Deck 6: Reporting and Interpreting Sales Revenue, Receivables, and Cash

Question 1

Prior year financial statements are adjusted when it is determined that prior year bad debt expense was too low.

Answer 1

False
Explanation: Prior year financial statements aren't adjusted; the current and/or future financial statements however will be adjusted.

Question 2

If the accounts receivable turnover ratio increases,the number of days it takes to collect the receivables also increases.

Answer 2

False
Explanation: The average collection period is calculated by dividing 365 by the receivables turnover ratio. Therefore the higher the receivable turnover ratio, the lower the number of days to collect the receivable will be.

Question 3

Credit card discounts are reported as operating expenses on an income statement.

Answer 3

False
Explanation: Credit card discounts are deducted from sales to calculate net sales.

Question 4

Cash equivalents such as treasury bills are reported as investments on the balance sheet.

Question 5

Sales discounts are deducted from sales in the calculation of net sales.

Question 6

Credit terms of "2/10,n/30" mean that if payment is made in two days,a 10% discount will be given; if not paid within two days,the full invoice price will be due in thirty days.

Question 7

The gross profit percentage is calculated by dividing net sales by gross profit.

Question 8

When goods are shipped FOB destination,the revenue from the sale is recognized on the shipment date.

Question 9

When preparing the statement of cash flows,the reason that we must adjust net sales revenue for the change in accounts receivables to convert net sales to cash collected from customers is that accounts receivable represents sales revenue not collected from customers at the beginning and end of the accounting year.

Question 10

The journal entry to write-off an uncollectible account does not change the net realizable value (book value)of accounts receivable.

Question 11

The gross profit percentage decreases when operating expenses increase.

Question 12

The accounts receivable aging schedule determines the dollar amount of uncollectible accounts receivable at year-end; this dollar amount of uncollectible accounts receivable is the bad debt expense that is recorded for the year regardless of the allowance for doubtful accounts balance.

Question 13

A company is thinking of borrowing money at an 18% annual interest rate in order to pay a $30,000 invoice within the discount period.The invoice terms are 2/10,n/30.They should borrow the money because they will have a net savings of 19.2%.

Question 14

When goods are shipped FOB shipping point,title passes to the buyer on the shipment date.

Question 15

When a particular account receivable is determined to be uncollectible,the journal entry to write-off the account reduces net income.

Question 16

The allowance for doubtful accounts is reported as a contra-asset on the balance sheet.

Question 17

Net sales multiplied by an historical percentage for bad debt expense,equals bad debt expense when using the percentage of credit sales method.

Question 18

The journal entry to record bad debt expense is made during the year that it is determined that a particular receivable is uncollectible.

Question 19

Sales returns and allowances is a contra-revenue account.

Question 20

The year-end journal entry to record bad debt expense reduces current assets and net income.

Question 21

Which of the following is correct when bad debt expense is recorded at year-end?

A)Current assets are not affected.
B)Gross profit will decrease.
C)Income from operations will decrease.
D)Current liabilities will increase.

Question 22

Which of the following statements is correct?

A)Revenue is recognized at the time of shipment when goods are shipped FOB destination.
B)Sales returns and allowances are reported as operating expenses on an income statement.
C)Revenue is recorded when title and risks of ownership transfer to the buyer.
D)Sales discounts are reported as operating expenses on an income statement.

Question 23

An objective of preparing the bank reconciliation is to reconcile the bank balance at the end of the period with the company's book balance at the end of the period.

Question 24

Which of the following journal entries correctly records the write-off of an uncollectible account receivable?

A) Bad debt expense
$\quad$ $\quad$ Accounts receivable
B) Allowance for doubtful accounts
$\quad$ $\quad$ Accounts receivable
C) Allowance for doubtful accounts
$\quad$ $\quad$ Bad debt expense
D) Bad debt expense
$\quad$ $\quad$ Allowance for doubtful accounts

Question 25

Which of the following journal entries correctly records bad debt expense?

