Accounting Test #3
The main reason that the bank statement cash balance and the company's cash balance do not initially balance is due to timing differences.
True
The transfer to expense of the cost of intangible assets attributed to the passage of time or decline in usefulness is called amortization.
True
The two main sources of stockholders' equity are investments contributed by stockholders and net income retained in the business.
True
When a note is received from a customer on account, it is recorded by debiting Notes Receivable and crediting Accounts Receivable.
True
What is the different focuses and financial statement emphasizes that the percent of sales and analysis of receivables method ?
Under the percent of sales method, Bad Debt Expense is the focus of the estimation process and places more emphasis on matching revenues and expenses and, thus, emphasizes the income statement. Adjusting entry-amount = Bad Debt Expense for the period ---> Allowance for Doubtful Accounts is credited for this amount Under the analysis of receivables method, the Allowance for Doubtful Accounts is the focus of the estimation process. The analysis of receivables method places more emphasis on the net realizable value of the receivables and, thus, emphasizes the balance sheet. Adjusting entry-amount = balance of Allowance for Doubtful Accounts equal to that estimated by the aging schedule---> Bad Debt Expense is debited for this amount.
Under the allowance method, an adjusting entry is made for uncollectible accounts.
When an account is determined to be uncollectible, it is written off against the allowance account. The allowance account is a contra asset account that normally has a credit balance after the adjusting entry has been posted. The estimate of uncollectible may be based on a percent of sales or an analysis of receivables.
Does the percent of the allowance for doubtful accounts to total accounts receivable vary across companies and industries.
Yes
when does the efficiency in collecting accounts receivable decline
#1 the accounts receivable turnover decreases #2 the number of days' sales in receivables increases.
Primary differences in Direct write-off method and Allowance Method
#1 - How and When bad debt expense is recorded #2- Allowance account #3- Primary users
Two financial measures that are useful in evaluating efficiency in collecting receivables are the following:
#1 - accounts receivable turnover #2- number of days' sales in receivables
How "bad debt expense" is recorded for both methods
#1 Bad debt expense is recorded Direct write-off method When the specific customer accounts are determined to be uncollectible. Allowance Method Using an estimate based on: (1) a percent of sales (2) an analysis of receivables (aging)
The two methods of accounting for uncollectible receivables
#1- the direct write-off method - used by small businesses #2 - the allowance method a. Percentage of Sales b. Aging Of receivables - GAAP require large business with a lot of receivables to us this method
1. To correct Error made in recording deposit 2. To record return of an unsigned check
#1- A ( + / - ) = L + E Sales Debit Cash Credit To correct Error made in recording deposit #2- A ( + / - ) = L + E Accounts Receivables Debit Cash Credit To record the return of an unsigned check
1. To record proceeds of note collected by bank 2. To record bank service charge 3. To record return of an NSF check
#1- A ( +/ - ) = L + E Cash Debit Notes receivables Credit To record proceeds of note collected by bank #2- A ( - ) = L + E (+) Miscellaneous expense Debit Cash Credit To record bank service charge #3- A ( + / - ) = L + E Accounts receivables Debit Cash Credit To record return of an NSF check
Difference between allowance account in both methods
#2- Allowance account Direct write-off method - None Allowance Method - Uses "Allowance for Uncollectible Receivables"
difference between the primary users of both methods
#3- Primary users Direct write-off method - Small companies and companies with few receivables. Allowance Method - Large companies and those with a large number of receivables.
What is the maturity value of a 90-day, 12% note for $10,000?
$10,300
At the end of the fiscal year, before the accounts are adjusted, Accounts Receivable has a balance of $200,000 and Allowance for Doubtful Accounts has a credit balance of $2,500. If the estimate of uncollectible accounts determined by aging the receivables is $8,500, the amount of bad debt expense is:
$6,000
At the end of the fiscal year, Accounts Receivable has a balance of $100,000 and Allowance for Doubtful Accounts has a balance of $7,000. The expected net realizable value of the accounts receivable is:
$93,000
Cash Dividends Journal Entries Steps
1. Declaration Date 2. Date of Record- no entry is necessary 3. Date of Payment
Vocabulary - EC, NSF, SC, ACH, MS
1. EC: Error correction to correct bank error 2. NSF: Not sufficient funds check 3. SC: Service charge 4. ACH: Automated clearing house entry for electronic funds transfer 5. MS: Miscellaneous item such as collection of a note receivable on behalf of the company or receipt of a loan by the company from the bank
Date of Payment (Cash Dividends Journal Entries Steps)
A ( - ) = L ( - ) + E Cash Dividends Payable (Debit) Cash (Credit) Paid Cash Dividends
Declaration Date (Cash Dividends Journal Entries Steps)
A = L ( + ) + E ( - Div ) Cash Dividends (Debit) Cash Dividends Payable (Credit) Declared Cash Dividend
the allowance method (impact of write-off vs adjusting entries)
-adjusting entry increases the Allowance for Doubtful Accounts - writing off accounts decreases the Allowance for Doubtful Accounts
(write- off or allowance) 1. which has an allowance for uncollectable receivables? 2. which has no journal entry at the end? 3. Which writes off receivables at the end?
