Accounting 1 - Chapter 5 Terms

When a business provides services to a customer, and the customer promises to pay later, this is referred to as

credit sales

Sales to customers in which the customers pay within 30 to 60 days are referred to as:

credit sales, sales on account

Pixie Inc. writes off a specific accounts receivable. If Pixie is using the allowance method, the write off will ______ net income.

not affect

Receivables not expected to be collected should:

not be counted in assets of the company.

Sales Allowance

the customer does not return the product or service, but the seller reduces the customer's balance owed to provide at least a partial adjustment of the amount the customer owes

Accounts receivable should be classified as a(n):

asset

Tudor Corp. has an ending balance in the accounts receivable account of $20,000. Tudor recorded bad debt expense of $1,000. Tudor has an ending balance in the allowance for uncollectible accounts of $2,000. What is the net accounts receivable balance?

$18,000 Reason: $20,000 - $2,000

Prime Corp. has an ending balance in the accounts receivable account of $100,000. Prime recorded bad debt expense of $3,000. Prime has an ending balance in the allowance for uncollectible accounts of $7,000. What is the net accounts receivable balance?

$93,000 Reason: $100,000 - $7,000

The effect of a sales allowance will result in which of the following:

A decrease to net income

A(n) ____ receivable is an informal credit arrangement with trade customers, whereas a(n) ____receivable is a formal signed credit arrangement between a creditor and a debtor.

Account, note

What is generally recorded at the time a company provides services to customers on account?

Accounts receivable

On October 1, Light Corp. provided services on account to Dark Corp. Light agreed to accept a $100,000, 8%, 6-month interest-bearing note from Dark in payment for the goods. The entry required on Light's books on December 31, would require which of the following entries?

Debit Interest Receivable $2,000; credit Interest Income $2,000.

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?

Debit to Allowance for Uncollectible Accounts Credit to Accounts Receivable

Note receivable

Formal credit arrangement between borrower and lender

The account "Allowance for Uncollectible Accounts" is classified as:

a contra asset to accounts receivable.

With the allowance method, bad debt expense is recorded:

at the end of the period when bad debts are estimated. Reason: The direct write off method records a bad debt when the debt becomes bad.

The estimated expense for accounts that may not be collected is referred to as:

bad debt expense

Compared to other methods of estimating uncollectible accounts, the aging of accounts receivables method tends to:

be more accurate

A trade discount is a reduction from the list price, which is used to:

change prices without publishing a new catalog, give quantity discounts to customers, disguise real prices from competitors

The receivables turnover ratio offers an indication of how quickly a company is able to:

collect its accounts receivable

Allowance Method (GAAP)

companies are required to estimate future uncollectible accounts and report those estimates in the current year. Under the allowance method, companies are required to estimate future uncollectible accounts and report those estimates in the current year.

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(n):

decrease in Accounts Receivable

The term net accounts receivable refers to:

accounts receivable less the allowance for uncollectible accounts.

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 partial adjustment to the amount owed by the customer for goods that were not returned, but did not fully meet the customer's expectations is referred to as a sales

allowance

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 noncurrent asset

A partial adjustment to the amount owed by the customer for goods that were not returned, but did not fully meet the customer's expectations is referred to as a sales:

allowance

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.

A company that expects that some of its customers will not pay the agreed upon sales price must utilize the:

allowance method

The receivables turnover ratio indicates:

the number of times during a year that the average accounts receivables were collected.

Accounts receivable

Accounts receivable represent amounts owed to a company by its customers from the sale of goods or services on account.

Revenue

Even though no cash is received at the time of the credit sale, the seller records revenue immediately once goods or services are provided to the customer, and future collection from the customer is probable.

True or false: Accounts receivable not expected to be collected should be counted in the assets of the company until they are later written off.

False Reason: Receivables not expected to be collected are not included in assets

The allowance method is required by _________

GAAP (Generally Accepted Accounting Principles)

Where is a note receivable reported in the balance sheet?

In either current or noncurrent assets, as appropriate.

Account receivable

Informal credit agreement with trade customers

Which information regarding the receivables turnover ratio is true?