A) Bad debt expense
$\quad$ $\quad$ Accounts receivable
B) Allowance for doubtful accounts
$\quad$ $\quad$ Accounts receivable
C) Allowance for doubtful accounts
$\quad$ $\quad$ Bad debt expense
D) Bad debt expense
$\quad$ $\quad$ Allowance for doubtful accounts

Question 26

Newark Company has provided the following information:
Cash sales,$450,000
Credit sales,$1,350,000
Selling and administrative expenses,$330,000
Sales returns and allowances,$90,000
Depreciation expense,$101,000
Gross profit,$1,360,000
Increase in accounts receivable,$55,000
Bad debt expense,$33,000
Sales discounts,$43,000
How much is Newark's gross profit percentage?

A)75.5%
B)81.6%
C)53.7%
D)83.2%

Question 27

A company sells magazines and collects subscription fees prior to the publication and distribution of the magazine.Which of the following correctly describes the impact on the financial statements when cash is received in advance from customers?

A)Current assets increase and gross profit increases.
B)Current liabilities aren't affected and stockholders' equity isn't affected.
C)Current assets increase and stockholders' equity increases.
D)Current liabilities increase and gross profit is not affected.

Question 28

Deposits in transit are deducted from the book balance when preparing the bank reconciliation.

Question 29

Flyer Company has provided the following information:
Cash sales,$150,000
Credit sales,$450,000
Selling and administrative expenses,$110,000
Sales returns and allowances,$30,000
Gross profit,$490,000
Accounts receivable,$110,000
Sales discounts,$14,000
Allowance for doubtful accounts credit balance,$1,200
How much is bad debt expense assuming that 5% of accounts receivable is estimated to be uncollectible?

A)$5,500
B)$6,700
C)$4,240
D)$4,300

Question 30

When completing the bank reconciliation,bank service charges should be deducted from the company's cash balance.

Question 31

Newark Company has provided the following information:
Cash sales,$450,000
Credit sales,$1,350,000
Selling and administrative expenses,$330,000
Sales returns and allowances,$90,000
Depreciation expense,$101,000
Gross profit,$1,360,000
Increase in accounts receivable,$55,000
Bad debt expense,$33,000
Sales discounts,$43,000
How much are Newark's net sales?

A)$1,634,000
B)$1,800,000
C)$1,667,000
D)$1,745,000

Question 32

Flyer Company has provided the following
Cash sales,$150,000
Credit sales,$450,000
Selling and administrative expenses,$110,000
Sales returns and allowances,$30,000
Gross profit,$290,000
Accounts receivable,$110,000
Sales discounts,$14,000
Allowance for doubtful accounts credit balance,$1,200
Flyer estimates bad debt expense assuming that 1.5% of credit sales are uncollectible.What is the balance in the allowance for doubtful accounts after bad debt expense is recorded?

A)$7,950
B)$6,750
C)$5,550
D)$7,800

Question 33

Newark Company has provided the following information:
Cash sales,$450,000
Credit sales,$1,350,000
Selling and administrative expenses,$330,000
Sales returns and allowances,$90,000
Depreciation expense,$101,000
Gross profit,$1,360,000
Increase in accounts receivable,$55,000
Bad debt expense,$33,000
Sales discounts,$43,000
How much is Newark's cost of goods sold?

A)$307,000
B)$252,000
C)$440,000
D)$340,000

Question 34

Flyer Company has provided the following information:
Cash sales,$150,000
Credit sales,$450,000
Selling and administrative expenses,$110,000
Sales returns and allowances,$30,000
Gross profit,$490,000
Accounts receivable,$110,000
Sales discounts,$14,000
Allowance for doubtful accounts credit balance,$1,200
Flyer estimates bad debt expense assuming that 5% of accounts receivable is estimated to be uncollectible.What is the balance in the allowance for doubtful accounts after bad debt expense is recorded?

A)$5,500
B)$6,700
C)$4,240
D)$4,300

Question 35

The CHS Company has provided the following information:
Accounts receivable written-off as uncollectible during the year amounted to $11,500.
The accounts receivable balance at the beginning of the year was $150,000.
The accounts receivable balance at the end of the year was $210,000.
The allowance for doubtful accounts balance at the beginning of the year was $14,000.
The allowance for doubtful accounts balance at the end of the year after the recording of bad debt expense was $12,900.
Credit sales during the year totaled $900,000.
How much was CHS Company's bad debt expense?

