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