mgmt chap 5 & 6

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 journal entry to record bad debt expense includes:

credit to allowance for uncollectible accounts debit to bad debt expense

The Accounts Receivable account is reduced when the seller:

determines that a specific customer account will not be collectible

The allowance method estimates

uncollectible accounts

The direct write-off method is used when

uncollectible accounts are not anticipated or are immaterial.

FOB shipping point means title to the goods passes:

when they are shipped.

A periodic inventory system measures cost of goods sold by:

counting inventory at the end of the period.

The account "Allowance for Uncollectible Accounts" normally has a ___ balance.

credit

Which inventory system recognizes cost of goods sold and decreases inventory each time a sale occurs?

Perpetual inventory system

LIFO

Provides better matching of current revenues with current inventory cost

Two important ratios that help in understanding a company's effectiveness in managing receivables are the:

average collection period receivables turnover ratio

The lower of cost and net realizable value method was developed to

avoid reporting inventory at an amount that exceeds the benefits it provides.

A major difference between companies that provide services and companies that manufacture or sell goods is that those that manufacture or sell goods must account for:

inventory

Items held for sale in the normal course of business are referred to as

inventory

Margot Inc, which uses the perpetual inventory system, purchases 500 units of inventory to be held for resale. Margot should debit the purchase to:

inventory

A formal credit arrangement between a creditor and debtor is called a(n)

note receivable.

A formal, signed credit agreement between a lender and a borrower is called a(n) ___ by the lender.

note recieveable

If a company uses the perpetual inventory system, how many entries are made when a sale occurs?

2

An informal credit arrangement with a customer for payment to be received after the sale is classified as a(n)

account receivable

Writing off a customer's account as uncollectible reduces the balance of

accounts receivable

The allowance for uncollectible accounts is a contra account to

accounts recieveable

In a perpetual inventory system, freight costs on purchases are

added to the inventory account.

The approach that considers the age of various accounts receivables to estimate uncollectible accounts is referred to as the ___ method of accounts receivable.

age

Accounts receivable should be classified as a(n)

asset

Using the perpetual inventory system, what is the effect of a sale of inventory on assets?

assets increase by the sales price of the inventory assets decrease by the cost of the inventory

Meller purchases inventory on account. As a results, Meller's

assets will increase.

With the allowance method, bad debt expense is recorded

at the end of the period when bad debts are estimated.

The cost of estimated accounts receivable that will not be collected is referred to as ____ _____ expense.

bad debt

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.

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

credit sales

Under the periodic inventory system, purchase returns and purchase discounts accounts represent

contra purchases accounts.

Inventory is classified as

current asset

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 shipping term FOB stands for

free on board.

Purchasing inventory on account:

increases assets increases liabilities

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

The legal right to receive cash from a credit sale and represents an asset of the company.

Account receivable

Where is inventory reported in the financial statements?

Balance sheet as a current asset

The allowance method is required by

GAAP (Generally Accepted Accounting Principles)

When prices increase, the __ inventory method provides the best matching of revenue and expenses.

LIFO

A trade discount is

a reduction from list price.

Allowance for Uncollectible Accounts has a credit balance because it is a(n) ___ account.

contra-asset

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

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

decreases retained

In a perpetual inventory system, purchase discounts and purchase returns

directly reduce the Inventory account balance.

Gwendolyn uses the allowance method to account for uncollectible receivables. Gwendolyn should record ____ bad debt expense ____.

estimated; at the end of the year

Purchase returns are recorded in a separate contra purchase account in a __ inventory system

periodic

Purchase discounts and purchase returns are recorded as a reduction in inventory cost in a __ inventory system

perpetual

Purchase discounts and purchase returns are recorded as a reduction in inventory cost in a ___ inventory system

perpetual

A _____ inventory system updates the inventory account each time a sale or purchase is made, whereas a ______ inventory system calculates cost of goods sold and ending inventory at the end of the reporting period.

perpetual periodic

Freight-in costs are debited to Inventory in this inventory system:

perpetual only

Alexandra Inc. utilizes a periodic inventory system. Related to inventory, Alexandra Inc. must record period-end adjustments to:

record cost of goods sold for the period close purchase-related temporary accounts adjust the inventory balance to its proper ending balance

A multiple-step income statement reports multiple levels of

income

The direct write-off method is required for

income tax purposes.

Norma Inc. uses the perpetual inventory system. When the company records a sale, it should make entries to:

increase an asset and increase revenue decrease an asset and increase an expense

(Face value x annual interest rate x fraction of the annual period) is the formula for

interest on a note.

The difference between LIFO and FIFO disclosed in the notes to the financial statements of a company currently utilizing the LIFO cost flow assumption is sometimes referred to as the LIFO

reserve

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

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

Which of the following is a discount in the amount to be paid if the customer pays within a specified time period?

sales discount

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

In a perpetual inventory system, when a company sells inventory on account, how many entries are required?

2

Green Company has net credit sales of $100,000, an asset turnover ratio of 4, and a receivables turnover ratio of 9. What is the average collection period?

40.6 days

Black Company has the following information: Receivable turnover 6 Inventory turnover 5 Asset turnover 3 Net credit sales $500,000 What is the average collection period?