A)$11,500
B)$12,900
C)$10,400
D)$14,000

Question 36

If a check received from a customer that has been deposited by the seller is returned with the bank statement as a nonsufficient funds (NSF)check,it would appear on the seller's bank reconciliation as a deduction from the ending bank statement balance.

Question 37

Effective internal control of cash should include the separation of the duties for receiving and disbursing cash.

Question 38

Cash equivalents on the balance sheet include certificates of deposit with maturities of 60 days or more.

Question 39

Flyer Company has provided the following information:
Cash sales,$150,000
Credit sales,$450,000
Selling and administrative expenses,$110,000
Sales returns and allowances,$30,000
Gross profit,$290,000
Accounts receivable,$110,000
Sales discounts,$14,000
Allowance for doubtful accounts credit balance,$1,200
How much is Flyer's bad debt expense assuming that 1.5% of credit sales have historically been uncollectible.

A)$7,950
B)$6,750
C)$5,550
D)$7,800

Question 40

Which of the following statements is false?

A)The journal entry to record bad debt expense decreases current assets.
B)The journal entry to record bad debt expense decreases retained earnings.
C)The journal entry to write-off an uncollectible account receivable decreases operating income.
D)The journal entry to write-off an uncollectible account receivable does not affect current assets.

Question 41

Which of the following correctly describes credit terms of 2/10,n/30?

A)A two percent discount for early payment is available if the invoice is paid before the tenth day of the month following the month the sale.
B)A two percent discount for early payment is available within ten days of the date of sale.
C)A ten percent discount for early payment is available if the invoice is paid within two days of the date of the invoice.
D)A two percent discount for early payment is available if the invoice is paid after the tenth day, but before the thirtieth day of the invoice date.

Question 42

Which of the following journal entries correctly records the collection of an account receivable for which a 1% sales discount was recorded at the time of collection?

A) Cash
Sales discounts
$\quad$ $\quad$ Accounts receivable
B) Cash
Bad debt expense
$\quad$ $\quad$ Accounts receivable
C) Cash
$\quad$ Sales discounts
$\quad$ Accounts receivable
D) Cash
$\quad$ Gross profit
$\quad$ Accounts receivable

Question 43

Which of the following accounts is not a contra-revenue?

A)Sales discounts
B)Credit card discounts
C)Sales returns and allowances
D)Allowance for doubtful accounts

Question 44

Which of the following statements is correct?

A)The journal entry to record bad debt expense requires a debit to bad debt expense and a credit to accounts receivable.
B)The journal entry to record bad debt expense requires a debit to bad debt expense and a credit to allowance for doubtful accounts.
C)The journal entry to record the write-off of an uncollectible account receivable requires a debit to bad debt expense and a credit to accounts receivable.
D)The journal entry to record the write-off of an uncollectible account receivable requires a debit to bad debt expense and a credit to allowance for doubtful accounts.

Question 45

Clark Company estimated the net realizable value of their accounts receivable as of December 31,2011,based on an aging schedule of accounts receivable,to be $165,000.Clark has also provided the following information:
The accounts receivable balance on December 31,2011 was $175,000.
Uncollectible accounts receivable written-off during 2011 totaled $12,000.
The allowance for doubtful accounts balance on January 1,2011 was $15,000.
How much is Clark's 2011 bad debt expense?

A)$10,000
B)$7,000
C)$13,000
D)$3,000

Question 46

Which of the following statements correctly describes the effect of recording the collection of a $10,000 account receivable for which a 2% sales discount was recorded at the time of collection?

A)Current assets will remain the same.
B)Gross profit will decrease $200.
C)Accounts receivable will decrease $9,800.
D)Net sales will increase $9,800.

Question 47

Woodland Company uses the allowance method to account for bad debts.During 2009,a customer became bankrupt and a receivable of $10,000 was deemed uncollectible.Which of the following journal entries records the uncollectible account write-off?