It shows the number of times during a period that the average accounts receivable balance is collected. It provides an indication of a company's efficiency in collecting receivables.

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.

Which of the following computations would be used to compute Net Revenues?

Net Revenue - Sales Returns - Sales Allowances - Sales Discounts

Net Revenues

Net revenues equals total revenues less any amounts for returns, allowances, and discounts. Companies often offer discounts and guarantees that can reduce the amount of cash the company is entitled to receive from those customers: 1.Trade discounts 2.Sales returns 3.Sales allowances 4.Sales discounts

Recording a Credit Sale

On March 1, a company provides services to a customer for $500. The customer doesn't pay cash at the time of service, but instead promises to pay the $500 by March 31. The company records the following at the time of the service:

Nontrade receivables

Receivables that originate from sources other than customers Examples: Tax refund claims, interest receivable, and loans by the company to other entities, including stockholders and employees

Trade Discounts

Reduction in list price of a product or service Used to provide incentives to larger customers or consumer groups to purchase from the company Because sellers are entitled to receive only the discounted amount, sale is recorded at this lower amount.

Sales Return

a customer returns a product

A trade discount is:

a reduction from list price

Sales discount

a reduction, not in the selling price of a good or service, but in the amount to be received from a credit customer if collection occurs within a specified period of time.

A(n) _____ is the legal right to receive cash from a credit sale and represents an asset of the company.

account receivable

The allowance for uncollectible accounts/allowance for doubtful accounts is a contra account to:

accounts receivable

A(n) _____ balance before adjustment indicates that the estimate of uncollectible accounts at the beginning of the year may have been too high.

credit

If the allowance for uncollectible accounts is 25% of year-end accounts receivable, this might indicate:

credit policies are too lenient.

ABC Corp. received a 3-month, 8%, $1,500 note receivable on November 1. The adjustment for interest earned by December 31 will include a:

credit to Interest Revenue of $20 Reason: $1,500 x 0.08 x (2/12) = $20; the time is 2/12 of the annual rate of 8%, not 2/3 of the 8% (12-month rate).

a _____ balance before adjustment indicates that the estimate of uncollectible accounts at the beginning of the year may have been too low

debit

Shannon determines that a customer account of $10,000 should be written off as uncollectible. The write off of the account will include:

debit Allowance for Uncollectible Accounts.

The journal entry to record bad debt expense includes:

debit to bad debt expense credit to allowance for uncollectible accounts

A sales allowance ______ the amount owed by the customer for merchandise that is ______ by the customer.

decreases; retained

The Accounts Receivable account is reduced when the seller:

determines that a specific customer account will not be collectible

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.

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.

Because some of the amounts reported in financial statements are based on ______ , some of the information may be inaccurate.

estimates

Notes receivable

formal credit arrangements evidenced by written debt instruments (or "notes")

Under the allowance method, companies estimate ______ uncollectible amounts and report those estimates in the ______ year.

future; current

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:

record the collection on the account receivable reinstate the account receivable

When a customer returns a product for a refund, in which account is the entry recorded?

sales return

When merchandise is returned for a refund or for credit to be applied to other purchases, the situation is called a(n):

sales return

Since accounting numbers, such as the Allowance for Uncollectible Accounts balance, are based on estimates, financial statements are:

subject to inaccuracy

Discount terms

such as 2/10, n/30, are a shorthand way to communicate the amount of the discount and the time period within which it's available. The term "2/10," pronounced "two ten," for example, indicates the customer will receive a 2% discount if the amount owed is paid within 10 days. The term "n/30," pronounced "net thirty," means that if the customer does not take the discount, full payment net of any returns or allowances is due within 30 days.

The amount of cash owed to a company by its customers from the sale of goods or services is referred to as:

accounts receivable

The term net accounts receivable refers to:

accounts receivable less the allowance for uncollectible accounts

Accounts receivable are typically classified as current assets because:

they will be converted to cash within 1 year.

Credit sales

transfer goods or services to a customer today while bearing the risk of collecting payment from that customer in the future.

The allowance method estimates:

uncollectible accounts

A customer account that is not expected to be collected is referred to as a(n) _____ debt

uncollectible/bad/non-collectible