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

Question 1

Sales returns and allowances is a contra-revenue account.

Answer 1

True

Question 2

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

Answer 2

True

Question 3

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

Answer 3

False

Question 4

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 5

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

Question 6

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

Question 7

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 8

When using the percentage of credit sales method, net sales multiplied by a historical percentage for credit losses equal bad debt expense.

Question 9

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

Question 10

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

Question 11

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

Question 12

Gross profit decreases when sales discounts increase.

Question 13

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

Question 14

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

Question 15

Gross profit is calculated as gross sales less cost of sales.

Question 16

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

Question 17

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

Question 18

The year-end journal entry to record bad debt expense reduces the accounts receivable account and increases net income.

Question 19

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 20

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

Question 21

Flyer Company has provided the following information prior to any year-end bad debt adjustment: • 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 have historically been 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 22

Flyer Company has provided the following information prior to any year-end bad debt adjustment: • 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 prepares an aging of accounts receivable and the result shows 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 23

A company sells a product FOB destination. The product is shipped on December 29, 2013 and the customer receives the shipment on January 3, 2014. Which of the following is true?

A) The sale will be recorded when the customer's credit card information is received.
B) The sale will be recorded when the shipment is received by the customer.
C)The sale will be recorded when the shipment is shipped.
D)The sale will be recorded when it is known there will be no returns or allowances.

Question 24

Cash equivalents on the balance sheet include certificates of deposit with maturities of 90 days or more.

Question 25

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
• Gross profit, $1,360,000
• Increase in accounts receivable, $55,000
• Bad debt expense, $33,000
• Sales discounts, $43,000
• Net income, $1,030,000
How much is Newark's cost of sales?

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

Question 26

Flyer Company has provided the following information prior to any year-end bad debt adjustment: • 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 prepares an aging of accounts receivable and the result shows that 5% of accounts receivable is estimated to be uncollectible. How much is bad debt expense?

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

Question 27

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

Question 28

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 cost of sales on an income statement.

Question 29

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 30

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

Question 31

Which of the following is not a reason for the Jones Hardware Store to accept credit cards from customers?

A) Jones can receive its money faster than if it directly extended credit to the customer by an account receivable.
B) The credit card company offers a discount to Jones so that Jones will have more money available for operations.
C)Jones will not have to be concerned with nonsufficient funds checks from customers.
D)Jones will not have to have extra office workers to make phone calls to customers requesting collections on accounts.

Question 32

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
• Gross profit, $1,360,000
• Increase in accounts receivable, $55,000
• Bad debt expense, $33,000
• Sales discounts, $43,000
• Net income, $1,030,000
What is the effect of collections from customers on cash flow from operating activities, using the indirect method?

A) Cash flow increased $975,000.
B) Cash flow increased $395,000.
C)Cash flow decreased $55,000.
D)Cash flow increased $450,000.

Question 33

Flyer Company has provided the following information prior to any year-end bad debt adjustment: • 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 have historically been uncollectible. How much is Flyer's bad debt expense?

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

Question 34

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

Question 35

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

Question 36

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

Question 37

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
• Gross profit, $1,360,000
• Increase in accounts receivable, $55,000
• Bad debt expense, $33,000
• Sales discounts, $43,000
• Net income, $1,030,000
How much are Newark's net sales?

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

Question 38

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

Question 39

Which of the following would be included in Latimer Company's sales in 2014?

A) Goods shipped from a supplier in 2014 with terms of FOB shipping point. Latimer received the goods in 2014.
B) Goods shipped to customers in 2014 with terms of FOB destination. The customer received the goods in 2015.
C)Goods shipped to customers in 2013 with terms of FOB destination. The customer received the goods in 2014.
D)Goods shipped to customers in 2013 with terms of FOB shipping point. The customer received the goods in 2014.

Question 40

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

A) Current assets will increase.
B) Gross profit will decrease.
C)Income from operations will decrease.
D)Current liabilities will decrease.

Question 41

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

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

Question 42

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

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

Question 43

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 44

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

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

Question 45

Which of the following does not 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 net income decreases.
C)Operating expenses remain the same and net income decreases.
D)Neither operating expenses, nor net income is affecteD.The journal entry includes a debit to credit card discount, which is a contra-revenue account and therefore reduces net sales, gross profit, and net income.

Question 46

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 47

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 48

Which of the following correctly describes the effect of a sales discount?