A) Allowance for doubtful accounts $\quad$ $\quad$$10.000$
$\quad$ Accounts receivable $\quad$ $\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$10.000$
B) Bad debt expense $\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$ 10,000
$\quad$ Allowance for doubtful accounts $\quad$$\quad$$\quad$$\quad$ 10,000
C) Allowance for doubtful accounts $\quad$$\quad$$\quad$ 10,000
Bad debt expense $\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$ 10,000
D) Loss on receivables $\quad$$\quad$$\quad$ 10,000
$\quad$ Accounts receivables $\quad$$\quad$$\quad$$\quad$ 10.000

Question 48

Oakwood Company had accounts receivable of $750,000 and an allowance for doubtful accounts of the $21,500 just prior to writing off as worthless an account receivable for Hyland Company of $5,000.The net realizable value of accounts receivable as shown by the accounting records before and after the write-off was as follows: $$\begin{array} { l l c } & \underline { \text { Before } } & \underline { \text { After } } \\\text { A. } & \$ 750,000 & \$ 750,000 \\\text { B. } & \$ 721,500 & \$ 733,500 \\\text { C. } & \$ 728,500 & \$ 723,500 \\\text { D. } & \$ 728,500 & \$ 728,500\end{array}$$

A)Option A
B)Option B
C)Option C
D)Option D

Question 49

The CHS Company has provided the following information:
Accounts receivable written-off as uncollectible during the year amounted to $11,500.
The accounts receivable balance at the beginning of the year was $150,000.
The accounts receivable balance at the end of the year was $210,000.
The allowance for doubtful accounts balance at the beginning of the year was $14,000.
The allowance for doubtful accounts balance at the end of the year after the recording of bad debt expense was $12,900.
Credit sales during the year totaled $900,000.
How much cash was received from collections of accounts receivable?

A)$888,500
B)$828,500
C)$690,000
D)$701,500

Question 50

At year end,Chief Company has a balance of $10,000 in accounts receivable of which $1,000 is more than 30 days overdue.Chief has a credit balance of $100 in the allowance for doubtful accounts before any year-end adjustments.Chief estimates that 1% of current accounts and 10% of accounts over thirty days are uncollectible.How much is bad debt expense?

A)$90
B)$190
C)$290
D)$100

Question 51

A company purchased goods on credit with credit terms of 3/15,n/45.Although the company does not have cash available to pay within the discount period,the manager of the company is considering borrowing money to take advantage of the discount.In order to make the appropriate decision,the manager computed the annual interest rate associated with the sales discount.Which of the following is the annual interest rate (rounded)?

A)56%.
B)38%.
C)25%.
D)18%.

Question 52

Which of the following is the most likely cause of a decrease in a company's gross profit percentage?

A)The selling price decreased.
B)The product cost as a percentage of sales decreased.
C)The operating expenses increased.
D)Fewer products were sold.

Question 53

A customer purchased and received $5,000 of goods on credit from Discount Paper Supply on September 1.The customer received the bill on September 13 and mailed a $5,000 check on September 30.Discount Paper Supply received the check on October 4.On which of the following dates should Discount Paper Supply record sales revenue?

A)September 1
B)September 13
C)September 30
D)October 4

Question 54

When credit terms for a sale are 2/15,n/40,the customer saves by paying early.What percent (rounded)would this savings amount to on an annual basis?

A)18%.
B)20%.
C)30%.
D)37%.

Question 55

Which of the following correctly describes the effect of a journal entry involving the recording of a sales return?

A)Gross profit is not affected.
B)Net sales increases.
C)Current assets remain the same.
D)Operating income decreases.

Question 56

When a credit sale is made with terms of 2/10,n/30 on May 10 and the customer's check is received on May 19,which of the following is true about the May 19 journal entry?

A)The debit to cash will equal the credit to accounts receivable because the discount was recorded on May 10.
B)There will be a debit to sales discounts on May 10.
C)The debit to cash will be less than the credit to accounts receivable on May 19.
D)There will be a credit to sales discounts on May 19.

Question 57

Dillon Company uses the allowance method to account for bad debts.The entry to write-off a bad account (one that will never be collected)should be: $\begin{array}{l l c}& \text { Debit } & \text { Credit }\\\text {A. } &\text { Bad debt expense} &\text { Accounts receivable }\\\text { B. } & \text { Bad debt expense }&\text { Allowance for doubtful accounts }\\\text { C. } & \text { Sales revenue }&\text { Accounts receivable}\\\text { D. } & \text {Allowance for doubtful accounts }&\text { Accounts receivable }\\\end{array}$

A)Option A
B)Option B
C)Option C
D)Option D

Question 58

Which of the following doesn't correctly describe the effect of a journal entry involving the recording of a credit card discount?

