Chapter 6

Short-term highly liquid investments with a maturity of ______ months or less that can be readily converted to cash with little risk of loss are classified as cash equivalents.

3

During the month, Cellum, Inc' sold 100 cells at a price of $100 each. Each cell was sold at a 1% sales discount. Cellum had returns of $198 (net of discounts) and incurred bank service charges of $20. Net sales for the month ended equals $__________

9702

Income Statement

Amount earned during the accounting period

Balance Sheet

Amount not yet collected from customers at the end of the accounting period

True or false: Net sales is the same as net income and is reported on the income statement

False

Since accounting numbers, such as the allowance for doubtful accounts balance, are based on _________, financial statements are susceptible to management manipulation.

estimates

On the income statement, Sales revenue less Credit card discounts less Sales discounts less Sales returns and allowances equals the line item called __________ ___________

Net; Sales

A company's Bad Debt Expense reports the _______ a) estimated amount of this period's credit sales that customers will fail to pay b) increase in accounts receivable c) cost of defaulting on its notes payable d) amount owed on loans

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

If the accounts receivable balance increased then cash collected from customers was ______ the sales for the accounting period a) less than b) same as c) greater than

a) less than

When merchandise is returned for a refund or for credit to be applied to other purchases, the account called Sales _________ and ________ is debited. (Enter only one word per blank)

Returns; Allowances

An analyst sees the line item Accounts receivable, net of allowances of $2,040,000, with a balance of $19,500,000. Which of the following statements is correct? (Select all that apply) a) $19,500,000 is the expected amount to be collected from customers b) $19,500,000 is the sum of all its customers' account balances c) $2,040,000 is the amount estimated to be uncollectible d) $21,540,000 is the gross receivables

a) $19,500,000 is the expected amount to be collected from customers c) $2,040,000 is the amount estimated to be uncollectible d) $21,540,000 is the gross receivables

Select all of the following that are properly defined a) Accounts Receivable (Net) is the net realizable value b) Accounts Receivable (Gross) includes both collectible and uncollectible receivables c) Accounts Receivable (Net) reports the amount of receivables expected to be collected d) Accounts Receivable (Gross) includes only the collectible receivables e) Allowance for Doubtful Accounts is the amount of receivables estimated to be uncollectible

a) Accounts Receivable (Net) is the net realizable value b) Accounts Receivable (Gross) includes both collectible and uncollectible receivables c) Accounts Receivable (Net) reports the amount of receivables expected to be collected e) Allowance for Doubtful Accounts is the amount of receivables estimated to be uncollectible

Which of the following are contra-asset accounts? (Check all that apply) a) Allowance for doubtful accounts b) Unearned revenue c) Accumulated depreciation d) Capital stock

a) Allowance for doubtful accounts c) Accumulated depreciation

ABC, Inc.'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 $8,000 of its receivables will be uncollectible. After the adjusting entry is made, ABC's financial statements will report: (Check all that apply) a) Allowance for doubtful accounts of $8,000 on the balance sheet b) Bad debt expense of $7,250 on the balance sheet c) Bad debt expense of $8,000 on the income statement d) Allowance for doubtful accounts of $7,250 on the balance sheet e) Bad debt expense of $7,250 on the income statement f) Allowance for doubtful accounts of $8,000 on the income statement

a) Allowance for doubtful accounts of $8,000 on the balance sheet e) Bad debt expense of $7,250 on the income statement

Which of the following are typically netted against sales to arrive at net sales? (Check all that apply) a) Sales returns and allowances b) Bank service charges c) Credit card discounts d) Cost of goods sold e) Sales discounts

a) Sales returns and allowances c) Credit card discounts e) Sales discounts

Removing an uncollectible account and its corresponding allowance from the accounting records is called ______ a) a write-off b) a write-up c) subsidiary accounting d) double entry accounting

a) a write-off

The Allowance for Doubtful Accounts is a contra-asset account. Increases to the account (to record the period's estimated bad debt expense) are recorded with _______ a) credits b) debits

a) credits

Accepting only cash and canceling a credit card program that previously allowed customers to purchase merchandise on credit may cause ______ (Check all that apply) a) sales to increase b) a decrease in customer traffic c) sales to decrease d) wage expense to increase

b) a decrease in customer traffic c) sales to decrease

Companies may use which of the following to motivate sales and collections? a) allow customers to pay in advance b) allow customers to purchase on credit c) sell merchandise FOB shipping point d) provide discounts for early collection

b) allow customers to purchase on credit d) provide discounts for early collection

What conclusion are managers likely to draw from a constant increase to sales returns and allowances? a) the company should give fewer cash discounts to customers b) customers are unhappy with the quality of the merchandise c) the company should increase its inventory purchases

b) customers are unhappy with the quality of the merchandise

A company's Bad Debt Expense reports the ________ a) cost of defaulting on its notes payable b) estimated amount of this period's credit sales that customers will fail to pay c) increase in accounts receivable d) amount owed on loans