1. Allowance Method 2. Direct Write-Off Method 3. Allowance Method
Company Section of Reconciliation
1. Enter the Cash balance according to the company from the ending cash balance in the ledger. 2. Add credit memos that have not been recorded. a. Identify the bank credit memos that have not been recorded by comparing the bank statement credit memos to entries in the journal. i. Examples: A note receivable and interest that the bank has collected for the company. 3. Deduct debit memos that have not been recorded. a. Identify the bank debit memos that have not been recorded by comparing the bank statement debit memos to entries in the journal. i. Examples: Customers' not sufficient funds (NSF) checks; bank service charges. 4. Determine adjusted balance by adding Step 6 and debuting Step 7 from the ending cash balance
Bank records show
1. Servicer charges 2. Paid checks 3. Deposited checks returned 4. Debit Memos 5. Credit Memos 6. Beginning and Ending balances 7. total debit and credit balances for the entire period *** not shown on the company's records
3 reasons the Bank Statement and Company Records Are Not Equal prior to Bank Reconciliation
1. time differences 2. Omissions 3. Errors - first look in cash record, and not bank statement
Days of Cash on Hand
A calculation that measures how long a company could survive if its sources of revenue were to decline significantly. Days' Cash on Hand= (Cash and Short-term Investments)/ (Daily Cash Operations) Daily Cash Operations = (Operating Expense - Depreciation Expense ) / 365 Higher # of Days' of Cash on Hand = High Liquidity (this is viewed favorably by creditors) - 50 days is usually adequate-- too high is a bad sign
NSF check- definition and journal entry
A check that is not paid by a bank because of insufficient funds in a bank account Accounts Receivable (Debit) Cash (Credit) To record the return of an NSF check received from customer
Allowance for Doubtful Accounts
A contra asset account for accounts receivable in which is recorded the estimate for uncollectible accounts when using the allowance method.
Notes Receivables
A note received to settle an account receivable is journalized as a debit to Notes Receivable and a credit to Accounts Receivable. When a note is paid at maturity, Cash is debited, Notes Receivable is credited, and Interest Revenue is credited. If the maker of a note fails to pay, the dishonored note is journalized by debiting an account receivable for the amount due from the maker of the note.
Bank Statement
A summary of all checking account transactions mailed to the depositor or made available online by the bank each month.
electronic funds transfer (EFT)
A system in which computers rather than paper (money, checks, etc.) are used to effect cash transactions.
In a bank reconciliation, what added and subtracted to the company's balance?
Added: 1. Credit Memo 2. Notes received by the bank 3. Error in recorded check (Bank's fault) 4. Recipts Subtracted: 1. Debit memo 2. NSF check 3. Service Charge 4. Error in recording check (Company's fault) 5. Deposited Checks Returned
In a bank reconciliation, what added to the bank balance? In a bank reconciliation, what subtracted from the bank balance?
Added: 1. deposits in transit 2. Bank Error Subtracted: 1. Outstanding Checks
Allowance method - write off (when have debit or credit balance)
As a result, the total write-offs to the allowance account during the period will rarely equal the balance of the account at the beginning of the period. Before the end of the period, the Allowance Account will have... - a credit balance = write-offs < beginning balance. - a debit balance = write-offs > beginning balance. should always have credit balance at end of period
Percent of sales method (uncollectible accounts)
Bad Debt Expense = Credit Sales * Bad Debt as a Percentage of sales A ( - ) = L + E ( - Exp) Bad Debt Expense Debit Allowance For Doubtful Accounts Credit Uncollectible Accounts Estimate Adjusting Entry amount = Bad Debt Expense thus, unadjusted balance + Bad debt expense = the adjusted balance for the Allowance For Doubtful Account
Under the direct write-off method, the entry to write off an account...
