Accounting chapter 6

Deposits in transit are ______.

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

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 ______. (Check all that apply.)

improve the efficiency and effectiveness of operations protect against theft of assets enhance the reliability of accounting information

Allowing credit cards, returns or discounts for early payment affects the recording of ______.

net sales revenue

In addition to safeguarding cash from theft, maintaining accurate accounting records of cash flows and other controls, effective cash management also involves ______.

preventing excess accumulation of cash in checking accounts

Separation of duties is essential to ______ assets. The person who has custody of an asset ______ also account for the asset.

safeguarding; should not

Offering customers ______ increases the likelihood the seller will receive the cash before the customer runs out of funds and encourages prompt payment.

sales discounts

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 ______.

1,000

Deposits in transit are ______.

added to the bank balance

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

added to the book balance

A bank reconciliation is needed in order to determine the ______.

correct cash balance

Nim Com Soup, Inc. uses the allowance method to account for bad debt expense. It determines that a customer account of $10,000 should be written off as uncollectible. The write off of the account will include a ______.

debit Allowance for Doubtful Accounts

In a bank reconciliation, an outstanding check is ______.

deducted from the bank balance

A bank service charge should be a(n) ______ on a bank reconciliation.

deduction from the book balance

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

false

Net sales is reported on the ______.

first line of the income statement

A check that you have written has cleared the bank when ______.

funds have been withdrawn from your bank account to cover the check

Notes Receivable differ from Accounts Receivable in that Notes Receivable ______.

generally charge the borrowers interest from the day they are signed to the day they are collected.

Brewed Awakenings, Inc., sold $100,000 of coffee to Java the Hut with sales terms of 1/7, n/30. Given Java paid within the discount period, the amount of the sales discount equals $

1000

Net sales revenue is $720,000. Beginning and ending net trade accounts receivable are $62,000 and $58,000, respectively. Calculate the receivables turnover ratio.

12.0 times

Which of the following is a noncurrent asset? (Check all that apply.)

2-year notes receivable Nontrade receivable due in 3 years

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 ______.

2100

Net sales are $730,000. Beginning and ending Accounts receivable are $62,000 and $58,000, respectively. The average collection period equals ______.

30 days

Accounts receivable, net on the balance sheet refers to ______.

Accounts Receivable minus the Allowance for Uncollectible Accounts

Which of the following is a current asset? (Check all that apply.)

Accounts receivable Trade receivable Notes receivable due within 90 days

Which of the following are contra-asset accounts? (Check all that apply.)

Accumulated depreciation Allowance for doubtful accounts

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?

Additional sales revenue

Delectable, Inc.'s unadjusted trial balance includes Accounts Receivable of $10,000; Allowance for Doubtful Accounts of $50 credit balance; and Sales Revenue of $100,000 (all on credit). Management estimates that 2% of credit sales will be uncollectible. Delectable's financial statements will show ______. (Check all that apply.)

Bad Debt Expense of $2,000 Allowance for Doubtful Accounts of $2,050 credit balance

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

credit, because a deposit is a liability from the bank's point of view

ABC Corp. wants to avoid lengthy cash collection periods and, therefore, allows customers to pay with a national credit card, rather than extend credit to its customers directly. What is the downside to such a strategy?

Credit card companies charge fees that reduce profits.

Which of the following are typically netted against sales to arrive at net sales? (Check all that apply.)

Credit card discounts Sales discounts Sales returns and allowances

Using the allowance method, which is the correct adjusting journal entry to record bad debt expense?

Debit Bad Debt Expense and credit Allowance for Doubtful Accounts

What are the financial statement effects of recording bad debt expense using the allowance method? (Check all that apply.)

Decrease assets Increase expenses

Which of the following reconciling items does not require a journal entry?

Deposit in transit

Which of the following are other account titles for Bad Debt Expense? (Select all that apply.)

