Accounting Chapter 6

Company sold 100 cells at 100 each (sold 1000) Each cell was sold at 1% sales discount (total discount of 100) had returns of 198 Incurred service charges of 20 Net sales is:

(100 x $100) - (10,000 x .01) - 198 = 9702 Expense is not netted against sales

The average collection period is computed as

365 divided by receivables turnover ratio

Company sold 100 cells at 100 each. Each cell was sold at a 1% discount. Company had returns of $198 and incurred bank service charges of 20. Net sales for the month ended equals:

9,702 (100 x 100) - (10,000 x .01) - 198 The 20 is an expense, not a contra revenue account

Company shows ending cash balance of 10,000 before preparing the bank reconcilliation. Give the bank reconciliation shows outstanding checks of 3,000; deposits in transit of 2,000; NSF cgeck of 100; and interest earned on the bank account of 10, the company's up to date ending cash balance equals -

9,910 10,000 - 100 divided by 10. The NSF check decreases the company's cash balance now because it was previously recorded as an increase.

Which method for allowing for doubtful accounts is most accurate

Aging of accounts receivable

Contra asset accounts

Allowance for doubtful accounts Accumulated depreciation

Company wants to avoid length cash collection periods and allow customers to pay with a national credit card, rather than extend credit to customers directly. What is the downside?

Credit card companies charge fees that reduce profits

When a business sells good to a customer , and the customer promises to pay later, this is referred to as --- sales

Credit sales

Using the aging approach, management estimated that 10% of 10,000 of accounts receivable will be uncollectible. The allowance for doubful accounts has a 100 unadjusted credit balance. The adjusting entry to record estimated bad debits includes a

Credit to allowance for doubtful accounts of 900 debit to bad debt expense of 900

Under the allowance method, what is the correct adjusting journal entry to record bad debt expense

Debit bad debt expense Credit allowance for doubtful accounts

What are the financial statement effects of recording bad debt expense using the allowance method?

Decrease assets Increase expenses

Percentage of credit sales method

Estimates bad debt expense based on the historical percentage of sales that lead to bad debt losses

Aging of receivables method

Estimates the allowance for doubtful accounts based on the age of each receivable

A 250 bank deposit made on the last day of the month did not appear on this month's bank statement. How would this item be treated on the bank reconciliation

It would be added to the bank balance

If bank statement showed interest earned of 45, how would this item be treated on the bank reconciliation?

It would be added to the book balance Book balance must be increased by the amount of interest earned as reported on the bank statement. The bank balance already includes the interest

The objectives when accounting for accounts receivable and bad debts are to...

Match the cost of bad debts to the accounting period in which the related credit sales are made Report accounts receivable at the amount the company expects to collect (net realizable value)

Cash equivalents

Money market funds investments within 3 months to maturity Cash equivalents are short term, highly liquid investments purchased within 3 months of maturity

Prescribed internal controls surrounding cash

Monthly bank reconciliations should be prepared Separate approval of purchases and the actual cash payments Checks should be renumbered

What would cause timing differences between the bank statement and what is recorded in a company's cash account?

NSF checks Deposits in transit Bank service charges Outstanding checks

What accounts cause timing differences between bank statement and what is recorded in a companys cash account?

NSF checks Outstanding checks Bank service charges Deposit in transit

The receivables turnover ratio is computed as

Net sales divided by average ney trade accounts receivable

For internal control purposes, what responsibilities should be separated for cash disbursements?

Payment approval and electronic fund transfer transmittals Payment approval and check writing

Accounting for bad debts using the allowance method requires which 2 steps

Recording an adjusting entry for the estimated bad debts Writing off the actual bad debts

When a customer returns product for refund

Sales returns and allowances

When does a company issue a nontrade receivable?

The company converts an existing trade receivable from a customer into a nontrade receivable by converting the trade receivable into a loan The company lends money to employees or businesses

Bad Debt Expense Accounts

Uncollectible Accounts Expense Provision for Uncollectible Accounts Doubtful Accounts Expense

What does the sales discount 2/10, n/30 mean?

