Deck 5: Receivables and Sales

Question 1

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.2/10 indicates a 2% discount (or $20 in this example)if payment is made within 10 days.

Answer 1

False

Question 2

Credit sales transfer products and services to a customer today while bearing the risk of collecting payment from that customer in the future.

Answer 2

True

Question 3

Accounts receivable represent the amount of cash owed to the company by its customers from the sale of products or services on account.

Answer 3

True

Question 4

The Sales Discounts account is an expense account.Sales Discounts is a contra revenue account.

Question 5

When a company sells a $100 service with a 20% trade discount,$80 of revenue is recognized.

Question 6

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.

Question 7

The adjustment for uncollectible accounts involves a debit to Bad Debt Expense and a credit to the Allowance for Uncollectible Accounts.

Question 8

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.

Question 9

The Sales Discounts account is an example of a contra revenue account.

Question 10

The Sales Returns account is an expense account.Sales Returns is a contra revenue account.

Question 11

The net realizable value of accounts receivable is the full amount owed by customers.Net realizable value is the net amount of cash we expect to collect.

Question 12

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.

Question 13

The Allowance for Uncollectible Accounts is a contra asset account representing the amount of accounts receivable that we do not expect to collect.

Question 14

A sales allowance is recorded as a debit to Accounts Receivable and a credit to Sales Allowances.A sales allowance is recorded as a debit to Sales Allowances and a credit to Accounts Receivable.

Question 15

At the time of a credit sale,a company would record an increase in assets and an increase in revenues.

Question 16

Trade discounts represent a discount offered to the purchasers for quick payment.Trade discounts represent a reduction in the listed price of a product or service.

Question 17

Sales returns and allowances occur when the buyer returns the goods or the seller reduces the customer's balance owed.

Question 18

Accounts receivable are reported at their net realizable value.

Question 19

Customers' accounts that we no longer consider collectible are referred to as uncollectible accounts (or bad debts).

Question 20

A sale on account is recorded as a debit to Service Revenue and a credit to Accounts Receivable.A sale on account is recorded as a debit to Accounts Receivable and a credit to Service Revenue.

Question 21

The direct write-off method involves recording an adjustment at the end of each period to account for the possibility of future uncollectible accounts.The allowance method records an adjustment for future uncollectible accounts.

Question 22

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.This is generally an advantage of the allowance method.

Question 23

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.

Question 24

The direct write-off method violates the matching principle.

Question 25

Under the allowance method,when a company collects cash from an account previously written off,total assets increase.Collecting cash from an account previously written off has no effect on total assets.

Question 26

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.

Question 27

Notes receivable are similar to accounts receivable but are more formal credit arrangements evidenced by a written debt instrument,or note.

Question 28

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.Under the direct write-off method,future uncollectible accounts are not estimated.

Question 29

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.

Question 30

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.Estimated uncollectible accounts = ($40,000 × 5%)+ ($5,000 × 20%)= $3,000.

Question 31

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

Question 32

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.

Question 33

Notes receivable typically arise from sales to customers.Notes receivable typically arise from loans to other entities including affiliated companies;loans to stockholders and employees;and only occasionally from the sale of merchandise or services.

Question 34

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

Question 35

Notes receivable are assets and are reported in the balance sheet.

Question 36

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.

Question 37

The direct write-off method is used for tax purposes but is generally not permitted for financial reporting.

Question 38

The aging method for estimating uncollectible accounts considers that a higher percentage of "older" accounts will not be collected compared to "newer" accounts.

Question 39

Under the direct write-off method,bad debt expense is recorded at the time accounts are known to be uncollectible.

Question 40

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.

Question 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.Interest = face value ($10,000)× annual interest rate (10%)× fraction of year (6/12)= $500.

Question 42

Which of the following best describes accounts receivable?

A)The amount of cash owed by a company to its vendors for purchases of products or services on account.
B)The amount of cash collected by a company from its customers from the sale of products or services on account.
C)The amount of cash owed to a company by its customers from the sale of products or services on account.

Question 43

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.Bad debt expense will typically differ between the two methods.

Question 44

The receivables turnover ratio equals average accounts receivable divided by net credit sales.The receivables turnover ratio equals net credit sales divided by average accounts receivable.

Question 45

Accrued interest on a note receivable is interest earned by the end of the year but not yet received.

Question 46

The average collection period shows the approximate number of days the average accounts receivable balance is outstanding.

Question 47

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).

Question 48

Credit sales are recorded as:

A)Debit Cash,credit Deferred Revenue.
B)Debit Service Revenue,credit Accounts Receivable.
C)Debit Cash,credit Service Revenue.
D)Debit Accounts Receivable,credit Service Revenue.

Question 49

Accrued interest on a note receivable has the effects of increasing assets and increasing liabilities.Accrued interest increases assets and increases revenues.

Question 50

Two important ratios that help in understanding the company's effectiveness in managing receivables are the receivables turnover ratio and the average collection period.

Question 51

Identify the likely disadvantage(s)of extending credit to customers.

A)Delay or failure to collect cash.
B)Lower profitability.
C)Lower revenues.

Question 52

Which of the following best describes credit sales?

A)Cash sales to customers that are new to the company.
B)Sales to customers using credit cards.
C)Sales to customers on account.

Question 53

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.

Question 54

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

Question 55

The amount of cash owed to a company by its customers from the sale of products or services on account is commonly referred to as:

A)Cash.
B)Accounts receivable.
C)Revenue.

Question 56

The percentage-of-credit-sales method (income statement method)is allowed only if amounts do not differ significantly from estimates using the percentage-of-receivables method.

Question 57

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.

Question 58

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.

Question 59

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.This method is referred to as the income statement method because the estimate of bad debts is based on an income statement amount-credit sales.

