Accounting SB4, SB5 & SB6
Under the allowance method, companies estimate _____ uncollectible amounts and report those estimates in the _____ year.
future; current
Compared to other methods of estimating uncollectible accounts, the aging of accounts receivables method tends to
be more accurate.
Employee purchases should be included in the accounting records
by the end of the accounting period.
A formal, signed credit agreement between a lender and a borrower is called a(n) _____ by the lender.
note receivable.
Munchkin Inc. pays for promotional expenses by charging the company's credit card. Munchkin should debit an expense and credit
accounts payable
The amount of cash owed to a company by its customers from the sale of goods or services is referred to as
accounts receivable.
In a bank reconciliation, a deposit outstanding is
added to the bank balance.
A small amount of cash on hand to pay for minor purchases is commonly referred to as a(n) ______ ______ fund. (Enter one word per blank.)
petty cash
Separation of duties and E-commerce controls are examples of ______ controls.
preventive
Two types of control activities are
preventive and detective controls.
The Sales Returns and Sales Allowances accounts are classified as
contra revenue accounts.
Allowance for Uncollectible Accounts has a credit balance because it is a(n) _____ account.
contra-asset
Sales Returns and Sales Allowances are ______ - ______ accounts and require a debit entry to increase the account.
contra-revenue
The statement of cash flows classifies items as
operating, investing, financing
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
When a business provides services to a customer, and the customer promises to pay later, this is referred to as
Credit sales
The asset most susceptible to fraudulent activity is _______
cash
The asset most susceptible to fraudulent activity is(are)
cash
Cash disbursements that have been recorded in the company's accounting records but are not yet recorded by the bank are called
checks outstanding.
The _____ ratio shows the number of times during a year that the average receivable balance is collected.
receivables turnover
One of the most important internal controls for cash is the bank ______.
reconciliation
When a customer returns a product for a refund, in which account is the entry recorded?
sales return
(Face value x annual interest rate x fraction of the annual period) is the formula for
interest on a note.
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
The list price in Boyton's catalog indicates that Product A sells for $3,000, with a trade discount of 5%. Boyton sells the goods to a customer who qualifies for the trade discount. At what amount should Boyton record the sale and related account receivable?
$2,850
In a bank reconciliation, which of the following will require a journal entry by the company?
Adjustments to the balance per books for items discovered on the bank reconciliation that were not yet recorded on the books
Warner Corp. sells goods on account for $10,000 on April 2. On April 20, the customer returns $3,000 of the merchandise. The customer has not yet paid for any of the goods. What is the entry Warner will make on April 20 when the goods are returned?
Debit Sales Returns; credit Accounts Receivable.
When a person intentionally deceives another person or company for personal gain, this is referred to as __________. (Enter one word per blank)
Fraud
The allowance method is required by _______. (Enter one word or abbreviation per blank)
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.
Which of the following allows greater reliance by investors on reported financial statements?
Strong internal control systems
An account receivable is normally classified as
an asset
The amount of net credit sales is reported on the _____ _____.
income statement
An aging schedule classifies accounts receivable based on
length of time outstanding.
The most common source of occupational fraud is:
misuse of company resources
Strong internal control systems allow greater reliance by investors on:
reported financial statements
Which of the following are provisions included in the Sarbanes-Oxley Act?
- Require that audit firms are hired by the audit committee of the board of directors. - Require auditors to retain work papers for 7 years.
Net revenues is calculated as total revenues minus which of the following items?
- Sales returns - Sales allowances - Sales discounts
Pine Corporation provides $1,000 of services on account with terms 2/10, n/30. If the customer takes the discount and pays within 10 days, Pine will receive
$980.
Acme, Inc.'s books show an ending cash balance of $10,000 before preparing the bank reconciliation. Given that the bank reconciliation shows outstanding checks of $3,000; deposits outstanding 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
List the steps for a bank reconciliation in the correct order. (Drag the items to put them in the proper order with the first step on top.)
1. Adjust bank's balance 2.Adjust the company's balance 3. Update the company's cash by recording items in the previous step.
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.