A) Gross profit increases.
B) Net sales increases.
C)Current assets remain the same.
D)Net income decreases.

Question 49

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 50

Clark Company estimated the net realizable value of its accounts receivable as of December 31, 2014, to be $165,000, based on an aging schedule of accounts receivable. Clark has also provided the following information: • The accounts receivable balance on December 31, 2014 was $175,000.
• Uncollectible accounts receivable written-off during 2014 totaled $12,000.
• The allowance for doubtful accounts balance on January 1, 2014 was $15,000.
How much is Clark's 2014 bad debt expense?

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

Question 51

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

Question 52

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 53

Superior Company has provided you with the following information before any year-end adjustments: Net credit sales are $120,000.
Historical percentage of credit losses is 2%.
Allowance for doubtful accounts has a credit balance of $300.
Accounts receivables ending balance is $47,000.
What is the estimated bad debt expense using the percentage of credit sales method?

A) $2,100.
B) $2,400.
C)$940.
D)$2,700.

Question 54

What would be incorrect about reporting accounts receivable in the balance sheet?

A) Presenting accounts receivable net of allowance for doubtful accounts.
B) Presenting accounting receivable at estimated net realizable value.
C)Presenting accounts receivable less bad debt expense and write-offs.
D)Presenting accounts receivable at gross amount, less allowance for doubtful accounts.

Question 55

Which of the following does not correctly describe the effect of a credit card discount?

A) Net sales decrease and gross profit decreases.
B) Net sales decrease and net income decreases.
C)Operating expenses remain the same and net income decreases.
D)Neither operating expenses, nor net income is affecteD.The credit card discount account is a contra-revenue account, which reduces net sales, gross profit, and therefore net income.

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

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 58

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

A) Gross profit decreases.
B) Net sales increases.
C)Current assets remain the same.
D)Net income increases.

Question 59

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 60

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 61

The cash records and the bank statement of Frankel Company showed the following at the end of February 2014: Outstanding checks as of the beginning of February 2014, $8,000; checks written by Frankel Company according to its books during February 2014, $50,000; and checks cleared by the bank during February 2014, $54,000. How much were the outstanding checks at the end of February 2014?

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

Question 62

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 stockholders' equity account.
D)It is created as a result of the adjusting entry to record bad debt expense.

Question 63

CHS Company has just finished preparing its bank reconciliation. If CHS did everything correctly, which items would have been included as an addition to the company's cash account?

A) Deposits in transit.
B) Interest received and collections of notes receivables.
C)Outstanding checks.
D)ATM and check printing fees.

Question 64

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 65

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)Debit allowance for doubtful accounts for the amount of the check.
D)Increase the sales returns and allowances account.

Question 66

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

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

Question 67

The Roscoe Company's March 31, 2014 bank statement balance was $70,000. As of March 31, 2014, outstanding checks total $22,000 and deposits in transit total $15,000. How much was Roscoe's March 31, 2014 cash balance on Roscoe's books?

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

Question 68

Woodland Company uses the allowance method to account for bad debts. During 2014, 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) Option A
B) Option B
C)Option C
D)Option D

Question 69

The Tanner Company's April 30, 2014 pre-reconciliation cash balance on its books was $35,000. While preparing the April 30 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 30, 2014 cash balance per the bank statement?

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

Question 70

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 71

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 72

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 73

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:

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

Question 74

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 75

Oakwood Company had accounts receivable of $750,000 and an allowance for doubtful accounts of $21,500 just prior to writing off as worthless a customer's $5,000 account receivable. The net realizable value of Oakwood's accounts receivable as shown by the accounting records before and after the write-off was as follows:

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

Question 76

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) 18.2%.
B) 20.0%.
C)29.2%.
D)36.5%.

Question 77

Upon completing an aging analysis of accounts receivable, the accountant for Rosco Works prepared and aging of 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 78

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 79

Dally Company has just finished preparing its bank reconciliation. If everything was done correctly, which of the following items would be reported as a deduction from the company's ending balance per the bank?

A) Deposits in transit.
B) Service Fees.
C)Outstanding checks.
D)NSF checks.

Question 80

The Conner Company's August 31, 2014 cash balance on its books was $90,000. As of August 31, outstanding checks total $44,000 and deposits in transit total $30,000. How much was Conner's August 31, 2014 cash balance on Conner's bank statement?

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