Acctg 201: Chapter 5 Learnsmart questions
Net revenues formula
Net revenues = (Sales) - (Sales returns- Sales allowances- sales discounts)
Average collection period formula
(365)/ (Receivables turnover ratio)
Receivables turnover ration formula
(Net credit sales)/ (Average accounts receivable)
The account "allowance for uncollectible accounts" typically has what kind of balance?
A credit balance
Sellers offer discounts to buyers for what 3 primary reasons?
1) Reward customer loyalty 2) Attract new customers 3) Encourage quick payments
What are the 2 disadvantages of extending credit to customers?
1) accounts that are uncollectible 2) delay in collecting accounts
What are 3 reasons why trade discounts are used by companies?
1) Change prices without publishing a new catalog 2) Disguise real prices from competitors 3) Give quantity discounts to customers
The two conditions that must exist for a sale and the related receivable to be recognized are what?
1) Collection from the customer is probable 2) The company has provided goods or services to the customer
If a company uses the percentage-of-credit-sales method to account for bad debt expense and decides to write off an account as uncollectible, what will the following entries in the journal be?
1) Debit to allowance for uncollectible accounts 2) Credit to accounts receivable
Which method is preferred for recognizing bad debts?
A balance sheet method such as percentage-of-receivables
What kind of balance before adjustment indicates that the estimate of uncollectible accounts at the beginning of the year may have been too high?
A credit balance
What kind of balance before adjustment indicates the balance may have been too low?
A debit balance
How is the average accounts receivable calculated?
Adding last year and this year's ending balance of accounts receivable and dividing the sum by 2
Which method of accounting requires estimating bad debt expense and matching the expense to sales of that period?
Allowance method
When an account previously written off is collected in full, which entry 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 is needed
Percentage-of-receivables method
Assets are reported closer to net realizable value
With the allowance method, when is the bad debt expense recorded?
At the end of the period when bad debts are estimated
Why is the direct write-off method not normally an accepted method under GAAP?
Because it fails to report accounts receivables at their net realizable value
Why are accounts receivables calculated as current assets?
Because they'll be converted to cash within 1 year of the normal operating cycle
Bad debt expense is reported on the income statement and classified as what?
Classified as an operating expense
Accounts receivables are normally classified as what in the balance sheet?
Classified as current assets
The sales returns and allowances account is classified as what type of account?
Contra revenue account
When an account previously written off is collected in full, the entry to reinstate the account would require what?
Debit accounts receivable and credit allowance for uncollectible accounts
The accounts receivable account is reduced when the seller does what?
Determines that a specific customer account will not be collectible
If sales returns are incorrectly treated as expenses, what are the effects on the financial statements?
Expenses are overstated and revenues are overstated
What are the results of extending payment periods?
Greater requirement investment in receivables AND increased gross sales
The direct write off method includes a debit and credit to what two accounts?
Includes a debit to bad debt expense and credit to accounts receivable
The financial statement effects of recording an allowance for estimated sales returns are what?
Income decreases, assets decrease, equity decreases
A calendar-year-end company that accepts a 3 month interest-bearing note on December 1st, must accrue what TYPE of revenue on December 31st?
Interest revenue
What does the allowance method estimate?
It estimates uncollectible accounts
Recording sales returns and allowances in a separate contra-revenue accounts helps managers do what?
It helps them analyze transactions
The journal entry to record bad debt expense includes what?
It includes a credit to allowance for uncollectible accounts and a debit to bad debt expense
What does the receivables turnover ratio indicate?
It indicates the number of times during a year that the average accounts receivables were collected?
What is notes receivable's typical balance?
It normally has a debit balance because it's classified as an asset
The use of the allowance method reduces (blank) and increases (blank)
It reduces assets and increases expense
What is a trade discount?
It's a percentage reduction from list price
What is another name for the percentage-of-sales method?
It's also called the income statement method
The difference between total accounts receivable and allowance for uncollectible accounts is referred to as what?
It's referred to net accounts receivable and net realizable value
Is income tax receivable trade or nontrade?
Nontrade
At the end of the year, companies must record estimated contra revenue for estimated sales returns and allowances and sales discounts pertaining to what?
Pertaining to current year sales only
If a company provides $20,000 of services on account, what is the account that needs to be credited?
Service revenue needs to be credited
Net realizable value
The amount of cash a company accepts to collect
Accounts receivables from sales to customers are what kind of receivables?
They are trade receivables
What is the purpose of recording an allowance for uncollectible accounts?
To report accounts receivable at net realizable value
What's another word for account receivable?
Trade receivable
The account "allowance for uncollectible accounts" is classified as what?
A contra asset account to accounts receivable
Percentage-of-sales method?
Better matching of revenues and expenses
When is payment for credit sales usually due?
Between 30-60 days
What are the 2 effects of uncollectible accounts?
1) Increase expenses 2) Reduce assets
What 2 comparative advantages do notes receivables possess compared to other receivables?
1) Interest-bearing 2) Higher likelihood of collectibility
What are the two most important ratios that help in understanding a company's effectiveness in managing receivables?
1) Receivable turnover ration 2) Average collection period
Which two entries are required when a previously written off account is paid?
1) Record the collection to accounts receivable 2) Reinstate the account receivable
"Net" credit sales refers to credit sales net of what 3 types of accounts?
1) Returns 2) Allowances 3) Discounts