Question 60

A company provides services on account.Indicate how this transaction would affect (1)assets, (2)stockholders' equity,and (3)revenues.

A)(1)Increase, (2)No effect (3)Increase
B)(1)No effect, (2)Increase (3)Increase
C)(1)Increase, (2)Increase (3)Increase

Question 61

Identify the likely advantage(s)of extending credit to customers.

A)Reduce accounts receivable.
B)Increase sales.
C)Reduce amounts owed to creditors.

Question 62

Garber Plumbers offers a 20% trade discount when providing $2,000 or more of plumbing services to its customers.In March 2018,Garber provided $4,000 of plumbing services to Red Oak Inc. ,and $1,500 of services to Cyril Inc. ,Each of these customers was granted credit terms of 2/10,net 30.If both customers paid for the plumbing services within the discount period,what was the net revenues amount for these two transactions?

A)$5,500.
B)$4,312.
C)$4,486.
D)$4,606.Trade discount = $4,000 × 20% = $800.Sales revenue = ($4,000 - $800)+ $1,500 = $4,700.Sales discount = $4,700 × 2% = $94.Net revenues = $4,700 - $94 = $4,606.

Question 63

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)Sales Revenue.
B)Sales Discounts.
C)Sales Returns.
D)Sales Allowances.

Question 64

A company collects a customer's account within the discount period.Indicate how this transaction would affect (1)assets, (2)stockholders' equity,and (3)revenues.

A)(1)Decrease, (2)Decrease, (3)Decrease
B)(1)Increase, (2)Increase, (3)Increase
C)(1)Increase, (2)Increase, (3)No effect

Question 65

Identify the condition(s)that must exist for a sale and the related receivable to be recognized.

A)Collection of cash is probable.
B)The company must have collected cash from at least one previous sale to the customer.
C)Goods or services have been provided to the customer.
D)Two of the other answers are conditions that must exist.

Question 66

A company records a sales return from a credit customer.Indicate how this transaction would affect (1)assets, (2)stockholders' equity,and (3)revenues.

A)(1)Decrease, (2)Decrease, (3)Decrease
B)(1)Decrease, (2)No effect, (3)Decrease
C)(1)Decrease, (2)Decrease, (3)No effect

Question 67

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)Bad debt.
B)Sales discount.
C)Sales return.

Question 68

A trade discount results in:

A)A contra revenue account being recorded.
B)A contra asset being recorded.
C)Customers delaying cash payment.
D)Revenue being recorded for the discounted price.

Question 69

Ryerson Co.provides goods and services to customers during the year totaling $100,000.Also during the year,customers are granted discounts,returns,and allowance of $20,000.At the end of the year,Ryerson estimates that an additional $5,000 in discounts,returns,and allowances will occur next year as a result of sales transactions this year.What is the amount of net revenues Ryerson will report in its current-year income statement?

A)$85,000.
B)$75,000.
C)$100,000.

Question 70

Lewis Inc.had the following information taken from various accounts at the end of the year: What was Lewis Inc.'s net revenues for the year?
$$\begin{array} { | l | r | } \hline \text { Sales discounts } & \$ 41,000 \\\hline \text { Deferred revenues } & \$ 32,000 \\\hline \text { Total sales } & \$ 459,000 \\\hline \text { Purchase discounts } & \$ 15,000 \\\hline \text { Sales allowances } & \$ 35,000 \\\hline \text { Accounts receivable } & \$ 205,000 \\\hline\end{array}$$

A)$368,000.
B)$434,000.
C)$383,000.
D)$437,000.

Question 71

Accounts receivable are normally reported at the:

A)Present value of future cash receipts.
B)Current value plus accrued interest.
C)Expected amount to be received.

Question 72

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.The price reduction is an example of a:

A)Sales revenue.
B)Sales discount.
C)Sales return.
D)Sales allowance.

Question 73

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)Sales Revenue.
B)Sales Discounts.
C)Sales Returns.

Question 74

Eric Company has the following information: What is the amount of net revenues for Eric Company?
$$\begin{array} { | l | r | } \hline \text { Total revenues } & \$ 860,000 \\\hline \text { Sales returns and allowances } & \$ 60,000 \\\hline \text { Sales discounts } & \$ 30,000 \\\hline \text { Ending inventory } & \$ 100,000 \\\hline\end{array}$$

A)$330,000.
B)$230,000.
C)$680,000.
D)$780,000.

Question 75

Boynton Jewelers reported the following amounts at the end of the year: total sales = $550,000;sales discounts = $12,000;sales returns = $44,000;sales allowances = $17,000.What was the company's net revenues for the year?

A)$489,000.
B)$485,000.
C)$477,000.

Question 76

Which of the following is recorded upon receipt of a payment on April 7,2018,by a customer who pays a $900 invoice dated March 3,2018,with terms 2/10,n/60?

A)Debit Sales Discounts $18.
B)Credit Purchase Discounts $18.
C)Credit Accounts Receivable $882.
D)Debit Cash $900.

Question 77

Fleming Corp.provided services on account.The transaction would be recorded with a debit to:

A)Retained Earnings.
B)Service Revenue.
C)Accounts Receivable.

Question 78

Which of the following items are classified as receivables?

A)Tax refund claims.
B)Amounts owed by customers.
C)Amounts loaned and expected to be collected.
D)All of the other answers are classified as receivables.

Question 79

Fleming Corp.provided services on account.The transaction would be recorded with a credit to:

A)Accounts Payable.
B)Service Revenue.
C)Accounts Receivable.

Question 80

Tom's Textiles shipped the wrong material to a customer,who refused to accept the order.This is an example of a:

A)Sales revenue.
B)Sales discount.
C)Sales return.