60.8 days

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

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

Amend Inc. debited Accounts Receivable and credited Allowance for Uncollectible Accounts to reestablish an account previously written off. Amend Inc. should also debit ____ and credit ____.

Cash; Accounts Receivable

Because prices change over time, costs reported for these accounts tend to differ among inventory cost methods.

Cost of Goods Sold Inventory

Clover Corporation uses the perpetual inventory system. When Clover purchases inventory on account, the entry will include which of the following?

Debit Inventory

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

For internal record keeping, most companies carry their inventory using the __ basis

FIFO

Which inventory cost flow assumption is commonly used internally by companies that externally report under the LIFO cost flow assumption?

FIFO

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

Where is a note receivable reported in the balance sheet?

In either current or noncurrent assets, as appropriate.

The definition of inventory includes which of the following items?

Items currently in production for future sale Materials used currently in the production of goods to be sold Items held for resale

Assuming that prices rise over time, which inventory cost flow assumption will result in the lowest ending inventory?

LIFO

Assuming that prices rise over time, which inventory cost flow assumption will result in the lowest pretax income?

LIFO

When prices increase, the ______ inventory method provides the best matching of revenue and expenses.

LIFO

Which of the following methods are available for costing inventory? (Select all that apply.)

LIFO FIFO Specific identification Weighted-average

The disclosure that shows the difference in the cost of inventory between LIFO and FIFO is referred to as the

LIFO reserve

What type of company purchases raw materials and makes goods to sell?

Manufacturers

FIFO

Most closely approximates the actual physical flow of inventory

Which of the following represent reasons why managers closely monitor inventory levels?

To minimize costs of inventory write-downs due to obsolete inventory. To ensure that sufficient units are available.

Which of the following accounts would be found in the balance sheet of a manufacturing company?

Work in process

Which of the following accounts are typically reported in the balance sheet of a manufacturing company?

Work in process Raw materials Finished goods

The account "Allowance for Uncollectible Accounts" is classified as

a contra asset to accounts receivable.

Mueller Inc. utilizes a periodic inventory system. When Mueller incurs shipping costs for purchased goods, the account debited should be

a separate freight-in account.

The approach that considers the age of various accounts receivables to estimate uncollectible accounts is referred to as the ____ method of accounts receivable.

age

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 and the average collection period provide information about a company's

effectiveness in managing receivables

Managers typically monitor inventory very closely to ensure that sufficient units are available for sale and to prevent inventory from becoming

expired

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 disguise real prices from competitors change prices without publishing a new catalog

When the allowance method is used, the write-off of an uncollectible account:

has no effect on net income

In times of rising prices, cost of goods sold determined using the LIFO inventory assumption typically will be __ than cost of goods sold determined using the FIFO inventory assumption.

higher

Gerald Corporation purchases inventory FOB shipping point. The shipping costs are $300. The shipping costs are

included in Gerald's inventory.

Companies are free to choose FIFO, LIFO, or weighted-average cost to report inventory and cost of goods sold. The reported amounts for ending inventory and cost of goods sold will not be the same across inventory reporting methods because:

inventory costs generally change over time.

In a perpetual inventory system, when inventory is purchased, the ______ account is debited, whereas in a periodic system, the _____ account is debited.

inventory, purchases

Major differences between service companies and retail or manufacturing companies is that retailers and manufacturers must account for (Select all that apply.)

inventory. cost of goods sold.

In times of rising prices, ending inventory determined using the LIFO inventory assumption will be ___ than ending inventory determined using the FIFO inventory assumption.

lower

The ___ method of valuing inventory was developed to avoid reporting inventory at an amount that is ___ than the benefits it can provide.

lower of cost and net realizable value; greater

The _____ method of valuing inventory was developed to avoid reporting inventory at an amount that is ____ than the benefits it can provide.

lower of cost and net realizable value; greater

Companies that produce the inventory they sell are referred to as

manufacturers

The type of income statement that reports a series of subtotals such as gross profit, operating income, and income before taxes is a ______ income statement.

multiple-step

What is the effect of recording a sale of inventory under the perpetual inventory system on the financial statements?

net income increases total assets increase stockholders' equity increases

Receivables not expected to be collected should

not be counted in assets of the company.

When a sale occurs under the periodic inventory system, we record:

only the sale, but not the related cost of goods sold

Ronald Corporation purchases inventory with terms FOB destination. The shipping costs are $300. The shipping costs are:

paid by the supplier.

The purposes of the period-end adjustment in the periodic inventory system include:

recognize cost of goods sold relating to sales during the period close the temporary accounts relating to inventory purchases, discounts, and returns and allowances reflect the proper ending balance in the inventory account

In a periodic inventory system, freight-in costs are

recognized in a temporary freight-in account.

Sales to customers in which the customers pay within 30 to 60 days are referred to as (Select all that apply.)

sales on account. credit sales.

What is the effect of recording a sale of inventory under the perpetual inventory system on the financial statements? (Assume that the sales price is higher than the cost of inventory)

stockholders' equity increases net income increases total assets increase

Accounts receivable are typically classified as current assets because

they will be converted to cash within 1 year.