Doubtful Accounts Expense Uncollectible Accounts Expense Provision for Uncollectible Accounts

A contra-asset account, such as Allowance for Doubtful Accounts or Accumulated Depreciation, has a normal balance of a ______ and causes total assets to ______.

credit; decrease

Identify which of the following would cause timing differences between the bank statement and what is recorded in a company's cash account.

NSF checks Outstanding checks Deposits in transit Bank service charges

To help minimize bad debt expense and provide feedback, a good internal control system will require ______. (Check all that apply.)

a periodic aging of accounts receivable approval of customers' credit history

Requiring approval of customers' credit history, reviewing the age of past due accounts and rewarding speedy collections are examples of controls over ______.

accounts receivable

The account that reports the amount that may not be collected and is matched against credit sales of the period is referred to as ______.

bad debt expense

The expense associated with the estimate of the amount of accounts receivable that may not be collected during the year is referred to as ______.

bad debt expense

Internal control over cash is important because cash ______.

can be stolen

Credit card companies earn revenues from ______. (Check all that apply.)

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

Physically locking up assets and electronically securing access to other assets is a good system of internal control as long as there is also ______.

separation of duties

Acme, Inc.'s books show an ending cash balance of $10,000 before preparing the bank reconciliation. Given the bank reconciliation shows outstanding checks of $3,000; deposits in transit of $2,000; NSF check of $100; and interest earned on the bank account of $10, the company's up-to-date ending cash balance equals ______.

$9,910

Identify two benefits to the seller of offering sales discounts to its customers.

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

True or false: An internal control goal for cash receipts is to ensure that the business documents the correct amount of cash received and safely deposits the cash into its bank account.

true

Libby Inc. sells $5,000 of goods to a customer. The customer pays with a VISA credit card. VISA charges a 3% fee on the sale. Recording the sale would include a debit to Cash of ______.

4,850

Which of the following is not an accurate statement about internal control?

It guarantees the management will behave ethically.

In which situations does a company issue a nontrade receivable?

The company lends money to employees or businesses.

The entry to record the collection of $9,600 from a customer whose account had previously been written off includes a ______.

credit to Allowance for doubtful accounts of $9,600

The adjusting entry to record the allowance for doubtful accounts causes total ______. (Check all that apply.)

stockholders' equity to decrease assets to decrease

The accounts receivable balance on the balance sheet represents the total of the individual customer accounts. Each customer's account is referred to as a(n) ______ account.

subsidiary

An analyst sees the line item Trade 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.)

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

If the company's accountant mistakenly recorded a $58 deposit as $85, the error would be shown on the bank reconciliation as a(n) ______.

$27 deduction from the book balance

XYZ Company sold merchandise for $5,000, with payment terms of 2/10,n/30. If the customer pays within the discount period and takes the discount, XYZ will receive ______.

$4,900

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

1) Recording an adjusting entry for the estimated bad debts and 2) writing off the actual bad debts

The average collection period (or average days sales in receivables) is computed as ______.

365 divided by the receivables turnover ratio

Malik Corp.'s bank statement has an ending balance of $50,000. The deposits in transit were $6,000. NSF checks were $1,000. Checks outstanding at the end of the month were $3,000. Using the bank statement, what is the corrected cash balance?

53,000

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.)

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

While preparing the bank reconciliation for March, the accountant for ABC Company discovered that a $694 check in payment of an account payable had been entered incorrectly in the journal as $649. Which of the following is true?

An adjusting entry must be made to debit Accounts payable and credit Cash for $45.

Bad debt expense is included in the category ______ net income and stockholders' equity.

General and Administrative Expenses on the income statement and decreases

Accounts Receivable represent ______.

amounts owed to a business by its customers

When preparing a bank reconciliation, NSF checks are ______ and must be ______ the company's cash balance.

bad checks that have been deposited; deducted from

The line item Trade accounts receivable, net of allowances will be found on the ______.

balance sheet

When using the allowance method, the adjusting entry to record estimated bad debt expense includes a ______. (Check all that apply.)

credit to Allowance for Doubtful Accounts debit to Bad Debt Expense

The entry to record NSF checks per the bank statement include a ______. (Check all that apply.)

credit to Cash debit to Receivables

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 ______.

credits

A customer that was written off now pays. The journal entry recorded to reverse this previously written-off amount is recorded as a ______.

debit Accounts receivable and credit Allowance for doubtful accounts

Management estimates that 1% of the $100,000 of credit sales 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.)

debit to Bad Debt Expense of $1,000 credit to Allowance for Doubtful Accounts of $1,000

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.)