A)Net sales decrease and gross profit decreases.
B)Net sales decrease and operating income decreases.
C)Operating expenses remain the same and operating income decreases.
D)Neither operating expenses nor operating income is affected.

Question 59

A company had the following partial list of account balances at year-end: $$\begin{array} { l r } \text { Sales Returns and Allowances } & \$ 1,000 \\\text { Accounts Receivable } & 38,000 \\\text { Sales Discounts } & 2,100 \\\text { Sales Revenue } & 95,000 \\\text { Allowance for Doubtful Accounts } & 1,200\end{array}$$ How much is net sales revenue?

A)$91,900
B)$90,700
C)$89,900
D)$88,600

Question 60

When using the allowance method for accounting for bad debts,accounts receivable is reported on the balance sheet at the expected net realizable value.When a particular receivable from a customer ultimately is determined to be uncollectible and is written off,the recording of this event will

A)decrease the net realizable value of the accounts receivable.
B)have an effect that is not determinable from the information given.
C)increase the net realizable value of the accounts receivable.
D)have no effect on the net realizable value of the accounts receivable.

Question 61

Merchandise was sold on credit for $10,000,terms 2/10,n/30.Which of the following journal entry descriptions correctly describes the cash collection?

A)Cash is debited for $10,000 and accounts receivable is credited for $10,000 if the collection is within the discount period.
B)Cash is debited for $10,000, accounts receivable is credited for $9,800 and sales discounts is credited for $200 if the collection is within the discount period.
C)Cash is debited for $10,000, accounts receivable is credited for $9,800, and sales discounts is credited for $200 if the collection is after the discount period.
D)Cash is debited for $10,000, accounts receivable is credited for $10,000 if the collection is after the discount period.

Question 62

Which of the following statements pertaining to bank reconciliations is false?

A)Outstanding checks are deducted from the bank cash balance.
B)Deposits in transit are added to the bank cash balance.
C)Bank service charges are deducted from the bank cash balance.
D)Non-sufficient funds checks identified in the bank statement are deducted from the book cash balance, not the bank cash balance.

Question 63

The Roscoe Company's March 1,2010 bank statement balance was $70,000.As of March 1,outstanding checks total $22,000 and deposits in transit total $15,000.How much was Roscoe's March 1,2010 cash balance on their books?

A)$63,000
B)$77,000
C)$70,000
D)$107,000

Question 64

The cash records and the bank statement of Frankel Company showed the following at the end of February 2010:
Outstanding checks as of the beginning of February 2010,$8,000; checks written by Frankel Company according to their books during February 2010,$50,000; and checks cleared by the bank during February 2010,$54,000.How much were the outstanding checks at the end of February 2010?

A)$2,000
B)$4,000
C)$6,000
D)$8,000

Question 65

Which of the following does not correctly describe the following journal entry? Cash
Credit card discount
$\quad$$\quad$ Accounts receivable

A)Current assets increase.
B)Gross profit decreases.
C)Net sales decreases.
D)Operating income is not affected.

Question 66

When a depositor receives a bank statement indicating that there was a "NSF check",the depositor should do which of the following?

A)Reduce the cash account per the books for the amount of the "NSF check".
B)Reduce the cash account per the bank statement for the amount of the "NSF check".
C)Credit allowance for doubtful accounts for the amount of the check.
D)Increase the sales returns and allowances account.

Question 67

When preparing a bank reconciliation,which of the following would be deducted from the company's cash balance?

A)Interest income paid by the bank.
B)The dollar amount of deposits in transit.
C)The dollar amount of outstanding checks.
D)The bank service charges included on the bank statement.

Question 68

When preparing the monthly bank reconciliation,the accountant for Farris Corporation discovered that a check correctly written to one of Farris' suppliers for $159 had been incorrectly recorded in the books as $195.Which of the following statements is correct with respect to the bank reconciliation process?

A)The cash balance per the books will be decreased.
B)The cash balance per the bank statement will be increased.
C)The cash balance per the bank statement will be decreased.
D)The cash balance per the books will be increased.

