Chapter 6 SB

Which method for accounting for doubtful accounts is more accurate?

Aging of accounts receivable

An EFT cash receipt from a customer is ______.

added to the cash balance

__________________ ______________ written by the company should be deducted from the bank balance on the company's bank reconciliation.

Blank 1: Outstanding Blank 2: checks

____________in transit should be added to the cash balance per the bank statement when preparing a bank reconciliation.

Deposits

Which of the following is not an accurate statement about internal control?

It guarantees the management will behave ethically.

The days to collect ratio provides what kind of information? (Check all that apply.)

That a higher number of days means a longer (worse) time for collection The average number of days from sale on account to collection

Removing an uncollectible account and its corresponding allowance from the accounting records is called ______.

a write-off

An analyst sees the line item Trade accounts receivable, net of allowances of $2,040,000, with a balance of $19,500,000. Which of the following statements is correct. (Select all that apply.)

$19,500,000 is the expected amount to be collected from customers $2,040,000 is the amount estimated to be uncollectible $21,540,000 is the gross receivables Reason: The sum of all of its customers' accounts equals $21,540,000 (= $19,500,000 + $2,040,000)

Net sales revenue is $720,000. Beginning and ending net trade accounts receivable are $62,000 and $58,000, respectively. Calculate the receivables turnover ratio.

12.0 times Reason: Use the average, not beginning Net Trade Accounts Receivable. The turnover equals 12.0 times (= $720,000/(($62,000 + $58,000)/2)).

The challenge businesses face when estimating the allowance for doubtful accounts is that ______.

at the time of the sale, it is not known which particular customer will be a "bad" customer

When preparing a bank reconciliation, NSF checks are ______ and must be ______ the company's cash balance.

bad checks that have been deposited; deducted from

An example of an EFT is ______.

direct deposit of employee paychecks

Which of the following is a current asset? (Check all that apply.)

Accounts receivable Notes receivable due within 90 days Trade receivable

____________ ____________ Expense is associated with the estimated uncollectible accounts receivable. (Enter one word per blank.)

Bad Debit

Which of the following are typically netted against sales to arrive at net sales? (Check all that apply.)

Sales returns and allowances Credit card discounts Sales discounts

Effective cash management includes ______. (Check all that apply.)

maintaining accurate accounting records of cash flows preventing excess accumulation of cash in checking accounts safeguarding cash from theft

Short-term highly liquid investments with a maturity of__________months or less that can be readily converted to cash with little risk of loss are classified as cash equivalents.

three

Which of the following are contra-asset accounts? (Check all that apply.)

Allowance for doubtful accounts Accumulated depreciation

The allowance method requires that ______. (Check all that apply.)

Bad Debt Expense be recorded in the same period as the related credit sales Allowance for Doubtful Accounts be netted against Accounts Receivable

Delectable, Inc.'s unadjusted trial balance includes Accounts Receivable of $10,000; Allowance for Doubtful Accounts of $50 credit balance; and Sales Revenue of $100,000 (all on credit). Management estimates that 2% of credit sales will be uncollectible. Delectable's financial statements will show ______. (Check all that apply.)

Bad Debt Expense of $2,000 Allowance for Doubtful Accounts of $2,050 credit balance Reason: This is the credit sales method and requires an adjusting entry that debits Bad Debt Expense and credits Allowance for Doubtful Accounts for $2,000 (=$100,000 x 2%). The unadjusted $50 credit balance plus the credit of $2,000 results in a $2,050 credit balance in the Allowance account.

Bad debt expense is included in the category ______ net income and stockholders' equity.

General and Administrative Expenses on the income statement and decreases

The ________of credit sales is the method that estimates bad debt expense using credit sales and the____________of accounts receivable method estimates the allowance for doubtful accounts based on the time each account receivable has been outstanding.

Percentage Aging

In a bank reconciliation, interest revenue earned on the bank account balance is ______.

added to the book balance Reason: The bank has already added the interest revenue to the company's bank account balance. The book balance needs to be adjusted by adding the interest earned per the bank statement.

The adjusting entry to record the allowance for doubtful accounts causes total ______. (Check all that apply.)

assets to decrease stockholders' equity to decrease Reason: Allowance for Doubtful Accounts is a contra-asset account that is used to reduce Accounts Receivable by the amount of estimated receivables expected not to be collected. The adjusting entry debits Bad Debt Expense (+E,-SE) and credits Allowance for Doubtful Accounts (+xA,-A).

hen preparing a bank reconciliation, NSF checks are ______ and must be ______ the company's cash balance.

bad checks that have been deposited; deducted from

The account that reports the amount that may not be collected and is matched against credit sales of the period is referred to as ______.

bad debt expense

The line item Trade accounts receivable, net of allowances will be found on the ______.

balance sheet

Accounts Receivable is classified on the ______.

balance sheet as a current asset

When using the allowance method, the adjusting entry to record estimated bad debt expense includes a ______. (Check all that apply.)

credit to Allowance for Doubtful Accounts debit to Bad Debt Expense Reason: Allowance for Doubtful Accounts is a contra-asset account that is used to reduce Accounts Receivable by the amount of estimated receivables expected not to be collected. The adjusting entry debits Bad Debt Expense (+E,-SE) and credits Allowance for Doubtful Accounts (+xA,-A).