A company that expects that some of its customers will not pay the agreed upon sales price must utilize the
allowance method
The cost of estimated accounts receivable that will not be collected is referred to as ______ ______expense.
bad debt
A calendar-year-end company that accepts a 3-month interest-bearing note on December 1 must accrue ______ revenue on December 31. (Enter only one word.)
interest
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
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
A trade discount is a reduction from the list price, which is used to: (Select all that apply.)
- disguise real prices from competitors - change prices without publishing a new catalog - give quantity discounts to customers
Which of the following items are classified as cash inflows from operating activities on the statement of cash flows?
- interest received on notes receivable - collection of an accounts receivable
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.
Which of the following is a discount in the amount to be paid if the customer pays within a specified time period?
Sales discount
High profile accounting scandals in the early 2000s prompted the passage of the:
Sarbanes-Oxley Act
The Public Company Accounting Reform and Investor Protection Act of 2002 is known as the
Sarbanes-Oxley Act.
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)
account receivable
Two important ratios that help in understanding a company's effectiveness in managing receivables are the:
- average collection period - receivable turnover ratio
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 asset that is most susceptible to employee fraud is
cash
Differences between the bank statement balance and the cash account balance in the accounting records are primarily caused by timing differences and _______. (Enter only one word.)
errors
Which of the following items are included in cash?
- Currency and coins - Balance in checking accounts - Checks from customers
"Net credit sales" refers to credit sales net of:
- returns - allowances - discounts
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
Adrian Corp. sells goods on account for $100,000 on May 1. On May 15, the customer returns $40,000 of the merchandise. The customer has not yet paid for any of the goods. What will Adrian record on May 15? (Select all that apply.)
- Debit to Sales Returns. - Credit to Accounts Receivable.
A company makes a sale on terms 2/10, n/30. What does this mean? (Select all that apply.)
- 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.
Which of the following will cause differences between the bank statement balance and the accounting balance for cash?
- Timing differences - Errors
York Inc. records a year-end adjustment for estimated sales returns and allowances. As a result of this entry, York's financial statements will change as follows: (Select all that apply.)
- assets decrease - equity decreases
The financial statement effects of recording an allowance for estimated sales returns are that: (Select all that apply.)
- assets decrease - net income decreases - equity decreases
Margot, a prospective investor, wants to know how much cash Ziegler Inc. has on December 31. Margot can find the information in Ziegler's: (Select all that apply.)
- balance sheet - statement of cash flows
Sales to customers in which the customers pay within 30 to 60 days are referred to as (Select all that apply.)
- credit sales. - sales on account.
Abby Fashions sells a suit to a customer for $600 on account. The day after the sale, the customer discovers that the jacket has a small stain on the back. Abby Fashions grants the customer a $60 credit. Abby Fashions will record:
- credit to accounts receivable $60 - debit to Sales Allowances $60
The journal entry to record bad debt expense includes: (Select all that apply.)
- credit to allowance for uncollectible accounts - debit to bad debt expense
What comparative advantages do notes receivables possess compared to other receivables? (Select all that apply.)
- higher likelihood of collectibility - interest-bearing
Which of the following items are classified as cash outflows from operating activities on the statement of cash flows? 1
- payment of an accounts payable balance - payment of salaries
Match each description with the correct term. 1. Sales return 2. Sales Allowance A. A customer returns merchandise purchased during the month and receives a refund of the full sales price. B. A customer receives a partial refund of the sales price after the customer discovers a flaw in the merchandise. The customer keeps the merchandise.
1. A 2. B
A company pays for a purchase with a credit card. What is the effect of this purchase on the accounts?
Accounts payable will increase
Which of the following items are not included in cash?
Accounts receivable from customers
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
The framework for designing an internal control system is provided by the
Committee of Sponsoring Organizations (COSO) of the Treadway Commission.
On March 5, Oak Corp. provided services on account to Pine. Oak agreed to accept a $100,000, 8%, 6-month interest-bearing note from Pine in payment for the services. The entry required on Oak's books on March 5 would require which of the following entries?
Debit Notes Receivable $100,000; credit Service Revenue $100,000.
Which of the following led to the passage of the Sarbanes-Oxley Act of 2002?
High profile accounting scandals during the early 2000s
Where is a note receivable reported in the balance sheet?
In either current or noncurrent assets, as appropriate.