Question 69

Linetech Company's bank statement showed an ending balance of $8,000.Items appearing in the bank reconciliation included:
Outstanding checks,$500; deposits in transit,$1,000; bank service charges,$50; and Driver Company's $250 check erroneously deducted from Linetech's bank account by the bank.How much is the correct cash balance at the end of the month?

A)$10,600
B)$8,750
C)$8,500
D)$8,250

Question 70

A deposit in transit on a bank reconciliation should be

A)added to the depositor's book cash balance.
B)subtracted from the depositor's book cash balance.
C)added to the bank statement balance.
D)subtracted from the bank statement balance.

Question 71

The cash account and the December bank statement of Gomez Company showed the following:
Deposits made by Gomez Company during December $90,000; deposits reflected on the December bank statement,$88,000; and deposits in transit on December 1,$5,000.How much were the deposits in transit at the end of December?

A)$10,000
B)$7,000
C)$5,000
D)$2,000

Question 72

The Conner Company's August 1,2010 cash balance on their books was $90,000.As of August 1,outstanding checks total $44,000 and deposits in transit total $30,000.How much was Conner's August 1,2010 cash balance on their bank statement?

A)$76,000
B)$90,000
C)$13,000
D)$104,000

Question 73

Which of the following demonstrates a poor internal control procedure?

A)The bookkeeper makes cash deposits and records journal entries related to cash, while the treasurer prepares the bank reconciliation.
B)The president, who does no bookkeeping, prepares the bank reconciliation each month.
C)The treasurer signs all checks after the bookkeeper prepares the supporting documents.
D)One bookkeeper prepares cash deposits and the other bookkeeper enters the collections in the journal and ledger.

Question 74

Upon completing an aging analysis of accounts receivable,the accountant for Rosco Works aged the accounts receivable and estimated that $5,000 of the $98,000 accounts receivable balance would be uncollectible.The allowance for doubtful accounts had a $400 debit balance at year-end prior to adjustment.How much is bad debt expense?

A)$5,000
B)$5,400
C)$4,600
D)$400

Question 75

Merchandise was sold on credit for $30,000,terms 3/15,n/30.Which of the following journal entry descriptions correctly describes the cash collection?

A)Cash is debited for $29,100 and accounts receivable is credited for $29,100 if the collection is within the discount period.
B)Cash is debited for $29,100, sales discounts is debited for $900, and accounts receivable is credited for $30,000 if the collection is within the discount period.
C)Cash is debited for $30,000, accounts receivable is credited for $29,100, and sales discounts is credited for $900 if the collection is within the discount period.
D)Cash is debited for $29,100 and accounts receivable is credited for $29,100 if the collection is after the discount period.

Question 76

The Tanner Company's April 1,2010 pre-reconciliation cash balance on their books was $35,000.While preparing the April 1 bank reconciliation,Tanner determined that outstanding checks total $11,000,deposits in transit total $7,000,and bank service charges are $50.How much was Tanner's April 1,2010 cash balance per the bank statement?

A)$31,000
B)$30,950
C)$38,950
D)$39,000

Question 77

Which of the following does not correctly describe the following journal entry? Sales returns and allowances
$\quad$$\quad$ Accounts receivable

A)Current assets decrease.
B)Gross profit decreases.
C)Net sales decreases.
D)Operating expenses increase.

Question 78

The Ward Company has provided the following information:
Net sales totaled $750,000.
Beginning net accounts receivable was $65,000.
Ending net accounts receivable was $85,000.
What was Ward's receivable turnover ratio?

A)10.0
B)8.8
C)11.54
D)5.0

Question 79

Which of the following correctly describes the following journal entry? Cash
Sales discounts
$\quad$$\quad$ Accounts receivable

A)The gross profit percentage remains the same.
B)Operating income decreases.
C)Current assets increase.
D)Net sales increases.

Question 80

Which of the following statements does not correctly describe the allowance for doubtful accounts balance?

A)It is reported on the balance sheet as a component of current assets.
B)It is a contra-asset account.
C)It is reported on the balance sheet as a current liability.
D)It is created as a result of the adjusting entry to record bad debt expense.