Chapter 7: Accounting for Receivables

If a company has current assets of $700,000, average accounts receivable of $160,000, credit sales of $1,500,000, cost of goods sold of $900,000 and net income of $100,000, what is its accounts receivable turnover ratio?

$1,500,000 / $160,000 = 9.38

In Year 1, Simpson Company earned $10,000 of revenue on account. Cash collections of accounts receivable amounted to $8,000. The Company estimated uncollectible accounts to be 10% of revenue. Simpson wrote-off $900 of uncollectible accounts during Year 1. Assuming the company uses the allowance method to account for uncollectible accounts, the amount of net realizable value shown on the Year 1 balance sheet is

$10,000 - $8,000 - $900 = $1,100 ($10,000 x 10%) - $900 = $100 $1,100 - $100 = $1,000

Jack Company loaned $12,000 to Jill Company on September 1, Year 1 for a one year term. Interest was set at 5% per year. Assume that the company's accounting year starts on January 1 and ends on December 31. In Year 2, Jack would recognize interest revenue amounting to

$12,000 x 5% = $600 $600 / 12 = $50 $50 x 8 = $400

Ellen Company loaned $10,000 cash to Ann Company on December 1, Year 1. The loan had a one year term and a 6% annual interest rate. Based on this information alone, net income for Year 1 is _________; net income for Year 2 is _________; cash flow from operations for Year 1 is _________; and cash flow from operations for Year 2 is _________.

$50, $550, zero, $600

If a company has current assets of $400,000, ending accounts receivable of $900,000, average accounts receivable of $80,000, and credit sales of $700,000, what is its average days to collect receivables?

$700,000 / $80,000 = 8.75 365 / 8.75 = 41.7

If a company has an accounts receivable turnover ratio of 15.5, ending accounts receivable of $150,000, and average accounts receivable of $140,000, what is its average days to collect receivables?

365 / 15.5 = 23.5

What is the formula for calculating the net realizable value of receivables?

A/Pay - Allow for DA

When a company recognizes a write-off of an uncollectible account, the balance of the:

Allow for DA decreases, Accts Rec decreases

When a company reinstates an account receivable that had previously been written-off, the balance of the:

Allow for DA increases, Accts Rec increases

Companies with large amounts of uncollectible accounts normally use the direct-write off method to account for uncollectible accounts expense. T/F

F

Only banks are permitted to use the direct write-off method. T/F

F

The allowance for doubtful accounts is an exact amount. T/F

F

The direct write-off method is used to ensure the matching of expenses with revenue. T/F

F

The net realizable value of receivables is an exact amount. T/F

F

Which of the following events will not affect the amount of cash flows? Cash receipts for revenue Recognizing uncollectible accounts expense Collecting an accounts receivable

Recognizing uncollectible accounts expense

The allowance for doubtful accounts is an estimated amount. T/F

T

The net realizable value of receivables is an estimated amount. T/F

T

The primary advantage of using the direct write-off method of recognizing the uncollectible accounts expense is simplicity. T/F

T

A company experienced an accounting event that caused the net realizable value of receivables to decrease. Which of the following events could have caused these effects? The company paid off an account payable account The company recognized revenue on account The company recognized uncollectible accounts expense The company collected an account receivable

The company recognized uncollectible accounts expense The company collected an account receivable

Which of the following statements is TRUE regarding the recognition of uncollectible accounts expense under the direct write-off method? The expense recognition will cause assets (A/Rec) to decrease, thereby affecting the balance sheet. The statement of changes in stockholders' equity is not affected by the write-off of an uncollectible account under the direct write-off method. The statement of cash flows is not affected by the write-off of an uncollectible account under the direct write-off method. The expense recognition will cause the amount of expenses shown on the income statement to increase, thereby increasing the amount of net income.

The expense recognition will cause assets (A/Rec) to decrease, thereby affecting the balance sheet. The statement of cash flows is not affected by the write-off of an uncollectible account under the direct write-off method.