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

From the bank's perspective, the bank will show a bank service charge as a _____.

debit, because a withdrawal decreases its liability from the bank's point of view

The bank credited your account for a deposit that should have been deposited into another customer's bank account, not yours. This bank error should be a(n) ______ on a bank reconciliation.

deduction from the bank balance

Which of the following would be added to the cash balance per the bank statement in a bank reconciliation?

deposits in transit

Which of the following timing differences result because of transactions that show up on the books but not on the bank statement? (Check all that apply.)

deposits in transit outstanding checks

A company's Bad Debt Expense reports the ______.

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

Given the unadjusted Allowance for Doubtful Accounts has a $50 debit balance, the amount of receivables written off was ______ than the amount estimated in the prior period. This will cause Bad Debt Expense to be ______ in the current period than had the unadjusted balance been a credit balance.

greater; greater

A company must disclose the revenue recognition rule they follow ______

in the footnote called Summary of Significant Accounting Policies

NSF checks written by customers are ______. (Check all that apply.)

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

A reader of financial statements determines when revenues are recognized by looking at the ______.

note to the financial statements called "Summary of Significant Accounting Policies"

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

When a company sells phones bundled with a one-year service contract, then the portion of revenue allocated to the one-year service is recognized ______.

over time as the service is provided

In its first year of business, ABC, Inc. had Accounts Receivable of $8,000 and Credit sales of $38,000. Management estimates 2% of the total credit sales will be uncollectible. Bad Debt Expense equals ______.

760

Libby, Inc. sells $1,000 of goods to a customer. The customer pays with a VISA credit card. VISA charges a 4% fee on the sale. Calculate the net sales Libby would report from this sale.

960

Which method for accounting for doubtful accounts is more accurate?

Aging of accounts receivable

Select all of the following that are properly defined.

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

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 an aging of its receivable, management estimates that $1,000 of receivables will be uncollectible. Delectable's financial statements will show ______. (Check all that apply.)

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

This month's bank statement shows interest earned of $45. How would this item be treated on the bank reconciliation?

It would be added to the book balance.

This month's bank statement shows that the bank incorrectly credited ABC Corp.'s account for a $600 deposit that should have been credited to XYZ Corp.'s account. How would this item be treated on ABC's bank reconciliation?

It would be deducted from the bank balance.

Which method for accounting for doubtful accounts is easier to apply but less accurate and thus tends to be used on a monthly basis, instead of on an annual basis?

Percentage of total credit sales method

Which of the following are prescribed internal controls surrounding cash? (Check all that apply.)

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

The days to collect ratio provides what kind of information? (Check all that apply.)

The average number of days from sale on account to collection That a higher number of days means a longer (worse) time for collection

Preparing a bank reconciliation ______. (Check all that apply.)

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

Given the unadjusted Allowance for Doubtful Accounts has a $50 credit balance, the amount of receivables written off was ______ than the amount estimated in the prior period. This will cause Bad Debt Expense to be ______ in the current period than had the unadjusted balance been a debit or $0 unadjusted balance.

less; less

Effective cash management includes ______. (Check all that apply.)

maintaining accurate accounting records of cash flows safeguarding cash from theft preventing excess accumulation of cash in checking accounts

Accepting only cash and canceling a credit card program that previously allowed customers to purchase merchandise on credit may cause ______. (Check all that apply.)

sales to decrease bad debt expense to decrease

Beckers, Inc. accepts major credit cards from its customers. The credit card companies charge 2%. How much should Becker report as net sales on its income statement if credit card sales were $1,000,000 during the year?

$980,000