Management estimates that 1% of the $100,000 of credit sales will be uncollectible. The Allowance for Doubtful Accounts has a $100 unadjusted credit balance. The adjusting entry to record estimated bad debts includes a ______. (Check all that apply.)

credit to Allowance for Doubtful Accounts of $1,000 debit to Bad Debt Expense of $1,000 Reason: Management estimates that the Bad debt expense on the income statement is $1,000 (= 1% x $100,000). Thus the entry includes a debit to Bad debt expense of $1,000. The corresponding $1,000 credit is to Allowance for doubtful accounts. After adjustment, the Allowance for Doubtful Accounts will have a $1,100 credit balance (=$100 unadjusted credit balance plus $1,000 credit adjustment) on the balance sheet.

The Allowance for Doubtful Accounts is a contra-asset account. Increases to the account (to record the period's estimated bad debt expense) are recorded with ______.

credits

Nim Com Soup, Inc. uses the allowance method to account for bad debt expense. It determines that a customer account of $10,000 should be written off as uncollectible. The write off of the account will include a ______.

debit Allowance for Doubtful Accounts

The entry to record NSF checks per the bank statement include a ______. (Check all that apply.)

debit to Receivables credit to Cash

Cash____________are investments with original maturities of three months or less that are readily convertible to cash and whose value is unlikely to change. Examples include bank certificates and US Treasury bills.

equivalents

A company's Bad Debt Expense reports the ______.

estimated amount of this period's credit sales that customers will fail to pay Reason: In accordance with the expense recognition principle, an estimated Bad Debt Expense is required to be recorded in the same period as the related credit sale so as not to overstate net income in the period the bad sales were made. The challenge is the company does not know which specific customers will end up not paying, and thus it must estimate the amount.

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

has no effect on net income

A company must disclose the revenue recognition rule they follow ______

in the footnote called Summary of Significant Accounting Policies

A reader of financial statements determines when revenues are recognized by looking at the ______.

note to the financial statements called "Summary of Significant Accounting Policies"

In addition to safeguarding cash from theft, maintaining accurate accounting records of cash flows and other controls, effective cash management also involves ______.

preventing excess accumulation of cash in checking accounts

Accounts receivable has a $2,300 balance, and the Allowance for doubtful accounts has a $200 credit balance. An $80 account receivable is written off. The net book value of receivables on the balance sheet after the write-off equals ______.

$2,100 Reason: Net receivables = ($2,300 - 80) - (200 - 80) = $2,100

In its first year of business, ABC, Inc. had Accounts Receivable of $8,000 and Credit sales of $38,000. Management estimates 2% of the total credit sales will be uncollectible. Bad Debt Expense equals ______.

$760 Reason: Management estimates that 2% of its sales, not its receivables, will be uncollectible. Bad Debt Expense = $38,000 x 0.02=$760.

Cellar's Inc. sold $800,000 of merchandise with sales terms of 2/10, n/30 and the customers paid within 10 days. The net sales equals ______.

$784,000 Reason: The discount term 2/10, n/30 means a 2% discount if paid within 10 days, otherwise 100% is due within 30 days. The company paid within 10 days and is eligible for the discount: $784,000 (= $800,000 Sales - ($800,000 x 2% discount))

Acme, Inc.'s books show an ending cash balance of $10,000 before preparing the bank reconciliation. Given the bank reconciliation shows outstanding checks of $3,000; deposits in transit 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 Reason: The correct cash balance is $9,910 (=$10,000 - 100 + 10). Outstanding checks are checks that have been written and recorded by the company and sent to the payee. Deposits in transit are have already been recorded by the company and taken to the bank.

The Allowance for Doubtful Accounts, a contra-asset account, is ______ when specific uncollectible accounts are written-off.

debited Reason: The Allowance for Doubtful Accounts is a contra-asset account, its normal balance is a credit. Thus, debits, not credits, decrease this account. Originally, the adjusting entry recorded an estimated amount of uncollectible accounts with a debit to Bad Debt Expense (+E,-SE) and credit Allowance for Doubtful Accounts (+xA,-A). Accounts Receivable could not be reduced until it is known which specific customer's account should be credited. Later when a non-paying customer is identified, the specific customer's Accounts Receivable (-A) can now be credited and taken out of the Allowance for Doubtful Accounts (+xA,-A) by debiting it.

A timing difference in cash occurs when a company records a transaction either before or after the bank records the same transaction. A bank____________is used to explain these timing differences. (Enter one word per blank.)

reconciliation

If a company records a transaction before the bank records the same transaction, this is called a/an ______ difference.

timing

Identify which of the following would cause timing differences between the bank statement and what is recorded in a company's cash account. (Check all that apply.)

Deposits in transit Outstanding checks Bank service charges NSF checks

The objectives when accounting for accounts receivable and bad debts are to ______. (Check all that apply.)

report accounts receivable net of the amount the company does not expect to collect (i.e., at the net realizable value) match the cost of bad debts to the accounting period in which the related credit sales are made Reason: An objective is to comply with the expense recognition principle which requires an estimated amount of bad debt expense be recorded in the same period as the related credit sales so as not to overstate assets and net income.

