Financial Accounting Chapter 7

Bad Debts Expense is a contra account that is used to reduce accounts receivable to its net realizable value.

False

Accounts receivable are shown on the balance sheet at their net realizable value.

True

Bad Debts Expense is increased and Accounts Receivable is decreased at the end of the period to recognize bad debts under the allowance method.

False

The percentage of net credit sales approach for recognizing bad debts considers any existing balance in Allowance for Doubtful Accounts.

False

The reason the allowance method of recognizing bad debts is used is primarily because it recognizes the maximum amount of write-off in each period.

False

What are the effects on the accounting equation when a company makes the adjustment to record bad debts expense using the allowance method? a. Assets and stockholders' equity decrease. b. Assets increase and stockholders' equity decreases. c. Assets and stockholders' equity increase. d. Assets decrease and stockholders' equity increases.

a. Assets and stockholders' equity decrease.

If a company uses the allowance method to account for bad debts, when will the company's owners' equity decrease? a. At the end of the accounting period when an adjustment for bad debts is recorded b. At the date a customer's account is written off c. At the date a customer's account is determined to be uncollectible d. When the accounts receivable amount becomes past due

a. At the end of the accounting period when an adjustment for bad debts is recorded

Which one of the following is an accurate description of Allowance for Doubtful Accounts? a. Contra account b. Liability account c. Revenue account d. Expense account

a. Contra account

The accounts receivable turnover ratio is a measure of how well a company manages its receivables.

True

The use of the allowance method is an attempt by accountants to match bad debts as an expense with the revenue of the period in which a sale on credit takes place.

True

Under the allowance method of accounting for bad debts, the company estimates the amount of bad debts before those debts actually occur.

True

When a note is discounted at a bank, it is normally done with recourse.

True

Which of the following statements is true regarding the two allowance methods used to account for bad debts? a. The direct write-off method takes into account the existing balance in the Allowance for Doubtful Accounts account. b. The percentage of accounts receivable approach takes into account the existing balance in the Allowance for Doubtful Accounts account. c. The percentage of net credit sales approach takes into account the existing balance in the Allowance for Doubtful Accounts account. d. The direct write-off method does a better job of matching revenues and expenses.

b. The percentage of accounts receivable approach takes into account the existing balance in the Allowance for Doubtful Accounts account.

What is the distinguishing characteristic between accounts receivable and notes receivable? a. Accounts receivable require payment of interest if not paid within the usual credit terms. b. Accounts receivable are usually current assets, while notes receivable are usually long-term assets. c. Notes receivable result from a written promise to pay within a specified amount of time. d. Notes receivable result from credit sale transactions for merchandising companies, while accounts receivable result from credit sale transactions for service companies.

c. Notes receivable result from a written promise to pay within a specified amount of time.

When using the allowance method, what are the effects on the accounting equation when a company writes off a bad debt? a. Assets and stockholders' equity increase. b. Assets increase and stockholders' equity decreases. c. Assets and stockholders' equity decrease. d. There is no effect on overall assets or equity.

d. There is no effect on overall assets or equity.