CH 7 multiple choice

How is days to collect accounts receivable determined? Net sales divided by 365. Accounts receivable turnover divided by 365 days. Net sales divided by average net trade receivables. 365 days divided by accounts receivable turnover.

365 days divided by accounts receivable turnover.

What is a compensating balance? a. Temporary investments serving as collateral for outstanding loans. b. Savings account balances. c. Margin accounts held with brokers. d. Minimum deposits required to be maintained in connection with a borrowing arrangement.

D. Minimum deposits required to be maintained in connection with a borrowing arrangement.

The advantage of relating a company's bad debt expense to its outstanding accounts receivable is that this approach gives a reasonably correct statement of receivables in the balance sheet. best relates bad debt expense to the period of sale. makes estimates of uncollectible accounts unnecessary. is the only generally accepted method for valuing accounts receivable.

gives a reasonably correct statement of receivables in the balance sheet.

What is a possible reason for accounts receivable turnover to increase from one year to the next year? Write-off uncollectible receivables. Improved collection process. Granting credit to customers with lower credit quality. Decreased credit sales during a recession

improved collection processes

The accounts receivable turnover is computed by dividing net sales by average net receivables. gross sales by ending net receivables. gross sales by average net receivables. net sales by ending net receivables.

net sales by average net receivables.

Under which section of the balance sheet is "cash restricted for plant expansion" reported? Current liabilities. Current assets. Stockholders' equity. Non-current assets.

non current assets

The accounts receivable turnover measures the percentage of accounts receivable arising during certain seasons. number of times the average balance of accounts receivable is collected during the period. percentage of accounts receivable turned over to a collection agency during the period. number of times the average balance of inventory is sold during the period.

number of times the average balance of accounts receivable is collected during the period.

Assuming that the ideal measure of short-term receivables in the balance sheet is the discounted value of the cash to be received in the future, failure to follow this practice usually does not make the balance sheet misleading because most receivables can be sold to a bank or factor. the amount of the discount is not material. most short-term receivables are not interest-bearing. the allowance for uncollectible accounts includes a discount element.

the amount of the discount is not material.

Which of the following is a generally accepted method of determining the amount of the adjustment to bad debt expense? A percentage of accounts receivable adjusted for the balance in the allowance. An amount derived from aging accounts receivable and not adjusted for the balance in the allowance. Actual losses from uncollectible accounts. A percentage of accounts receivable not adjusted for the balance in the allowance.

A percentage of accounts receivable adjusted for the balance in the allowance.

Which of the following statements is incorrect regarding the classification of accounts and notes receivable? Disclose any loss contingencies that exist on the receivables. Any discount or premium resulting from the determination of present value in notes receivable transactions is an asset or liability respectively. Valuation accounts should be appropriately offset against the proper receivable accounts. Segregation of the different types of receivables is required if they are material.

Any discount or premium resulting from the determination of present value in notes receivable transactions is an asset or liability respectively.

Which of the following concepts relates to using the allowance method in accounting for accounts receivable? Bad debt expense is management's determination of which accounts will be sent to the attorney for collection. Bad debt expense is an estimate that is based on historical and prospective information. Bad debt expense is based on the actual amounts determined to be uncollectible. Bad debt expense is an estimate that is based only on an analysis of the receivables aging.

Bad debt expense is an estimate that is based on historical and prospective information.

Which of the following methods of determining bad debt expense does not properly match expense and revenue? Charging bad debts with an amount derived from aging accounts receivable under the allowance method. Charging bad debts as accounts are written off as uncollectible. Charging bad debts with a percentage of sales under the allowance method. Charging bad debts with an amount derived from a percentage of accounts receivable under the allowance method.

Charging bad debts as accounts are written off as uncollectible.

Which of the following is included in the normal journal entry to record the collection of accounts receivable previously written off when using the allowance method? Debit Accounts Receivable, credit Allowance for Doubtful Accounts. Debit Allowance for Doubtful Accounts, credit Bad Debt Expense. Debit Bad Debt Expense, credit Allowance for Doubtful Accounts. Debit Allowance for Doubtful Accounts, credit Accounts Receivable.

Debit Accounts Receivable, credit Allowance for Doubtful Accounts.`

What is the normal journal entry when writing-off an account as uncollectible under the allowance method? Debit Allowance for Doubtful Accounts, credit Accounts Receivable. Debit Allowance for Doubtful Accounts, credit Bad Debt Expense. Debit Bad Debt Expense, credit Allowance for Doubtful Accounts. Debit Accounts Receivable, credit Allowance for Doubtful Accounts.

Debit Allowance for Doubtful Accounts, credit Accounts Receivable.

What is the normal journal entry for recording bad debt expense under the allowance method? Debit Allowance for Doubtful Accounts, credit Accounts Receivable. Debit Accounts Receivable, credit Allowance for Doubtful Accounts. Debit Allowance for Doubtful Accounts, credit Bad Debt Expense. Debit Bad Debt Expense, credit Allowance for Doubtful Accounts.

Debit Bad Debt Expense, credit Allowance for Doubtful Accounts.

Which of the following is an appropriate reconciling item to the balance per bank in a bank reconciliation? Bank service charge. Bank interest. Changeback for NSF check. Deposit in transit.