NSF checks written by customers are ______. (Check all that apply.)

not sufficient fund checks subtracted from the company's cash balance

If a company debits Allowance for doubtful accounts and credits Accounts receivable it is recording the ______.

write off of a specific uncollectible account

Multiple Choice Question A $250 bank deposit made on the last day of the month did not appear on this month's bank statement. How would this item be treated on the bank reconciliation?

It would be added to the bank balance. Reason: Deposits in transit should be added to the bank, not book, balance. The deposit was already added to the books back when the deposit was made. The bank has yet to record the deposit.

Match the following methods for estimating bad debts with their descriptions.

Percentage of credit sales method -quires directly computing the desired amount of bad debt expense on the income statement Requires directly computing the desired amount of bad debt expense on the income statement Aging of receivables method -Requires directly computing the desired allowance for doubtful accounts on the balance sheet and then computing the amount of the adjusting entry necessary to obtain this desired balance Requires directly computing the desired allowance for doubtful accounts on the balance sheet and then computing the amount of the adjusting entry necessary to obtain this desired balance

Which method for accounting for doubtful accounts is easier to apply but less accurate and thus tends to be used on a monthly basis, instead of on an annual basis?

Percentage of total credit sales method Reason: Aging of accounts receivable method is more accurate but not as easy to apply as the percentage of credit sales method.

Malik Corp.'s bank statement has an ending balance of $50,000. The deposits in transit were $6,000. NSF checks were $1,000. Checks outstanding at the end of the month were $3,000. Using the bank statement, what is the corrected cash balance? Multiple choice question. $53,000

Reason: $50,000 + 6,000 - 3,000 = $53,000. The NSF checks are already recorded by the bank.

During the year, ABC Corp. realizes that a particular customer will never pay. What action should ABC take?

Write off the uncollectible account and its corresponding allowance from the accounting records. Reason: The adjusting entry credits Allowance for Doubtful Accounts (+xA,-A) instead of Accounts Receivable because it is an estimate. Accounts Receivable cannot be reduced until it is known which specific customer's account should be credited. Later when a non-paying customer is identified, it is written off and the specific customer's Accounts Receivable (-A) can be credited and taken out of the Allowance for Doubtful Accounts (+xA,-A) by debiting it.

The benefits of internal control procedures are that they ______. (Check all that apply.)

improve the efficiency and effectiveness of operations enhance the reliability of accounting information protect against theft of assets

The allowance method is a method of accounting that ______ for estimated bad debts.

decreases net accounts receivable

In a bank reconciliation, an outstanding check is ______.

deducted from the bank balance Reason: Outstanding checks have already been subtracted from the book's balance but have not yet been subtracted from bank's balance. Thus the outstanding checks must be subtracted from the bank's balance on the reconciliation.

Outstanding checks written by the company should be a(n) ______ on the company's bank reconciliation.

deduction from the bank balance Reason: Outstanding checks are subtracted from the bank balance because the checks will reduce the bank balance when the checks clear the bank. The outstanding checks have already been subtracted from the book balance when the checks were written.

Which of the following would be added to the cash balance per the bank statement when preparing a bank reconciliation?

deposits in transit

Deposits in transit are ______.

deposits sent to the bank and recorded by the company but have not yet been recorded by the bank

A high receivables turnover ratio is a sign of a company's ______.

effectiveness in granting and collecting credit

Management estimates that 1% of the $100,000 of credit sales will be uncollectible. The Allowance for Doubtful Accounts has a $100 unadjusted debit balance. The Allowance for Doubtful Accounts balance on the balance sheet will equal ______.

$900 Reason: Management estimates that the expense is $1,000 or 1%x$100,000. The entry is a $1,000 debit to Bad Debt Expense and $1,000 credit to the Allowance for Doubtful Accounts. The balance in the allowance account, after adjustment, will equal $900 (=$100 debit plus $1,000 credit) on the balance sheet.

Muffins & Turnovers, Inc.'s net trade accounts receivable are $880 and $820 at the end of 2019 and 2018 respectively. Net sales for 2019 are $7,225. The accounts receivable turnover for 2019 is ______ times.

8.5 Reason: Receivable turnover=$7,225/(($880+820)/2)=8.5 times

If the direction of change in Accounts Receivable is a decrease from the prior period, the amount of that change is added to net income in the____________activities section of the statement of cash flows.

operating

Using the allowance method, which is the correct adjusting journal entry to record bad debt expense?

Debit Bad Debt Expense and credit Allowance for Doubtful Accounts Reason: Allowance for Doubtful Accounts is a contra-asset account that is used to reduce Accounts Receivable by the amount of estimated receivables expected not to be collected. The adjusting entry debits Bad Debt Expense (+E,-SE) and credits Allowance for Doubtful Accounts (+xA,-A).

This month's bank statement shows interest earned of $45. How would this item be treated on the bank reconciliation?

It would be added to the book balance.