Bad Debt Expense Debit Accounts Receivables Credit Neither an allowance account nor an adjusting entry is needed at the end of the period - last entry is recorded as "No Entry"
How it Appears on Bank Statment
Bank Correction of an error recording $6,200 as $2,600 - smaller than original = Credit memo (increases) EFT Payment = debit memo (Decreases) Note Collected from company = Credit memo (Increases) Service Charge = Debit memo (Decreases) This is because the Bank views the the company's checking account balance as a liability (credit), thus transactions that increase the company's account balance will be written as a credit (increase), and transactions that decrease the company's account balance will be seen as a debit, since it will decrease the bank's liability
Bank section of Reconciliation
Bank section of Reconciliation 1. Enter the "Cash Balance according to bank" from the ending cash balance according to the bank statement 2. Add deposits not recorded by the bank a. Identify deposits not recorded by the bank by comparing each deposit listed on the bank statement with the unrecorded deposits appearing in the recording of the period's reconciliation and with the current periods' deposits i. Examples: deposits in transit at the end of the period 3. Deduct outstanding checks that have not been paid by the bank a. Identify outstanding checks by comparing paid checks with outstanding checks appearing on the preceding period's reconciliation and with recorded checks. i. Examples: Outstanding checks at the end of the period. 4. Determine adjusted balance by adding Step 2 and debuting Step 3 from the ending cash balance
The amount of depreciation expense for a fixed asset costing $95,000, with an estimated residual value of $5,000 and a useful life of 5 years or 20,000 operating hours, is $21,375 by the units-of-output method during a period when the asset was used for 4,500 hours.
False
Issuing Stock Journal Entry
Cash (Debit) Preferred stock (Credit) Paid in Capital in Excess of Par - Preferred Stock (Credit) Issued $50 par preferred stock at $55
Check company issued to pay off debt was erroneously recorded as $580 instead of $58
Cash Debit Accounts Payable Credit
special-purpose funds
Cash funds used for a special business need.
how cash and cash equivalents are reported on balance sheet
Cash is listed as the first asset in the "Current assets" section of the balance sheet. Companies that have invested excess cash in highly liquid investments usually report Cash and cash equivalents on the balance sheet.
The cost of treasury stock is deducted from total paid-in capital and retained earnings in determining total stockholders' equity.
True
How "Cash Short and Over" is Recorded...
Day- Of Transaction Shortage = Debit Overage = Credit At the End of Accounting Period - Income Statement Debit = Miscellaneous Expense Credit = Other Revenue
Bank Reconciliation
Differences between the company balance and bank balance may arise because of a delay by either the company or bank in recording transactions. (due to timing issues) The analysis that details the items responsible for the difference between the cash balance reported on the bank statement and the balance of the cash account in the ledger The adjusted cash balance is determined in BR then reported on the balance sheet Usually done once every month- depending one company's size, it may do it more frequently or rarely
Petty Cash Fund- Definition / Journal Entry for replenishing fund
FUnd used to pay relatively small amounts - postage, office supplies, minor repairs Petty Cash Debit Cash Credit
After a bank reconciliation is completed, journal entries are prepared for items in the balance per company's records as well as items in the balance per bank statement.
False
All property, plant, and equipment assets are depreciated over time.
False
At the end of a period (before adjustment), Allowance for Doubtful Accounts has a debit balance of $2,000. The Accounts Receivable balance is analyzed by aging the accounts and, the amount estimated to be uncollectible is $15,000. The amount to be recorded in the adjusting entry for the bad debt expense is $15,000.
False
If 20,000 shares are authorized, 15,000 shares are issued, and 500 shares are held as treasury stock, a cash dividend of $1 per share would amount to $15,000
False
In preparing a bank reconciliation, the amount of deposits in transit is deducted from the balance per bank statement.
False
In preparing a bank reconciliation, the amount of outstanding checks is added to the balance per bank statement.
False
The amount of depreciation expense for the first full year of use of a fixed asset costing $95,000, with an estimated residual value of $5,000 and a useful life of 5 years, is $19,000 by the straight-line method.
False
The balance of Allowance for Doubtful Accounts is added to Accounts Receivable on the balance sheet.
False
The book value of a fixed asset reported on the balance sheet represents its market value on that date.
False
The cost of replacing an engine in a truck is an example of ordinary maintenance.
False
The declaration of a cash dividend decreases a corporation's stockholders' equity and decreases its assets.
