finance chapter 5 learn smart
Compared to other methods of estimating uncollectible accounts, the aging of accounts receivables method tends to
be more accurate.
A trade discount is recognized
by reducing the revenue amount recorded.
The Accounts Receivable account is reduced when the seller:
determines that a specific customer account will not be collectible
The allowance for uncollectible accounts is a contra account to
accounts receivable
Accounts receivable are typically classified as current assets because
they will be converted to cash within 1 year.
(Face value x annual interest rate x fraction of the annual period) is the formula for
interest on a note.
A formal credit arrangement between a creditor and debtor is called a(n)
note receivable.
For accounts receivable, the longer an account is outstanding,
the more likely it will prove uncollectible.
When an account previously written off is collected in full, which is required to ensure the accounting for the complete payment history of the customer?
An entry to reinstate the account receivable and an entry to record payment.
The allowance method is required by
GAAP
When a company has earned interest in the current period but has not yet recorded the interest, what type of adjustment is the company required to make?
Make an adjusting entry at the end of the current period to accrue the interest earned.
The ratio that shows the approximate number of days the average accounts receivable balance is outstanding is referred to as the average
collection period
Sales Returns and Sales Allowances are _____ _____ revenue accounts and require a debit entry to increase the account.
contra-revenue
The journal entry to record bad debt expense includes:
credit to allowance for uncollectible accounts debit to bad debt expense
Gwendolyn uses the allowance method to account for uncollectible receivables. Gwendolyn should record _____ bad debt expense ______.
estimated; at the end of the year
Bad debt expense is reported on the:
income statement
The amount of net credit sales is reported on the
income statement
An aging schedule classifies accounts receivable based on
length of time outstanding.
Total revenues less discounts, returns, and allowances are referred to as
net revenues
Two important ratios that help in understanding a company's effectiveness in managing receivables are the:
receivable turnover ratio average collection period
"Net credit sales" refers to credit sales net of:
returns, discounts, allowances
The direct write-off method is used when
uncollectible accounts are not anticipated or are immaterial.
Where is a note receivable reported in the balance sheet?
In either current or noncurrent assets, as appropriate.
What is the formula for the receivables turnover ratio?
Net credit sales divided by average accounts receivable (net).
Net revenues is calculated as total revenues minus which of the following items?
Sales discounts Sales allowances Sales returns
Which of the following items are classified as receivables?
Tax refund claims Amounts owed by customers Amounts loaned and expected to be repaid
A company makes a sale on terms 2/10, n/30. What does this mean?
The customer may take a 2% discount off the price if paid within 10 days. If payment is not made in 10 days, the net amount is due in 30 days.
The receivables turnover ratio indicates
The number of times during a year that the average accounts receivables were collected.
The account "Allowance for Uncollectible Accounts" is classified as
a contra asset to accounts receivable.
The normal balance of notes receivable is:
a debit
a trade discount is
a percentage reduction from list price.
The percentage-of-receivables method of estimating bad debt applies ____ to _____.
a single percentage; accounts receivable
An informal credit arrangement with a customer for payment to be received after the sale is classified as a(n)
accounts receivable
To record an estimate for future bad debts at the end of the period, an adjustment would be made with a credit to
allowance for uncollectible accounts.
The estimated expense for accounts that may not be collected is referred to as
bad debt expense.
The percentage-of-receivables approach to measuring bad debt expense is referred to as _____ method.
balance sheet
Under the allowance method, companies estimate _____ uncollectible amounts and report those estimates in the _____ year.
future, current
A trade discount is a reduction from the list price, which is used to:
give quantity discounts to customers change prices without publishing a new catalog disguise real prices from competitors
What comparative advantages do notes receivables possess compared to other receivables?
higher likelihood of collectibility interest-bearing
Accounts receivable are normally classified
in the balance sheet as assets
An _____ receivable typically yields interest revenue and possesses a fairly high probability of collectibility.
note
A customer receives a partial refund of the sales price after the customer discovers a flaw in the merchandise. The customer keeps the merchandise.
sales allowence
A cash discount representing a reduction in the amount to be paid by a credit customer if the customer pays within a specified period of time is also referred to as a(n) _____ _____
sales discount
A customer returns merchandise purchased during the month and receives a refund of the full sales price.
sales return
When a customer returns a product for a refund, in which account is the entry recorded?
sales return
The average collection period is an estimate of
the number of days the average account receivable balance is outstanding
When the direct write-off method is used, an entry for bad debt expense is required
when the account receivable is determined to be uncollectible.
