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Exam 5: Receivables and Sales

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Question 41

True/False

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The receivables turnover ratio shows the number of times during a year that the average accounts receivable balance is collected (or "turns over").

A) True
B) False

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Question 42

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The direct write-off method is generally not permitted for financial reporting purposes because:

A) Compared to the allowance method,it would allow greater flexibility to managers in manipulating reported net income.
B) This method is primarily used for tax purposes.
C) It is too difficult to accurately estimate future bad debts.
D) Expenses (bad debts) are not properly matched with the revenues (credit sales) that they help to generate.

E) A) and D)
F) None of the above

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Question 43

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Which of the following best describes accounts receivable?

Gershwin Wallcovering Inc.shipped the wrong shade of paint to a customer.The customer agreed to keep the paint upon being offered a 15% price reduction.Gershwin would record this reduction by crediting Accounts Receivable and debiting:

Under the direct write-off method,what adjustment is made at the time an actual bad debt occurs?

A lower receivables turnover ratio generally indicates more favorable management of accounts receivable by company managers.A higher receivables turnover ratio generally indicates more favorable management of accounts receivable.

When $2,500 of accounts receivable are determined to be uncollectible,which of the following should the company record to write off the accounts using the allowance method?

Suppose a customer is unable to pay its account on time,so the company accepts a six-month interest-bearing note receivable to replace the customer's account receivable.Over the next six months,what effect will accepting the note receivable have on the company's financial statements?

At December 31,Gill Co.reported accounts receivable of $238,000 and an allowance for uncollectible accounts of $600 (credit) before any adjustments.An analysis of accounts receivable suggests that the allowance for uncollectible accounts should be 3% of accounts receivable.The amount of the adjustment for uncollectible accounts would be:

Prior to year-end adjusting entries,what would explain the Allowance for Uncollectible Accounts having a debit balance?

Under the allowance method,which of the following does not change the balance in the Accounts Receivable account?

At December 31,Amy Jo's Appliances had account balances in Accounts Receivable of $311,000 and in Allowance for Uncollectible Accounts of $970 (debit) before any adjustments.An analysis of Amy Jo's December 31 accounts receivable suggests that the allowance for uncollectible accounts should be 2% of accounts receivable.Bad debt expense for the year should be:

Which of the following provides an accurate match?

The adjustment to account for future bad debts has the effect of (1)reducing assets and (2)increasing liabilities.The adjustment has the effect of (1)reducing assets and (2)increasing expenses.An increase in expenses reduces net income and retained earnings.

A debit balance in the Allowance for Uncollectible Accounts before adjustment indicates that last year's estimate of uncollectible accounts was too low.

When customers purchase products on account,Spitz Manufacturing offers them a 2% reduction in the amount owed if they pay within 10 days.This is an example of a:

Under the allowance method,when a company writes off an account receivable as an actual bad debt,it reduces total assets.Writing off an account receivable has no effect on total assets.

The following information pertains to Lightning Inc. ,at the end of the year: Lightning uses the percentage-of-credit-sales method and estimates 1% of sales are uncollectible.What is the ending balance of the allowance account after the year-end adjustment? $\begin{array} { | l | r | l | } \hline \text { Credit Sales } & \$ 60,000 & \\\hline \text { Accounts Payable } & 10,000 & \\\hline \text { Accounts Receivable } & 7,000 & \\\hline \begin{array} { l } \text { Allowance for Uncollectible } \\\text { Accounts }\end{array} & 400 & \text { credit } \\\hline \text { Cash Sales } & 20,000 & \\\hline\end{array}$

Interest on a note receivable is calculated as the face value of the note times the annual interest rate stated on the note times the fraction of the year the note is outstanding.

A company collects an account receivable previously written off.Indicate how this transaction would affect (1) assets, (2) stockholders' equity,and (3) revenues.