When uncollectible accounts expense is recognized, this event causes the balance in the

Uncollectible Accts Exp account to increase, Allow for DA account to increase

When an allowance for uncollectible accounts expense is recognized, the balance in the:

Uncollectible Accts Exp increases, Allow for DA increases

Ellen Company loaned $10,000 cash to Ann Company on August 1, Year 1. The loan had a one year term and a 6% annual interest rate. Match the amounts with Ellen Company's financial statement items. Year 1 revenue Year 1 cash flow from operations Year 2 revenue Year 2 cash flow from operations Zero $600 $350 $250

Year 1 rev - $250 Year 1 cash flow from operations - Zero Year 2 rev - $350 Year 2 cash flow from operations - $600

Which is NOT a common feature of a promissory note?

a government loan guarantee

A company experienced an event that caused total assets and net income to increase, but had no affect on cash flow. What could have caused these effects?

accepting a credit card for services provided

What are potential costs of extending credit?

additional administrative salaries, uncollectible accts exp, additional record keeping costs

Recognizing accrued interest revenue is a(n)

asset source transaction

What are disadvantages of using the direct write-off method of recognizing uncollectible accounts expense?

assets are overstated, exp are not matched with rev

The allowance for Doubtful Accounts appears on what financial statement?

balance sheet

What financial statement is affected when a company writes-off an uncollectible account receivable?

balance sheet

Which financial statement is affected when a company writes-off an uncollectible account receivable?

balance sheet

Stable Company recognized accrued interest revenue. This event would affect which of Stable Company's financial statements?

balance sheet, income statement, statement of changes in stockholders equity

When a company writes-off an uncollectible account under the allowance method, the amount of:

cash flow from operating activities is not affected, total assets is not affected

A company experienced an accounting event that caused the net realizable value of receivables to decrease. What events could have caused these effects?

company recognized uncollectible accts exp, company collected an acct rec

The journal entry to recognize accrued interest on a note receivable includes a ______ (debit/credit) to interest revenue and a ______ (debit/credit) to interest receivable.

credit, debit

Under the allowance method, the journal entry to recognize the reinstatement of an account receivable includes a ______ (debit/credit) to allowance for doubtful accounts and a ______ (debit/credit) to accounts receivable.

credit, debit

The journal entry to record an investment in a note receivable will include a

debit to note rec, credit to cash

Under the allowance method, the journal entry to recognize the write-off of an uncollectible account receivable includes a:

debit to the Allow for DA account, credit to A/Rec account

The journal entry to recognize uncollectible accounts expense under the direct write-off method requires a ______ (debit/credit) to the uncollectible accounts expense account and a ______ (debit/credit) to the accounts receivable account.

debit, credit

Under the allowance method, the journal entry to recognize uncollectible accounts expense includes a ______ (debit/credit) to uncollectible accounts expense and a ______ (debit/credit) to allowance for doubtful accounts.

debit, credit

The Uncollectible Accounts Expense account appears on what financial statements

income statement

Recognizing uncollectible accounts expense under the direct write-off method will affect which financial statements?

income statement, balance sheet, statement of changes is stockholders' equity

When a company accepts a credit card as payment for services provided, the transaction causes the balance in the Accounts Receivable account to ________ (inc/dec), the balance in the Credit Card Expense account to ________ (inc/dec) and the balance in the Service Revenue account to ________ (inc/dec).

increase, increase, increase

Lee Company loaned Grey Company money. On Lee's books, the balance in the Notes Receivable account _________ (inc/dec) and the balance in the Cash account _________ (ince/dec).

increases, decreases

The longer an account receivable remains outstanding, the ____ likely it is to be collected.

less

________ refers to how quickly assets are expected to be converted to cash during normal operations

liquidity

When a company recognizes uncollectible accounts expense, the amount of:

net income decreases, total equity decreases, total assets decrease

Fran Company recognized accrued interest revenue. How would this event affect Fran Company's financial statements?

net income increases, cash flow from operating activities is not affected

Western Company loaned Eastern Company money. How would this event affect Western Company's financial statements?

net income is not affected, cash flow from investing activities decreases

Interest is normally shown as a(n) ________ (nonoperating/operating) item on the income statement and a(n) ________ (nonoperating/operating) activity on the statement of cash flows.

nonoperating, operating

The percent of ___________ (rev/rec) method of estimating uncollectible accounts focuses on producing the best balance sheet, while the percent of ___________ (rev/rec) focuses on producing the best income statement.

rec, rev

A company experienced an event that had NO AFFECT on the amount of total assets, net income, or cash flow. What events could have caused these effects?

reinstated an acct rec, wrote-off and uncollectible acct

Other things equal, a company would prefer that its average days to collect receivables be _______ (shorter/longer), indicating that it takes the company fewer days to collect a receivable.

shorter

The Uncollectible Accounts Expense account is a(n)

stockholders' equity account

What are common features of a promissory note?

the borrower; a statement of the maturity date; the creditor, a statement of the principal amount