TestBank financial accounting 2n spiceland ch5

Ch5 Student: _ Credit sales transfer products and services to a customer today while bearing the risk of collecting payment from that customer in the future True At the time of a credit sale, a company would record an increase in assets and an increase in revenues True False A sale on account for $1,000 offered with terms 2/10, n/30 means that the customers will get a $2 discount if payment is made within 10 days; otherwise, full payment is due within 30 days True False A sales discount represents a reduction, not in the selling price of a product or service, but in the amount to be paid by a credit customer if payment is made within a specified period of time True False When a company sells a $100 service with a 20% trade discount, $80 of revenue is recognized True False Trade discounts represent a discount offered to the purchasers for quick payment True False Accounts receivable represent the amount of cash owed to the company by its customers from the sale of products or services on account True False A sale on account is recorded as a debit to Service Revenue and a credit to Accounts Receivable True False False The Sales Discounts account is an example of a contra revenue account True False 10 The Sales Discounts account is an expense account True False 11 Sales returns and allowances occur when the buyer returns the goods or the seller reduces the customer's balance owed True False 12 A sales allowance is recorded as a debit to Accounts Receivable and a credit to Sales Allowances True False 13 The Sales Returns account is an expense account True False 14 If a company has total revenues of $100,000, sales discounts of $3,000, sales returns of $4,000, and sales allowances of $2,000, the income statement will report net revenues of $91,000 True False 15 Accounts receivable are reported at their net realizable value True False 16 The net realizable value of accounts receivable is the full amount owed by customers True False 17 Customers' accounts that we no longer consider collectible are referred to as uncollectible accounts (or bad debts) True False 18 The direct write-off method involves recording an adjustment at the end of each period to account for the possibility of future uncollectible accounts True False 19 The adjustment to account for future bad debts has the effect of (1) reducing assets and (2) increasing liabilities True False 20 The adjustment for uncollectible accounts involves a debit to Bad Debt Expense and a credit to the Allowance for Uncollectible Accounts True False 21 The Allowance for Uncollectible Accounts is a contra asset account representing the amount of accounts receivable that we not expect to collect True False 22 Bad debt expense is the amount of the adjustment to the allowance for uncollectible accounts that represents the cost of the estimated future bad debts True False 23 One disadvantage of the allowance method (over the direct write-off method) for recording uncollectible accounts is that it generally matches bad debt expense with the revenue it helped to generate True False 24 If a company is owed $10,000 by its customers, but it expects that $1,000 will not be collected, accounts receivable in the balance sheet are reported at the net amount of $9,000 True False 25 Under the allowance method, when a company writes off an account receivable as an actual bad debt, it reduces total assets True False 26 Under the allowance method, when a company writes off an account receivable as an actual bad debt, it records an expense True False 27 Under the allowance method, the write-off of an actual bad debt is recorded with a debit to the Allowance for Uncollectible Accounts and a credit to Accounts Receivable True False 28 Under the allowance method, when a company collects cash from an account previously written off, total assets increase True False 29 A credit balance in the Allowance for Uncollectible Accounts before adjustment indicates that last year's estimate of uncollectible accounts may have been too high True False 30 A debit balance in the Allowance for Uncollectible Accounts before adjustment indicates that last year's estimate of uncollectible accounts was too low True False 31 The aging method for estimating uncollectible accounts considers that a higher percentage of "older" accounts will not be collected compared to "newer" accounts True False 32 A company expects 5% of its newer accounts receivable to be uncollectible and 20% of its older