False
The double-declining-balance depreciation method calculates depreciation each year by taking twice the straight-line rate times the book value of the asset at the beginning of each year.
False
The issuance of common stock affects both paid-in capital and retained earnings.
False
The maturity value of a 12%, 60-day note for $5,000 is $5,600.
False
The normal balance of the accumulated depreciation account is a debit.
False
The number of shares of outstanding stock is equal to the number of shares authorized minus the number of shares issued.
False
The par value of common stock must always be equal to its market value on the date the stock is issued.
False
When a company establishes an outstanding reputation and has a competitive advantage because of it, the company should record goodwill on its financial statements.
False
When the allowance method for accounting for uncollectible receivables is used, net income is reduced when a specific receivable is written off.
False
When using the direct write-off method of accounting for uncollectible receivables, the account Allowance for Doubtful Accounts is debited when a specific account is determined to be uncollectible.
False
Journal entries based on the bank reconciliation are required for:
For both... 1. additions to the cash balance according to the company's records. 2. deductions from the cash balance according to the company's records.
cash equivalents
Highly liquid investments that are usually reported with cash on the balance sheet.
Internal Auditor Vs External Auditor
Internal auditors are responsible for day-today monitoring of controls External auditors also evaluate and report on internal controls as an apart of their annual finial statement audit
The number of days' sales in receivables
Is an estimate of the length of time the accounts receivable have been outstanding. # of days' sales in receivables= (Average accounts receivable) / (Average Daily Sales) Average daily sales = sales / 365
received $500 from Dr. Kyle and written off the remainder owed by her (original amount 6,400). Then, Reinstated the account of Dr.Kyle that had previously been written -off on June 2 and received $5900 cash in full payment
Jan 1. Account Receivables- Dr.Kyle 6,400 (D) Sales 6,400 (C) CGS 3000(D) Inventory 3000 (C) Jan 5. Cash 500(D) Bad Debt Expense 5900(D) AR- Dr. Kyle. 6,400 (C) Jan 8. AR- Dr. Kyle 5900 (D) Bad Debt Expense 5900 (C) Cash 5900 (D) AR- Dr. Kyle. 59000 (C)
Accounts receivable turnover
Measures how frequently during the year the accounts receivable are being converted to cash. Accounts receivable turnover = (sales) / (average accounts receivable) Average accounts receivable = (beginning + ending accounts receivable balances ) / 2
Bank debit memo for service charge - company pays fee
Miscellaneous Expense Debit Cash Credit
Date of Record (Cash Dividends Journal Entries Steps)
No entry is necessary. this date determines which stockholders will receive the dividends
What is the due date of a $12,000, 90-day, 8% note receivable dated August 5?
November 3 November 3 is the due date of a $12,000, 90-day, 8% note receivable dated August 5 [26 days in August (31 days - 5 days) + 30 days in September + 31 days in October + 3 days in November].
For Company Records
Outstanding Checks = Liability (Credit) Deposits in Transit = Asset (Debit)
The Sneed Corporation issues 10,000 shares of $50 par preferred stock for cash at $75 per share. The entry to record the transaction will consist of a debit to Cash for $750,000 and a credit or credits to
Preferred Stock for $500,000 and Paid-In Capital in excess of Par-Preferred Stock for 250,000
Definition Of 1. Factoring 2. factor Benefits of factoring
Selling receivables is called factoring the receivables. The buyer of the receivables is called a factor. Advantages: #1 the company that is selling its receivables immediately receives cash for operating and other needs. *** Depending on the factoring agreement, some of the risks of uncollectible accounts is shifted to the factor.***
The difference between the balance in a fixed asset account and its related accumulated depreciation account is the asset's book value.
True
Analysis of receivables method (uncollectible accounts)
Step 1 The due date of each account receivable is determined Step 2 The number of days each account is past due is determined. This is the number of days between the due date of the account and the date of the analysis. Step 3 Each account is placed in an aged class according to its days past due. Typical aged classes include the following: 1-30 ; 31-60 ; 61-90 ; 91-180 ; 181-365 ; Over 365 Step 4 The totals for each aged class are determined. Step 5 The total for each aged class is multiplied by an estimated percentage of uncollectible accounts for that class. Step 6 The estimated total of uncollectible accounts is determined as the sum of the uncollectible accounts for each aged class. ***** total estimated uncollectible accounts for each aged class = the estimated uncollectible accounts = adjusted balance for Allowance for Doubtful Accounts.
The direct write-off method records bad debt expense when an account is determined to be uncollectible.