Smith's operating cash flows in millions were $100, $150, $80 during the past three years; while Jones' operating cash flows in millions were $105, $115, $110 during the same period. From the perspective of operating cash flows, which company would likely be perceived as riskier?
Smith
The ending balance in cash is reported in which financial statement(s)?
The balance sheet and statement of cash flows
The percentage-of-receivables approach to measuring bad debt expense is referred to as _____ method.
a balance sheet
The allowance for uncollectible accounts is a contra account to
accounts receivable.
The approach that considers the age of various accounts receivables to estimate uncollectible accounts is referred to as the _______ method of accounts receivable. (Enter only one word.)
aging
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 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
Accounts receivable should be classified as a(n)
asset
With the allowance method, bad debt expense is recorded
at the end of the period when bad debts are estimated.
The estimated expense for accounts that may not be collected is referred to as
bad debt expense.
The components of internal control are
based on the ethical tone set by management.
A trade discount is recognized
by reducing the revenue amount recorded.
A journal entry that affects a company's Statement of Cash Flows will include an inflow or outflow of ______. (Enter only one word per blank)
cash
The ratio that shows the approximate number of days the average accounts receivable balance is outstanding is referred to as the average ______ _______.
collection period
The accounting term for a situation where two or more people act in coordination to circumvent internal controls is __________ (Enter one word per blank).
collusion or colluding
The Sarbanes-Oxley Act applies to
companies that are required to file with the SEC.
A(n) ______ balance before adjustment indicates that the estimate of uncollectible accounts at the beginning of the year may have been too high.
credit
The account "Allowance for Uncollectible Accounts" normally has a ______ balance. (Enter only one word.)
credit
The income statement approach for estimating bad debts uses a percentage of
credit sales.
Planters Corp. wrote off a customer's uncollectible account in April. In the following month, Planters collected from the customer in full. The entry to reinstate the account would require a
credit to Allowance for Uncollectible Accounts.
The bank will show a customer's deposit on bank statements as a ______.
credit, because a deposit is a liability from the bank's point of view
Because cash is assumed to be available for spending, it is typically reported on the balance sheet as a(n) _____ _____. (Enter only one word per blank.)
current asset
The income statement approach for estimating bad debts focuses on
current year's credit sales.
A(n) _____ balance before adjustment indicates that the estimate of uncollectible accounts at the beginning of the year may have been too low.
debit
Shannon Corp. uses the aging method to account for bad debt expense. 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.
On June 1, Tulip Corp. provided services on account to Daffodil. Tulip agreed to accept a $40,000, 10%, 3-month interest-bearing note from Daffodil in payment for the services. The entry required on Tulip's books on June 1 would include a
debit to Notes Receivable, $40,000.
Kilroy Corporation provides services to a customer for $1,000. The customer complained that there was a slight defect in the service. Kilroy granted the customer a $50 credit. Kilroy will record this adjustment to the sales price with a
debit to Sales Allowances $50.
Notes receivable normally has a(n) _______ balance because it is classified as a(n) ______. (Enter only one word per blank.)
debit; 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 ____ the amount owed by the customer for merchandise that is _____ by the customer.
decreases; retained
The Accounts Receivable account is reduced when the seller:
determines that a specific customer account will not be collectible
The receivables turnover ratio and the average collection period provide information about a company's
effectiveness in managing receivables
The amount of cash in the balance sheet reflects the
ending cash on the balance sheet date.
A(n) _______ is a mistake in accounting, which can be intentional or unintentional. (Enter one word per blank)
error
The two reasons why companies may issue incorrect financial statements are fraud and _____
errors
Published financial statements may be incorrect because of (Select all that apply.)
errors. fraud.
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.
Gwendolyn uses the allowance method to account for uncollectible receivables. Gwendolyn should record _____ bad debt expense ______.
estimated; at the end of the year
Internal control components are built on the foundation of the _______ tone established by top management in its control environment.
ethical or ethics
The formula for calculating interest on a note is
face value x annual rate x fraction of the annual period.
When the allowance method is used, the write-off of an uncollectible account:
has no effect on net income
Accounts receivable are normally classified
in the balance sheet as assets.