accounts to be uncollectible If the company has $40,000 of newer accounts and $5,000 of older accounts, the total estimate of uncollectible accounts is $2,000 True False 33 Under the direct write-off method, bad debt expense is recorded at the time accounts are known to be uncollectible True False 34 The direct write-off method is used for tax purposes but is generally not permitted for financial reporting True False 35 The direct write-off method violates the matching principle True False 36 Under the direct write-off method, recording an estimate of future uncollectible accounts includes a debit to Bad Debt Expense and a credit to the Allowance for Uncollectible Accounts True False 37 Notes receivable are similar to accounts receivable but are more formal credit arrangements evidenced by a written debt instrument, or note True False 38 Notes receivable typically arise from sales to customers True False 39 Notes receivable are assets and are reported in the balance sheet True False 40 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 True False 41 A $10,000 note that has a stated interest rate of 10% and is due in six months would have interest of $1,000 True False 42 Accrued interest on a note receivable is interest earned by the end of the year but not yet received True False 43 Accrued interest on a note receivable has the effects of increasing assets and increasing liabilities True False 44 Two important ratios that help in understanding the company's effectiveness in managing receivables are the receivables turnover ratio and the average collection period True False 45 The receivables turnover ratio shows the number of times during a year that the average accounts receivable balance is collected (or "turns over") True False 46 The receivables turnover ratio equals average accounts receivable divided by net credit sales True False 47 A lower receivables turnover ratio generally indicates more favorable management of accounts receivable by company managers True False 48 The average collection period shows the approximate number of days the average accounts receivable balance is outstanding True False 49 The percentage-of-receivables method for estimating uncollectible accounts is commonly referred to as the balance sheet method, because the estimate of bad debts is based on a balance sheet amount—accounts receivable True False 50 The percentage-of-credit-sales method for estimating uncollectible accounts is commonly referred to as the income statement method, because it always results in a higher amount of net income being reported in the income statement True False 51 Even though the percentage-of-receivables method and the percentage-of-credit-sales method use different accounts to estimate future uncollectible accounts, the amount of bad debt expense reported in the income statement will always be the same under the two methods True False 52 From an income statement perspective, the percentage-of-credit-sales method is typically preferable because it better matches the revenues (credit sales) with their related expenses (bad debts) True False 53 From a balance sheet perspective, the percentage-of-receivables method is typically preferable because assets (net accounts receivable) are reported closer to their net realizable value True False 54 The percentage-of-credit-sales method (income statement method) is allowed only if amounts not differ significantly from estimates using the percentage-of-receivables method True False 55 Which of the following best describes credit sales? A B C D Cash sales to customers that are new to the company Sales to customers using credit cards Sales to customers on account Sales with a high risk that the customer will return the product 56 Credits sales are recorded as: A B C D Debit Cash; credit Unearned Revenue Debit Service Revenue, credit Accounts Receivable Debit Cash; credit Service Revenue Debit Accounts Receivable, credit Service Revenue 57 Barton Health Services provided care to a patient worth $1,200 Because the patient was over the age of 65, Barton granted the patient a 20% discount and the customer paid the correct amount in cash How would Barton record the service transaction? A B C D Option a Option b Option c Option d 58 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: A B C D Sales Revenue Sales Discounts Sales Returns Sales Allowances 59 Tom's Textiles shipped the wrong material to a customer, who refused to accept the order Upon receipt of the material, Tom's would credit