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

Net sales is reported on the ______ a) balance sheet under current assets b) first line of the income statement c) income statement and balance sheet d) income statement below cost of goods sold

b) first line of the income statement

Delectable, Inc.'s unadjusted trial balance includes Accounts receivable of $10,000; Allowance for doubtful accounts as a $50 credit balance; and Credit sales of $100,000. Based on the aging of its receivables, management estimates that $1,000 of receivables will be uncollectible. Delectable's financial statements will show _______ (Check all that apply) a) Allowance for Doubtful Accounts of $950 b) Bad Debt Expense of $1,000 c) Allowance for Doubtful Accounts of $1,000 d) Allowance for Doubtful Accounts of $1,050 e) Bad Debt Expense of $950

c) Allowance for Doubtful Accounts of $1,000 e) Bad Debt Expense of $950

Although there are some clear disadvantages associated with extending credit to customers, such as bad debt costs, most managers believe a particular advantage outweighs the costs. To which primary advantage do they refer? a) increased labor costs b) increased bad debt expense c) additional sales revenue

c) additional sales revenue

The line item Accounts Receivable, net of allowances will be found on the _______ a) income statement b) both the balance sheet and income statement c) balance sheet

c) balance sheet

When a business sells goods to a customer, and the customer promises to pay later, this is referred to as _______ sales. a) current b) cash c) credit d) operating

c) credit

Using the aging approach, management estimates that $1,000 of Accounts Receivable will be uncollectible. The Allowance for Doubtful Accounts has a $100 unadjusted credit balance. The adjusting entry to record estimated bad debts includes a _______ (Check all that apply) a) credit to Allowance for Doubtful Accounts of $1,100 b) debit to Bad Debt Expense of $1,000 c) credit to Allowance for Doubtful Accounts of $900 d) debit to Bad Debt Expense of $1,100 e) debit to Bad Debt Expense of $900 f) credit to Allowance for Doubtful Accounts of $1,000

c) credit to Allowance for Doubtful Accounts of $900 e) debit to Bad Debt Expense of $900

A contra-asset account, such as Allowance for Doubtful Accounts or Accumulated Depreciation, has a normal balance of a _______ and causes total assets to ______ a) debit; increase b) debit; decrease c) credit; decrease d) credit; increase

c) credit; decrease

When the allowance method is used, the write-off of an uncollectible account _______ a) increases net income b) decreases net income c) has no effect on net income

c) has no effect on net income

Statement of Cash Flows

Cash collected during the accounting period

The challenge businesses face when estimating the allowance for doubtful accounts is that ________ a) at the time of the sale, it is not known which particular customer will be a "bad" customer b) in bad economic times, fewer customers will have problems with their payments c) past default rates are not a good predicator of future default rates

a) at the time of the sale, it is not known which particular customer will be a "bad" customer

When a business sells goods to a customer, and the customer promises to pay later, this is referred to as ______ sales a) credit b) current c) cash d) operating

a) credit

Sales to customers in which the customers pay within 30 days are referred to as _______ (Check all that apply) a) credit sales b) nonaccrued sales c) deferred sales d) sales on account

a) credit sales d) sales on account

Using the aging approach, management estimates that $1,000 of Accounts Receivable will be uncollectible. The Allowance for Doubtful Accounts has a $100 unadjusted credit balance. The adjusting entry to record estimated bad debts includes a ___________ a) credit to Allowance for Doubtful Accounts of $900 b) debit to Bad Debt Expense of $900 c) credit to Allowance for Doubtful Accounts of $1,000 d) debut to Bad Debt Expense of $1,000 e) debit to Bad Debt Expense of $1,100 credit to Allowance for Doubtful Accounts of $1,100

a) credit to Allowance for Doubtful Accounts of $900 b) debit to Bad Debt Expense of $900

Sales discounts should appear in the financial statements as a(n) ______ a) deduction from sales b) part of current liabilities c) operating expense d) addition to inventory e) addition to sales

a) deduction from sales

Bad Debt Expense _______ (Check all that apply) a) is an estimate b) is based on actual events and does not require estimation c) should exceed the revenue generated from incurring the cost d) is a cost of extending credit to customers

a) is an estimate d) is a cost of extending credit to customers

During the year, ABC Corp. realizes that a particular customer will never pay. What action should ABC take? a) write off the uncollectible account and its corresponding allowance from the accounting records b) nothing, as Bad Debt Expense has already been recorded c) Increase Bad Debt Expense

a) write off the uncollectible account and its corresponding allowance from the accounting records