You can take a 2% discount if you pay within 10 years, or the full amount due in 30 days

Deposits in transit are......

added to the bank balance deposit was added to the books when the deposit was made, the bank has yet to record the deposit

In bank reconciliation, interest revenue earned on the bank account balance is

added to the book balance

Allowance for doubtful accounts

amount of receivables estimated to be uncollectible

Bad debt expense is...

an estimate the cost of extending credit to customers on credit

ABC's unadjusted trial balance included Accounts receivable of 80,000; allowance for doubtful accounts as a 750 credit balance; and credit sales of 400,000; ABC uses the aging of receivables method and estimates that 8000 of its receivables will be uncollectible ; after adjusting entry is made, abc will report

bad debt expense of 7250 on income statement allowance for doubtful accounts of 8000 on balance sheet

If the balance in allowance for doubtful accounts hasa credit balance on the unadjusted trial balance, then

bad debt expense will be less on the income statement than the allowance for doubtful accounts on the balance sheet

the line item trade accounts receivable, net of allowances will be found on the...

balance sheet

accounts receivable (gross)

both collectible and uncollectible accounts receivable

Credit card companies earn revenues from...

charging the credit card holder interest charging the retailer a fee for each credit card sale

A bank reconciliation is needed in order to determine the

correct cash balance

Sales in which the customers pay within 30 days are

credit sales sales on account

The bank will show interest earned on customer's bank statements as

credit, because a deposit is a liability from the banks point of view

Company accepts major credit cards - credit card companies charges 2% . The entry to record the collection of 1000 in credit card sales includes as

debit cash 980 debit cc discount 20 credit sales 1000

Check in payment of an account payable was entered incorrectly in the journal for a lesser amount

debit difference to accounts payable , credit cash

From the banks perspective, the bank will show a bank service charge as a

debit, because a withdrawal decrease its liability from the bank;s point of view

If direction of accounts receivable is a -- from prior period, the amount of that change is added to net income in the operating activities section of the statement of cash flows

decrease

The allowance method is a method of accounting that ---- net accounts receivable (as well as net income) for estimated bad debts.

decreases

In bank reconciliation, an outstanding check is...

deducted from the bank balance

Deposits in transit are

deposits sent to the bank and recorded by the company but have not yet been recorded by the bank

EFT is

electronic funds transfer

Bad debt expense reports the

estimated amount of this period's credit sales that customers fail to pay

when the allowance method is used, the write off of an uncollectible account

has no effect on net income

The benefits of internal control procedures are that they:

improve the efficiency and effectiveness of operations Protect against theft of assets Enhance the reliability of accounting information

Noncurrent assets are assets that...

last over 1 year

accounts receivable (net)

net realizable value

If a bank reconciliation included a deposit in transit of 670, the company's journal entry for this reconciling item would include

nothing because the deposit has already been recorded

Timing difference in cash

occurs when a company records a transaction either before or after the bank records the same transaction

2 benefits to the seller of offering sales discounts to customers

prompt receipt of cash increases likelihood the seller will receive cash before customer runs out

Preparing a bank reconciliation

provides a comparison of the bank balance and the company's cash balance helps a company to determine the correct cash balance is a sound internal control procedure

The objectives when accounting for accounts receivable and bad debts are to...

report accounts receivable at the amount the company expects to collect (net realizable value) match the cost of bad debts to the accounting period in which the related credit sales are mad

NSF checks from a customer should be --- on a bank reconciliation

subtracted from book balance

NSF checks are...

subtracted from the company's cash balance not sufficient fund checks

Since accounting numbers, such as the allowance for doubtful accounts balance, are based on estimates, financial statements are...

susceptible to management manipulation

When merchandise is returned for a refund or for credit to be applied to other purchases...

the account called sales returns and allowances is debited

Receivables turn over ratio

the lower the better

FOB destination means that goods are owned by the buyer as soon as

they arrive at the buyers place of business