Accounts Receivable and debit: A B C D Sales Revenue Sales Discounts Sales Returns Sales Allowances 60 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: A B C D Bad debt Sales discount Sales return Sales allowances 61 On November 10 of the current year, Flores Mills sold carpet to a customer for $8,000 with credit terms 2/ 10, n/30 How would Flores record the sale on November 10? A B C D Option a Option b Option c Option d 62 On November 10 of the current year, Flores Mills provides services to a customer for $8,000 with credit terms 2/10, n/30 The customer made the correct payment on November 17 How would Flores record the collection of cash on November 17? A B C D Option a Option b Option c Option d 63 On November 10 of the current year, Flores Mills provides services to a customer for $8,000 with credit terms 2/10, n/30 The customer made the correct payment on December How would Flores record the collection of cash on December 5? A B C D Option a Option b Option c Option d 64 Oswego Clay Pipe Company provides services of $46,000 to Southeast Water District #45 on April 12 of the current year with terms 1/15, n/60 What would Oswego record on April 12? A B C D Option a Option b Option c Option d 65 Oswego Clay Pipe Company provides services of $46,000 to Southeast Water District #45 on April 12 of the current year with terms 1/15, n/60 What would Oswego record on April 23, assuming the customer made the correct payment on that date? A B C D Option a Option b Option c Option d 66 Oswego Clay Pipe Company provides services of $46,000 to Southeast Water District #45 on April 12 of the current year with terms 1/15, n/60 What would Oswego record on June 10, assuming the customer made the correct payment on that date? A B C D Option a Option b Option c Option d 67 Which of the following is recorded upon receipt of a payment on April 7, 2012, by a customer who pays a $900 invoice dated March 3, 2012, with terms 2/10, n/60? A B C D Debit Sales Discounts $18 Credit Purchase Discounts $18 Credit Accounts Receivable $882 Debit Cash $900 68 Accounts receivable are normally reported at the: A B C D Present value of future cash receipts Current value plus accrued interest Expected amount to be received Current value less expected collection costs 69 Shupe Inc estimates uncollectible accounts based on the percentage of accounts receivable What effect will recording the estimate of uncollectible accounts have on the accounting equation? A B C D Increase liabilities and decrease stockholders' equity Decrease assets and decrease liabilities Decrease assets and decrease stockholders' equity Increase assets and decrease stockholders' equity 70 Under the allowance method, which of the following does not change the balance in the Accounts Receivable account? A B C D Returns on credit sales Collections on customer accounts Bad debt expense adjustment Write-offs 71 At December 31, Gill Co reported accounts receivable of $238,000 and an allowance for uncollectible accounts of $600 (credit) 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: A B C D $6,540 $7,800 $7,140 $7,740 72 At December 31, Gill Co reported accounts receivable of $238,000 and an allowance for uncollectible accounts of $600 (debit) 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: A B C D $6,540 $7,800 $7,140 $7,740 73 At December 31, Amy Jo's Appliances had account balances in Accounts Receivable of $311,000 and $970 (credit) in Allowance for Uncollectible Accounts 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: A B C D $6,220 $6,450 $5,250 $7,190 Ch5 Key TRUE TRUE FALSE TRUE FALSE TRUE TRUE FALSE TRUE 10 FALSE 11 TRUE 12 FALSE 13 FALSE 14 TRUE 15 TRUE 16 FALSE 17 TRUE 18 FALSE 19 FALSE 20 TRUE 21 TRUE 22 TRUE 23 FALSE 24 TRUE 25 FALSE 26 FALSE 27 TRUE 28 FALSE 29 TRUE 30 TRUE 31 TRUE 32 FALSE 33 TRUE 34 TRUE 35 TRUE 36 FALSE 37 TRUE 38 FALSE 39 TRUE 40 TRUE 41 FALSE 42 TRUE 43 FALSE 44 TRUE 45 TRUE 46 FALSE 47 FALSE 48 TRUE 49 TRUE 50 FALSE 51 FALSE 52 TRUE 53 TRUE 54 TRUE 55 C 56 D 57 A 58 D 59 C 60 B 61 B 62 B 63 D 64 A 65 C 66 C 67 D 68 C 69 C 70 C 71 A 72 D 73 C 74 D 75 A 76 B 77 D 78 B 79 B 80 D 81 B 82 D 83 C 84 A 85 D 86 C 87 B 88 D 89 C 90 D 91 C 92 B 93 D 94 C 95 D 96 C 97 B 98 D 99 A 100 B 101 A 102 B 103 D 104 B 105 C 106 A 107 C 108 B 109 110 111 112 $440,000 113 $350,000 114 115 116 117 118 119 120 121 $56,000 122 $70,000 123 124 -$2,000 (or $2,000 debit) 125 126 $10,800 127 128 129 130 (a) $400; (b) months; (c) 5%; (d) $20,000 131 $1,200 132 2012 = $800; 2013 = $400 133 2012 = $4,500; 2013 = $6,000; 2012 = $1,500 134 135 136 137 Company = 22; Company = 25; Company is more efficient 138 139 140 141 A sales discount represents a reduction, not in the selling price of a product or service, but in the amount to be paid by a credit customer if paid within a specified period of time Sales returns occur when a customer returns a product Sales allowances occur when the seller reduces the customer's balance owed or provides at least a partial refund because of some deficiency in the company's product or service 142 Companies should account for uncollectible accounts receivable using the allowance method Under this method, a company estimates future bad debts and records those estimates as an expense and a contra asset in the current period 143 Net realizable value is the amount of cash a company expects to collect from its accounts receivable, and it is calculated as total accounts receivable minus an allowance for uncollectible accounts The net realizable value of accounts receivable is the amount reported in the balance sheet 144 The allowance method requires companies to estimate future bad debts and record those estimates in the current period as a reduction in accounts receivable (using a contra asset account) and an increase in bad debt expense The direct write-off method makes no attempt to estimate future bad debts Instead, the reduction in accounts receivable and increase in expense associated with bad debts is recorded only when the bad debt actually occurs Only the allowance method is allowed for financial reporting purposes 145 The receivables turnover ratio equals net sales divided by average accounts receivable The ratio shows the number of times during a year that the average accounts receivable balance is collected (or "turns over") Typically, a higher ratio is a good indicator of a company's effectiveness in managing receivables 146 The percentage-of-receivables method estimates future bad debts based on a balance sheet amount - accounts receivable The percentage-ofcredit-sales method estimates future bad debts based on an income statement amount - credit sales The current emphasis on better measurement of assets (balance sheet focus) outweighs the emphasis on better measurement of net income (income statement focus) This is why the percentageof-receivables method (balance sheet method) is the preferable method and most commonly used in practice, while the percentage-of-credit-sales method (income statement method) is allowed only if amounts not differ significantly from estimates using the percentage-of-receivables method 147 148 149 150 151 152 153 154 155 156 157 158 159 160 161 162 D 163 C 164 D 165 D 166 D 167 B 168 D 169 D 170 A 171 A 172 D 173 C 174 D 175 D 176 D 177 B 178 C 179 D 180 A 181 A 182 D 183 C 184 TRUE 185 TRUE 186 FALSE 187 TRUE 188 FALSE 189 TRUE 190 TRUE 191 FALSE 192 TRUE 193 FALSE 194 TRUE 195 FALSE 196 FALSE 197 TRUE 198 TRUE 199 FALSE 200 TRUE 201 FALSE 202 FALSE 203 TRUE 204 TRUE 205 TRUE 206 FALSE 207 TRUE 208 FALSE 209 FALSE 210 TRUE 211 FALSE 212 TRUE 213 TRUE 214 TRUE 215 FALSE 216 TRUE 217 TRUE 218 TRUE 219 FALSE 220 TRUE 221 FALSE 222 TRUE 223 TRUE 224 FALSE 225 TRUE 226 FALSE 227 TRUE 228 TRUE 229 FALSE 230 FALSE 231 TRUE 232 TRUE 233 FALSE 234 FALSE 235 TRUE 236 TRUE 237 TRUE 238 C 239 D 240 A 241 D 242 C 243 B 244 B 245 B 246 D 247 A 248 C 249 C 250 D 251 C 252 C 253 C 254 A 255 D 256 C 257 D 258 A 259 B 260 D 261 B 262 B 263 D 264 B 265 D 266 C 267 A 268 D 269 C 270 B 271 D 272 C 273 D 274 C 275 B 276 D 277 C 278 D 279 C 280 B 281 D 282 A 283 B 284 A 285 B 286 D 287 B 288 C 289 A 290 C 291 B 292 293 294 295 $440,000 296 $350,000 297 298 299 300 301 302 303 304 $56,000 305 $70,000 306 307 -$2,000 (or $2,000 debit) 308 309 $10,800 310 311 312 313 (a) $400; (b) months; (c) 5%; (d) $20,000 314 $1,200 315 2012 = $800; 2013 = $400 316 2012 = $4,500; 2013 = $6,000; 2012 = $1,500 317 318 319 320 Company = 22; Company = 25; Company is more efficient 321 322 323 324 A sales discount represents a reduction, not in the selling price of a product or service, but in the amount to be paid by a credit customer if paid within a specified period of time Sales returns occur when a customer returns a product Sales allowances occur when the seller reduces the customer's balance owed or provides at least a partial refund because of some deficiency in the company's product or service 325 Companies should account for uncollectible accounts receivable using the