Using the aging approach, management estimates that $1,000 of accounts receivable will be uncollectible. The Allowance for Doubtful Accounts has a $100 unadjusted debit balance. The Allowance for Doubtful Accounts on the balance sheet will equal ___________ a) $900 b) $1,000 c) $1,100

b) $1,000

Cellar's Inc. sold $800,000 of merchandise with sales terms of 2/10, n/30 and the customers paid within 10 days. The net sales equals ________ a) $16,000 b) $784,000 c) $816,000 d) $800,000

b) $784,000

Accounts receivable, net on the balance sheet refers to ________ a) Sales minus Sales Discounts minus Sales Returns and Allowances b) Accounts Receivable minus the Allowance for Uncollectible Accounts c) Sales minus Accounts Receivable d) Sales minus Cost of Goods Sold

b) Accounts Receivable minus the Allowance for Uncollectible

Accounts receivable, net on the balance sheet refers to _______ a) Sales minus Cost of Goods Sold b) Accounts Receivable minus the Allowance for Uncollectible Accounts c) Sales minus Accounts Receivable d) Sales minus Sales Discounts minus Sales Returns and Allowances

b) Accounts Receivable minus the Allowance for Uncollectible Accounts

When the allowance method is used, the write-off of an uncollectible account ________ a) increases net income b) has no effect on net income c) decreases net income

b) has no effect on net income

Allowing credit cards, returns, or discounts for early payment affects the recording of _________ a) unearned revenue b) net sales revenue c) cost of goods sold d) prepaids

b) net sales revenue

Identify two benefits to the seller of offering sales discounts to its customers a) increases the seller's net sales relative to its sales b) prompt receipt of cash c) decreases the seller's cost of goods sold d) increases the likelihood the seller will receive the cash before the customer runs out of funds

b) prompt receipt of cash d) increases the likelihood the seller will receive the cash before the customer runs out of funds

Offering customers ______ increases the likelihood the seller will receive the cash before the customer runs out of funds and encourages prompt payment. a) free shipping b) sales discounts c) allowances for uncollectible accounts d) sales on credit

b) sales discounts

Which of the following are typically netted against sales to arrive at net sales? (Choose all that apply) a) cost of goods sold b) sales discounts c) bank service charges d) credit card discounts e) sales returns and allowances

b) sales discounts d) credit card discounts e) sales returns and allowances

If a company debits Allowance for doubtful accounts and credits Accounts receivable it is recording the ______ a) adjusting entry for the estimated amount of bad debts b) write off a specific uncollectible account c) allowance for discounts on sales made on account d) return of goods or services made on account

b) write off a specific uncollectible account

Accounts receivable has a $2,300 balance, and the Allowance for Doubtful Accounts has a $200 credit balance. An $80 account receivable is written off. The net book value of receivables on the balance sheet after the write-off equals ________ a) $2,180 b) $2,020 c) $2,100 d) $2,200

c) $2,100

Ace Electronics recorded a debit to Sales Returns and Allowances and a credit to Accounts Receivable, along with a debit to Inventory and a credit to Cost of Goods Sold. What business event must have taken place? a) the customer received a discount because the invoice was paid on time b) the customer sent in a partial payment and promised to pay the balance next month c) the customer received a damaged product and returned it d) the customer received a damaged product, but kept it and asked for a reduction in price

c) the customer received a damaged product and returned it

Which of these are cash equivalents? a) Notes receivable that mature in 5 months b) Highly-liquid investments with original maturities of 3 months or less c) US Treasury bonds that mature in 1 year d) Treasury bills that mature in 2 months

d) Treasury bills that mature in 2 months

What does the sales discount 1/7, n/30 mean? a) For every day the bill is overdue past 7 days, you will be charged 1% interest b) You can take a 10% discount if you pay within 23 days, or a 30% discount if you pay today c) You can take a 30% discount if you pay within 1 to 7 days d) You can take a 1% discount if you pay within 7 days, or the full amount is due within 30 days

d) You can take a 1% discount if you pay within 7 days, or the full amount is due within 30 days

What does the sales discount, 2/10, n/30 mean? a) For every day the bill is overdue past 10 days, you will be charged 2% interest b) You can take a 10% discount if you pay within 2 days, or the full amount is due within 30 days c) You can take a 10% discount if you pay within 2 days, or a 30% discount if you pay today d) You can take a 2% discount if you pay within 10 days, or the full amount is due within 30 days

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

Short-term, highly liquid investments such as money market funds or treasury bills are classified as ________ a) short-term investments b) restricted cash c) liquid securities d) cash equivalents

d) cash equivalents

When an entry is recorded with a debit to Accounts Receivable and credit to Sales Revenue, then the sale was a(n) ______ sale a) discounted b) debit c) FOB shipping point d) credit e) FOB destination

d) credit

Net sales is reported on the _______ a) balance sheet under current assets b) income statement and balance sheet c) income statement below the cost of goods sold d) first line of the income statement

d) first line of the income statement

When an entry is recorded with a debit to Accounts Receivable and credit to Sales Revenue, then the sale was a(n) _______ sale a) FOB destination b) discounted c) FOB shipping point d) debit e) credit

e) credit