Bad debt expense is reported on the _____ _____ and is classified as an operating expense.
income statement
Bad debt expense is reported on the:
income statement
The amount of net credit sales is reported on the ______ ______
income statement
The direct write-off method is required for
income tax purposes.
A key factor in helping safeguard cash is a well functioning _______ _______ system.
internal control
Because most companies receive payments for the sale of products and services either in the form of cash or as a check received through the mail,
internal control over cash receipts is important.
A company's plans to safeguard company assets and enhance the reliability and accuracy of accounting information are referred to as
internal controls.
Total revenues less discounts, returns, and allowances are referred to as _________ revenues. (Enter only one word.)
net
The acronym NSF stands for
nonsufficient funds.
Pixie Inc. writes off a specific accounts receivable. If Pixie is using the allowance method, the write off will _____ net income.
not affect
Receivables not expected to be collected should
not be counted in assets of the company.
A(n) ____ receivable typically yields interest revenue and possesses a fairly high probability of collectibility.
note
A formal credit arrangement between a creditor and debtor is called a(n)
note receivable.
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) ______ discount.
sales
When merchandise is returned for a refund or for credit to be applied to other purchases, the situation is called a(n) _______ ________. (Enter only one word per blank.)
sales return
A petty cash fund is used for
small amounts of cash needed for low-cost items.
For accounts receivable, the longer an account is outstanding,
the more likely it will prove uncollectible.
The average collection period is an estimate of
the number of days the average account receivable balance is outstanding.
The receivables turnover ratio indicates
the number of times during a year that the average accounts receivables were collected.
Assume Company X is in its fifth year of operation. Analyze the following schedule. What conclusion can be drawn from the following schedule?
the target amount in allowance for uncollectible accounts is $25,500.
Accounts receivable are typically classified as current assets because
they will be converted to cash within 1 year.
A bank statement may not agree with the amount of cash recorded by the company in the cash account because of _______ differences and errors.
timing
A bank statement may not agree with the amount of cash recorded by the company in the cash account because of ________ differences and errors.
timing
A(n) ______ difference in cash occurs when a company records a transaction either before or after the bank records the same transaction. (Enter only one word.)
timing
The allowance method estimates
uncollectible accounts
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.
Neumann, Inc.'s books show an ending cash balance of $20,000 before preparing the bank reconciliation. Given that the bank reconciliation shows outstanding checks of $2,000; deposits outstanding of $3,000; NSF check of $200; and interest earned on the bank account of $30, the company's up-to-date ending cash balance equals:
$20,000-$200+$30 = $19,830
Effective internal control over cash requires segregation of duties. Which of the following duties should be segregated?
- Depositing checks into the bank and recording receipts in the accounting records - Opening the mail and deposit of checks in the bank
Which of the following items will require a journal entry following a bank reconciliation? (Select all that apply.)
- NSF checks - Notes collected by the bank
Which of the following are detective controls?
- Reconciliations - Audits - Performance reviews
Which of the following are errors in accounting for cash?
- Recording a cash collection of $4,000 but depositing $3,000 into the bank. - Recording a check for $168 for $186 in the cash account. - The bank processing a check for $210 as $120.
Which of the following are preventive controls?
- Separation of duties - Physical controls
When adjusting the company's cash account balance in a bank reconciliation, which items reduce the company's cash account balance? (Select all that apply.)
- Service charges - Charges for NSF checks
What would cause a bank statement not to agree with the cash balance in the accounting records?
- The bank made an error in recording a deposit made by the company. - The bank paid interest that the company has not recorded. - Deposits outstanding that have been recorded on the company's records, but not on the bank's. - The company made an error in recording a deposit.
Internal control procedures for cash disbursements (other than small disbursements from petty cash) should include that (Select all that apply.)
- checks are signed by authorized individuals. - all disbursements are made by check, debit card, or credit card. - all expenditures are authorized.
Which of the following items are classified as cash inflows from operating activities on the statement of cash flows? #2
- collection from customers - receipt of interest
The three classifications on the statement of cash flows are cash flows from (Select all that apply.)
- investing activities. - financing activities. - operating activities.
The two most common sources of occupational fraud are:
- misuse of company resources - financial statement manipulation
Which of the following are common controls over cash receipts? (Select all that apply.)