Deposit in Transit

Why is the allowance method preferred over the direct write-off method of accounting for bad debts? Allowance method is used for tax purposes. Estimates are used. Determining worthless accounts under direct write-off method is difficult to do. Improved matching of bad debt expense with revenue.

Improved matching of bad debt expense with revenue.`

At the beginning of 2016, Gannon Company received a three-year zero-interest-bearing $1,000 trade note. The market rate for equivalent notes was 8% at that time. Gannon reported this note as a $1,000 trade note receivable on its 2016 year-end statement of financial position and $1,000 as sales revenue for 2016. What effect did this accounting for the note have on Gannon's net earnings for 2016, 2017, 2018, and its retained earnings at the end of 2018, respectively? Overstate, understate, understate, understate Overstate, overstate, understate, zero Overstate, overstate, overstate, overstate Overstate, understate, understate, zero.

Overstate, understate, understate, zero.

Which of the following methods of determining annual bad debt expense best achieves the matching concept? Direct write-off Percentage of ending accounts receivable Percentage of average accounts receivable Percentage of sales

Percentage of sales

Which of the following statements is correct regarding receivables? Receivables are non-financial assets. Receivables are claims held against customers and others for money, goods, or services. Receivables that are expected to be collected within a year are classified as noncurrent. Receivables are written promises of the purchaser to pay for goods or services.

Receivables are claims held against customers and others for money, goods, or services`

Which of the following is true when accounts receivable are factored without recourse? The factor assumes the risk of collectibility and absorbs any credit losses in collecting the receivables. The transaction may be accounted for either as a secured borrowing or as a sale, depending upon the substance of the transaction. The receivables are used as collateral for a promissory note issued to the factor by the owner of the receivables. The financing cost (interest expense) should be recognized ratably over the collection period of the receivables.

The factor assumes the risk of collectibility and absorbs any credit losses in collecting the receivables.

What is "recourse" as it relates to selling receivables? The obligation of the seller of the receivables to pay the purchaser in case the debtor fails to pay. The obligation of the purchaser of the receivables to pay the seller if all of the receivables are collected. The obligation of the purchaser of the receivables to pay the seller in case the debtor fails to pay. The obligation of the seller of the receivables to pay the purchaser in case the debtor returns the product related to the sale.

The obligation of the seller of the receivables to pay the purchaser in case the debtor fails to pay.

Of the following conditions, which is the only one that is not required if the transfer of receivables with recourse is to be accounted for as a sale? The transferor surrenders control of the future economic benefits of the receivables. The transferor is obligated to make a genuine effort to identify those receivables that are uncollectible. The transferee cannot require the transferor to repurchase the receivables. The transferor's obligation under the recourse provisions can be reasonably estimated.

The transferor is obligated to make a genuine effort to identify those receivables that are uncollectible.

When should a transfer of receivables be recorded as a sale? The transferor maintains effective control over the transferred assets through an agreement to repurchase or redeem them prior to their maturity. The buyer surrenders control of the receivables to the seller. The transferee cannot pledge or exchange the transferred assets. The transferred assets are isolated from the transferor.

The transferred assets are isolated from the transferor.

Why would a company sell receivables to another company? To limit its legal liability. To accelerate access to amounts collected. To comply with customer agreements. To improve the quality of its credit granting process

To accelerate access to amounts collected.

Which of the following statements is not true of fair value option? Unrealized holding gains and losses from fair value adjustments are reported as a component of comprehensive income. Receivables are recorded at fair value in the financial statements. The International Accounting Standards Board believes that fair value measurement for financial instruments provides more relevant and understandable information than historical cost. An unrealized holding gain or loss is the net change in the fair value of the receivable from one period to another, exclusive of interest revenue.

Unrealized holding gains and losses from fair value adjustments are reported as a component of comprehensive income.

Which of the following items should be included in accounts receivable reported on the balance sheet? Interest receivable. Allowance for doubtful accounts. Advances to related parties and officers. Notes receivable.

allowance for doubtful accounts

The category "trade receivables" includes amounts owed by customers for goods bought or services rendered. advances to officers and employees. income tax refunds receivable. claims against insurance companies for casualties sustained.

amounts owed by customers for goods bought or services rendered.

Antique Company has notes receivable that have a fair value of $920,000 and a carrying amount of $710,000. Antique decides on December 31, 2017, to use the fair value option for these recently-acquired receivables. The adjusting entry to record this change will include a: credit to Notes Receivable for $210,000. credit to Unrealized Holding Gain or Loss―Income for $210,000. debit to Notes Receivable for $920,000. debit to Unrealized Holding Gain or Loss―Income for $210,000.

credit to Unrealized Holding Gain or Loss―Income for $210,000.

A cash equivalent is a short-term, highly liquid investment that is readily convertible into known amounts of cash and is acceptable as a means to pay current liabilities. is so near its maturity that it presents insignificant risk of changes in interest rates. has a current market value that is greater than its original cost. bears an interest rate that is at least equal to the prime rate of interest at the date of liquidation.

is so near its maturity that it presents insignificant risk of changes in interest rates.

The journal entries for a bank reconciliation may include a debit to Office Expense for bank service charges. may include a debit to Accounts Payable for an NSF check. may include a credit to Accounts Receivable for an NSF check. are taken from the "balance per bank" section only.

may include a debit to Office Expense for bank service charges.