True
When a note receivable is dishonored, Accounts Receivable is debited for what amount?
The maturity value of the note
allowance method
The method of accounting for uncollectible receivables that recognizes an expense by estimating future uncollectible accounts at the end of the accounting period.
direct write-off method
The method of accounting for uncollectible receivables that recognizes an expense only when an account is determined to be worthless. when the account is deemed worthless the account is written off
bad debt expense
The operating expense incurred because of the failure to collect receivables. (uncollectible accounts expense, or doubtful accounts expense.)
aging the receivables
The process of analyzing the accounts receivable and classifying them according to various age groupings, with the due date being the base point for determining age.
Indicators that an account is uncollectible
The receivable is past due. The customer does not respond to the company's attempts to collect. The customer files for bankruptcy. The customer closes its business. The company cannot locate the customer.
The amount of the depreciation expense for the second full year of use of a fixed asset costing $100,000, with an estimated residual value of $5,000 and a useful life of 4 years, is $25,000 by the double-declining-balance method.
True
how to enhance internal control for bank reconciliation
To enhance internal control, the bank reconciliation should be prepared by an employee who does not take part in or record cash transactions.
(T/F) While the methods normally yield different amounts for any one period, over several periods the amounts should be similar
True
A check for $342 was erroneously charged by the bank as $432. In order for the bank reconciliation to balance, you must add $90 to the bank statement balance.
True
Although Allowance for Doubtful Accounts normally has a credit balance, it may have either a debit or a credit balance before adjusting entries are recorded at the end of the accounting period.
True
At the end of a period (before adjustment), Allowance for Doubtful Accounts has a credit balance of $5,000. The Accounts Receivable balance is analyzed by aging the accounts and the amount estimated to be uncollectible is $50,000. The amount to be recorded in the adjusting entry for the Bad Debt Expense is $45,000.
True
Capital expenditures are costs that improve a fixed asset or extend its useful life.
True
GAAP requires companies with a large amount of receivables to use the allowance method.
True
In preparing a bank reconciliation, the amount indicated by a credit memo for a note receivable collected by the bank is added to the balance per company's records.
True
Intangible assets differ from property, plant, and equipment assets in that they lack physical substance.
True
One of the prerequisites to paying a cash dividend is sufficient retained earnings.
True
Patents are exclusive rights to produce and sell goods with one or more unique features.
True
Preferred stockholders must receive their current-year dividends before the common stockholders can receive any dividends.
True
Regardless of the depreciation method, the amount that will be depreciated during the life of the asset will be the same.
True
Residual value is not incorporated in the initial calculations for double-declining-balance depreciation.
True
The bank erroneously charged Tropical Services' account for $450.50 for a check that was correctly written and recorded by Tropical Services as $540.50. To reconcile the bank account of Tropical Services at the end of the month, you would:
deduct $90 from the cash balance according to the bank statement.
In preparing a bank reconciliation, the amount of checks outstanding would be:
deducted from the cash balance according to the bank statement.
At the end of a period (before adjustment), Allowance for Doubtful Accounts has a credit balance of $250. The credit sales for the period total $500,000. If the company estimates uncollectible accounts at 1% of credit sales, the amount of bad debt expense to be recorded in an adjusting entry is $4,750.
false
Bank reconciliation- errors
if error impacts whoever created the mistake error made by bank - This bank error of $450 ($500 - $50) would be added to the bank balance in the bank section of the reconciliation. error made by company - assume that the company recorded a deposit of $1,200 as $2,100. This company error of $900 ($2,100 - $1,200) would be deducted from the cash balance in the company section of the bank reconciliation. The company would correct the error using a journal entry.
service charge recorded as
miscellaneous expense
journal entries are created for company or bank after reconciliation
only company as the bank's transactions will work out accordingly since it just timing issues that caused the adjusted balance
Net Realizable Value
the amount of cash the firm expects to collect
maturity value- definition and formula
the amount that is due on the maturity date of a note
can deductions and additions be combined in bank reconciliation
yes
A bank makes credit entries (issues credit memos) for the following:
· Deposits made by electronic funds transfer (EFT) · Collections of notes receivable for the company · Proceeds for a loan made to the company by the bank · Interest earned on the company's account · Correction (if any) of bank errors
A bank makes debit entries (issues debit memos) for the following:
· Payments made by electronic funds transfer (EFT) · Service charges · Customer checks returned for not sufficient funds · Correction (if any) of bank errors