- opening mail daily and making a detailed list of checks received - having two different employees take custody of the checks and make the deposit
Which of the following items are classified as cash outflows from operating activities on the statement of cash flows? 2
- purchase of supplies with cash - interest paid on notes - payment of employee salaries
The key provisions of the Sarbanes-Oxley Act include
- requiring documentation and assessing effectiveness of internal controls. - restricting activities of auditors to prevent conflicts of interest. - requiring that corporate executives certify financial statements.
Internal control consists of plans to (Select all that apply.)
- safeguard company assets. - provide accurate and reliable accounting information.
Match each activity with its classification on the statement of cash flows. 1. Purchasing inventory from vendors 2. Signing a long-term promissory note 3. Selling equipment A. Operating Activity B. Financing Activity C. Investing Activity
1. A 2. B 3. C
Match each activity with its classification on the statement of cash flows. 1. Sell goods to customers 2. Sell stock to investors 3. Purchase Equipment A. Operating Activity B. Financing Activity C. Investing Activity
1. A 2. B 3. C
Match each component of internal control with its definition. 1. Monitoring 2. Control Activities 3. Risk Assessment 4. Control Environment A. Includes formal procedures for reporting control deficiencies B. Policies and procedures that help ensure management's directives are being carried out C. Identifies and analyzes factors that could prevent objectives from being achieved Identifies and analyzes factors that could prevent objectives from being achieved D. Formal policies related to management's philosophy, assignment of responsibilities, and organizational structure
1. A 2. B 3. C 4. D
When adjusting the company's cash account balance in a bank reconciliation, which item must be added to the cash account balance?
Collections of funds by the bank
When adjusting the bank balance in a bank reconciliation, which item must be added to the bank balance?
Deposits outstanding
A bank reconciliation reconciles the bank statement with the company's
cash account in the balance sheet.
Internal control over cash is important because
cash can be stolen.
The asset that is most easily stolen and susceptible to fraud is
cash or money
When two or more persons work together to circumvent internal control procedures and commit a fraud, this is called ________
collusion or colluding
Lindell sells $100 of goods to a customer. The customer pays with a personal check. Recording this transaction will include a
debit to Cash.
The bank will show a customer's withdrawal as a _____.
debit, because a withdrawal decreases its liability from the bank's point of view
In a bank reconciliation, an outstanding check is ______.
deducted from the bank balance
Cash receipts that have been recorded in the company's accounting records but are not yet recorded by the bank are
deposits outstanding.
The Committee of Sponsoring Organizations (COSO) of the Treadway Commission provided a framework for
designing an internal control system.
The two types of control procedures are preventive and __________. (Enter one word per blank)
detective
A periodic performance review is an example of a(n) ______ control.
detective or internal
The use of one's occupation for personal enrichment through the deliberate misuse or misapplication of the employer's resources is called occupational...
fraud
Preparation of a bank _____ helps maintain control of cash accounts.
reconciliation
If a company records a transaction before the bank records the same transaction, this is called a/an ______ difference.
timing
A bank reconciliation compares the company's cash records with the bank statement and discovers differences in those amounts due to
timing differences and errors.
A non-sufficient funds check requiring an adjustment to the cash balance was written:
to the company preparing the bank reconciliation
Which of the following steps are necessary to reconcile the bank balance and the cash account balance.
- Adjust the company's cash balance - Record items that reconcile the company's cash balance - Adjust bank's cash balance
Which of the following are components of internal control?
- Control environment - Control activities - Monitoring - Risk assessment
Which of the following entries affect a company's cash flows?
- Debit supplies; credit cash - Debit rent expense; credit cash
Which of the following is an internal control procedure for cash disbursements?
Disbursements should be made by check, debit, or credit card.
True or false: Employee purchases using cash or purchase cards must be recorded immediately as business expense.
False
True or false: The entry for a sale to customers is different depending on whether the customer pays with cash or a check.
False
True or false: Variability in operating cash flows is unimportant as long as the total cash flows over a three-year period is sufficiently positive.
False
Who has final responsibility for internal controls?
Management
When adjusting the bank balance in a bank reconciliation, which item must be subtracted from the bank balance?
Outstanding checks
Who is responsible for providing an opinion on management's assessment of internal control?
The company's auditors
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