allowance method Under this method, a company estimates future bad debts and records those estimates as an expense and a contra asset in the current period 326 Net realizable value is the amount of cash a company expects to collect from its accounts receivable, and it is calculated as total accounts receivable minus an allowance for uncollectible accounts The net realizable value of accounts receivable is the amount reported in the balance sheet 327 The allowance method requires companies to estimate future bad debts and record those estimates in the current period as a reduction in accounts receivable (using a contra asset account) and an increase in bad debt expense The direct write-off method makes no attempt to estimate future bad debts Instead, the reduction in accounts receivable and increase in expense associated with bad debts is recorded only when the bad debt actually occurs Only the allowance method is allowed for financial reporting purposes 328 The receivables turnover ratio equals net sales divided by average accounts receivable The ratio shows the number of times during a year that the average accounts receivable balance is collected (or "turns over") Typically, a higher ratio is a good indicator of a company's effectiveness in managing receivables 329 The percentage-of-receivables method estimates future bad debts based on a balance sheet amount - accounts receivable The percentage-ofcredit-sales method estimates future bad debts based on an income statement amount - credit sales The current emphasis on better measurement of assets (balance sheet focus) outweighs the emphasis on better measurement of net income (income statement focus) This is why the percentageof-receivables method (balance sheet method) is the preferable method and most commonly used in practice, while the percentage-of-credit-sales method (income statement method) is allowed only if amounts not differ significantly from estimates using the percentage-of-receivables method 330 331 332 333 334 335 336 337 338 339 340 341 342 343 344 345 D 346 C 347 D 348 D 349 D 350 B 351 D 352 D 353 A 354 A 355 D 356 C 357 D 358 D 359 D 360 B 361 C 362 D 363 A 364 A 365 D 366 C Ch5 Summary Category AACSB: Analytic AACSB: Reflective Thinking AICPA: Critical Thinking AICPA: Decision Making AICPA: Measurement AICPA: Reporting Blooms: Analysis Blooms: Analysis Blooms: Application Blooms: Application Blooms: Comprehension Blooms: Comprehension Blooms: Evaluation Blooms: Evaluation Blooms: Knowledge Blooms: Knowledge Blooms: Synthesis Blooms: Synthesis Difficulty: Easy Difficulty: Hard Difficulty: Medium Learning Objective: 05-01 Recognize accounts receivable Learning Objective: 05-02 Calculate net revenues using discounts; returns; and allowances Learning Objective: 05-03 Record an allowance for future uncollectible accounts Learning Objective: 05-04 Apply the procedure to write off accounts receivable as uncollectible Learning Objective: 05-05 Use the aging method to estimate future uncollectible accounts Learning Objective: 05-06 Contrast the allowance method and direct write-off method when accounting for uncollectible accounts Learning Objective: 05-06 Contrast the allowance method and direct write-off method when accounting for uncollectible accounts.-off method when accounting for uncollectible accounts Learning Objective: 05-07 Apply the procedure to account for notes receivable; including interest calculation Learning Objective: 05-08 Calculate key ratios investors use to monitor a companys effectiveness in managing receivables Learning Objective: 05-08 Calculate key ratios investors use to monitor a companys effectiveness in managing receivables Learning Objective: 05-09 Estimate uncollectible accounts using the percentage-of-credit-sales method Spiceland - Chapter 05 # of Questions 180 186 124 20 194 28 80 80 17 17 22 22 2 59 59 3 94 118 154 40 82 88 56 34 34 46 12 12 28 370 ... debt is written-off 92 Which method is not allowed under Generally Accepted Accounting Principles for the purpose of accounting for uncollectible accounts? A B C D Allowance method Direct write-off... write-off method for recording uncollectible accounts Which of the two is acceptable under financial accounting rules? 145.How is the receivables turnover ratio measured? What does this ratio... Accounts Receivable Debit Bad Debt Expense, credit Accounts Receivable No adjustment is made 90 Which accounting principle does the direct write-off method violate? A B C D Cost Realization Revenue