 15

A higher receivables turnover ratio is a warning sign indicating that the company is allowing a longer time period for customers to pay.
BT: Comprehension

Accepted Answer

A higher receivables turnover ratio actually indicates that the company is collecting its accounts receivables more quickly, which is generally a positive sign. A lower receivables turnover ratio could indicate that the company is allowing customers a longer time period to pay, which could be a warning sign.

Question 16

The receivables turnover ratio indicates how many times,on average,the process of selling to and collecting the sales proceeds from customers occurs during the accounting period.
BT: Comprehension

Accepted Answer

The statement accurately describes the receivables turnover ratio.

Question 17

Interest on notes receivable is recorded as revenue when the cash is received.
BT: Comprehension

Accepted Answer

Interest on notes receivable is typically recorded as revenue when it is earned, regardless of when the cash is received, following the accrual basis of accounting.

Question 18

more than 90 days old,$4,000.Calculate the balance that should be reported in the Allowance for Doubtful Accounts at December 31,2005,and prepare the appropriate bad debt expense adjusting entry at December 31,2005.

Accepted Answer

The answer of more than 90 days old,$4,000.Calculate the balance...

Question 19

The aging of accounts receivable method is based upon the principle that the longer an account is overdue,the higher the risk of non-payment.
BT: Knowledge

Accepted Answer

The statement is correct and reflects the correct principle of the aging of accounts receivable method. As the account gets older, the likelihood of non-payment increases, resulting in a higher risk factor. Therefore, B is an incorrect statement.

Question 20

When a company receives an interest payment on a note,the entire payment must then be recorded as revenue.
BT: Comprehension

Accepted Answer

Just because a company receives an interest payment on a note, it doesn't mean the entire payment must be recorded as revenue. Some portion of the payment may be allocated to interest expense or principal repayment, depending on the accounting method used by the company.

Quiz 8: Receivables, bad Debt Expense, and Interest Revenue

The allowance for doubtful accounts is a contra-asset account. BT: Knowledge

If the receivables turnover ratio rises significantly,the increase may be a signal that the company is extending credit to high-risk borrowers or allowing an overly generous repayment schedule. BT: Comprehension

Direct write-off method violates the matching principle. BT: Knowledge

The smaller the receivables turnover ratio the larger the days to collect measure will be. BT: Comprehension

The allowance for doubtful accounts is not used in the direct write off method. BT: Knowledge

In normal circumstances,the allowance for doubtful accounts for a company should be a fairly consistent percentage of gross accounts receivable. BT: Knowledge

Companies of similar size operating in the same country tend to have similar receivables turnover ratios. BT: Comprehension

The two methods of accounting for bad debts that are acceptable under GAAP are the allowance method and the direct write-off method. BT: Comprehension

When the allowance method is used,the journal entry to write-off an uncollectible account does not change the amount reported as net accounts receivable on the balance sheet. BT: Comprehension

The amount of the principal of a notes receivable depends on the maturity date. BT: Comprehension

Analysts often interpret a sudden decline in the receivables turnover ratio as a signal of a developing problem. BT: Comprehension

Companies do not need to explain to financial statement users how uncollectable receivables are accounted for because they do not need this information. BT: Knowledge

Under the aging of accounts receivable method,bad debt expense is calculated and then added to the beginning balance in the allowance for doubtful accounts. BT: Comprehension

The receivables turnover ratio is calculated using the average net accounts receivable. BT: Knowledge

A higher receivables turnover ratio is a warning sign indicating that the company is allowing a longer time period for customers to pay. BT: Comprehension

The receivables turnover ratio indicates how many times,on average,the process of selling to and collecting the sales proceeds from customers occurs during the accounting period. BT: Comprehension

Interest on notes receivable is recorded as revenue when the cash is received. BT: Comprehension

more than 90 days old,$4,000.Calculate the balance that should be reported in the Allowance for Doubtful Accounts at December 31,2005,and prepare the appropriate bad debt expense adjusting entry at December 31,2005.

The aging of accounts receivable method is based upon the principle that the longer an account is overdue,the higher the risk of non-payment. BT: Knowledge

When a company receives an interest payment on a note,the entire payment must then be recorded as revenue. BT: Comprehension