CHAPTER 5
What is the formula for the receivables turnover rate?
Net credit sales divided by average accounts receivable (net)
the allowance for uncollectible accounts is a contra account to?
accounts receivable
accounts receivable = 20000, recorded a bad debit expense of 1000, ending balance for uncollectible assets of 2000 what is the net realizable value of accounts receivable?
18000
what is the average collection period? receivable turnover 6, inventory turnover 5, asset turnover 3, net credit sales 500000,
365 / receivable turnover rate 365/6 =60.8 days
the formula for average collection period is
365 divided by the receivable turnover ratio
When a business sells goods to a customer, and the customer promises to pay later, this is referred to as a "?"
Credit sale
a trade discount is
a percentage reduction from list price
to record bad debits at the end of the period, an adjustment would be made by a credit to?
allowance for uncollectable accounts
to reinstate an account which had been written off would require a credit to?
allowance for uncollectible accounts
what is bad debit classified as?
an operating expense
a customer account that is not expected to be collected is referred to as a ?
bad debit
the expense associated with amounts of accounts receivable that may not be collected during the year is called
bad debit expense
to record bad debit at the end of a period, an adjustment would be made by a debit to?
bad debit expense
the two conditions that must exist for a sale and the related receivable to be recognized are "?" "?"
collection from the customer is reasonably assured, the earnings process is virtually complete
when a business sells good to a customer and the customer promises to pay later it is referred to as a?
credit sale
sales to customers in which they pay within 30 to 60 days are referred to as
credit sales, sales on account
what will be recorded during a sales return ?
credit to accounts receivable, debit to sales returns
accounts receivable should be classified as a
current asset
the sales returns and allowance accounts are a contra revenue account which require a "?" entry to increase the account
debit
offering an interest bearing note would require what journal entries on the day of its signing
debit notes receivable, credit service revenue (don't worry about interest on the note just yet)
If a customer pays in time to receive a sales discount what would you journal entries would you record?
debit sales discount, debit cash (less the discount) credit accounts receivable
to write off an account that has been deemed uncollectable, which entries should be recorded in the journal?
debit to allowance for uncollectible accounts, credit to accounts receivable,
a trade discount is a reduction from the list price, which is used to "?" "?" "?"
disguise real prices from competitors, give quantity discounts to customers, change prices without publishing a new catalog
formula for finding the amount of adjustment for uncollectible accounts
ending balance of accounts for uncollectible assets + amount already written off - beginning balance
what affects does the allowance method have?
increases expenses, decreases assets
if sales returns are treated as expenses what are the effects on financial statements
expenses are overstated, revenues are overstated
formula for calculating interest on a note is
face amount x annual rate x fraction of the annual period
note receivable
formal credit arrangement between borrower and lender
do companies seek a high or low receivable turnover ratio?
high receivable turnover ratio
what classifies a long term asset?
if the company expects to receive the cash in over one year
what classifies a current asset?
if the company expects to receive the cash within one year
accounts receivable are normally classified
in the balance sheet as current assets
where is bad debit reported?
income statement
account receivable
informal credit agreement with trade customers
companies extend credit to customers and sell good on account because?
it increases sales
what information does the receivable turnover ratio provide?
it provides and indication o a company's efficiency in collecting receivables, it shows the number of times during a period that the average accounts receivable balance is collected
the direct write off method is normally not permitted for u.s gaap reporting because it violates which principal?
matching principal
The amount that is actually expected to be collected on accounts receivable is referred to as ?
net realizable value
the balance sheet approach to measuring bad debit expenses focuses on?
net realizable value of accounts receivable
total revenues less discounts, return, and allowances are referred to as ?
net revenues
find the receivables turnover ratio, net sales =200,000. total assets for years 1 and 2 = 800,000 and 1,200,0000. accounts receivable at the end of year 1 and 2 = 40,000 and 60,000
net sales / average accounts receivable = 4
income tax is a "?" receivable
non trade
what is the balance sheet approach to measuring bad debit expense also known as?
percentage of receivables method
A claim to cash in the future is a
receivable
what does the direct write off method do?
reduces accounts receivable, and records bad debit expense at the the the account receivable proves to be uncollectable
which two entries are required when a previously written off account is paid, these are?
reinstate the account receivable, record the collection on the account receivable
a cash discount representing a reduction in the amount to be paid by a credit customer if the customers pay within a specific period of time is also called a
sales discount
when a customer returns a product for a refund, in what account is the entry recorded?
sales return
when merchandise is returned for a refund or for credit to be applies to other purchases, the situation is called a
sales return
net revenues are calculated by subtracting which items?
sales returns, sales allowances, sales discounts
ABC company provides 20,000 of services on account the account that should be credited is?
service revenue
to increase revenue which account should be credited?
service revenue
Items classified as receivables
tax refund claims, amounts owed by customers, amounts loaned and expected to be repaid
the approach that considers the age of various accounts receivables to estimate uncollectible accounts is referred to as which method?
the aging of accounts receivable method
net realizable value of accounts receivable (net accounts receivable) =
total accounts receivable less the allowance for uncollectible accounts
why is the direct write off method bad / not acceptable for financial accounting
violates matching principal, as the credit sale is made during a different period bad debit is not matched with revenues (credit sales), also accounts receivable will be overstated in the prior period
what is a sales return?
when a customer return a product for a full refund
when is the direct write off method used?
when uncollectible accounts are not anticipated or are immaterial
what is a sales allowance
where a customer keeps the product but obtains a partial refund
what are the disadvantages to extending credit to customers?
accounts that are un-collectible, delays in collecting accounts
what does the allowance method account for?
uncollectible accounts