The formula for average collection period is
365 divided by the receivable turnover ratio
Raven receives a 3-year note receivable from a customer for goods sold. How should Raven report this note receivable in its financial statements?
as a concurrent asset
The receivables turnover ratio and the average collection period provide information about a company's
effectiveness in managing receivables
At the beginning of the year, Gerta Company's allowance account has a credit balance of $10,000. This may indicate that the
estimate of uncollectible accounts was too high.
Receivables not expected to be collected should
not be counted in assets of the company.
A formal, signed credit agreement between a lender and a borrower is called a(n) _____ by the lender
note receivable.
The allowance method estimates
uncollectible accounts.
A company that expects that some of its customers will not pay the agreed upon sales price must utilize the
allowance method
Sales to customers in which the customers pay within 30 to 60 days are referred to as
credit sales. sales on account.
At the beginning of the year, Blocker Company's allowance account has a debit balance of $10,000. This may indicate that the
estimate of uncollectible accounts was too low.
When an account previously written off is collected in full, the entry to reverse the previous write-off would require which of the following?
Credit Allowance for Uncollectible Accounts. Debit Accounts Receivable.
Joyce Corp. uses the percentage-of-receivables method to account for bad debt expense. Joyce determines that a customer account of $20,000 should be written off as uncollectible. The write off of the account will include which of the following entries?
Credit to Accounts Receivable Debit to Allowance for Uncollectible Accounts
What are the financial statement effects of recording bad debt expense using the allowance method?
Increase expenses Decrease assets
Which of the following are classified as receivables?
Interest due from loans to customers Loans by a company to other entities
The approach that considers the age of various accounts receivables to estimate uncollectible accounts is referred to as the ________ method of accounts receivable
aging
A sales return occurs when a customer returns a product for a full refund, whereas a sales _______ is when the customer keeps the product and obtains a partial refund.
allowance
With the allowance method, bad debt expense is recorded
at the end of the period when bad debts are estimated.
The formula to compute the receivables turnover ratio is net credit sales divided by
average accounts receivable.
The cost of estimated accounts receivable that will not be collected is referred to as
bad debit expense
An ______ balance before adjustment indicates that the estimate of uncollectible accounts at the beginning of the year may have been too high
credit
When a business provides services to a customer, and the customer promises to pay later, this is referred to as
credit sales.
Notes receivable normally has a ______ balance because it is classified as an _______
debit, asset
Adrian Corp. sells goods on account for $100,000 on May 1. The customer paid for the goods on May 10. On May 15, the customer returns $40,000 of the merchandise. The entry Adrian makes on May 15 will include the
credit to Cash debit to Sales Returns
________ balance before adjustment indicates that the estimate of uncollectible accounts at the beginning of the year may have been too low.
debit
Ophelia Inc. just learned that Patton Inc., one of its customers with an outstanding accounts receivable balance, filed for bankruptcy. Assuming that the company utilizes the allowance method, Ophelia should record a
decrease in Accounts Receivable
A sales allowance ____ the amount owed by the customer for merchandise that is _____ by the customer.
decreases , retained
Recording bad debt expense:
increases expenses decreases assets decreases net income
A calendar-year-end company that accepts a 3-month interest-bearing note on December 1 must accrue _______ revenue on Dec. 31st
interest
Pixie Inc. writes off a specific accounts receivable. If Pixie is using the allowance method, the write off will _____ net income.
not effect
_________receivable typically yields interest revenue and possesses a fairly high probability of collectibility.
note
The _____ ratio shows the number of times during a year that the average receivable balance is collected.
receivables turnover
Two entries are required when a previously written off account is collected. These two entries include:
reinstate the account receivable record the collection on the account receivable