Professional Documents
Culture Documents
Review Questions
1. Accounts receivable represent the right to receive cash in the future from customers for
goods sold or for services performed. Accounts receivable are usually collected within a
short period of time such as 30 or 60 days. Notes receivable are usually longer in term than
accounts receivable. Notes receivable represent a written promise that a borrower will pay a
fixed amount of principal plus interest by a certain date in the future.
2. Common examples of other receivables include dividends receivable, interest receivable, and
taxes receivable.
4. A business must maintain a separate accounts receivable account for each customer in order
to account for payments received from the customer and amounts still owed. All sales and
collections from that customer are tracked in that account, along with the balance.
5. The balance in all the subsidiary accounts receivable accounts must equal the total balance of
the control account, Accounts Receivable.
6. The benefits to a business of accepting credit cards and debit cards include the ability to
attract more customers, not having to check each customer’s credit rating, and not having to
keep accounts receivable records or make collections from the customer.
7. Two common methods for deposits of proceeds from credit card sales are the net method and
the gross method. With the net method, the total sale less the processing fee assessed equals
the net amount of cash deposited by the processor, usually within a few days of the sale date.
With the gross method, the total sale is deposited daily, within a few days of the actual sale
date. The processing fees for all transactions processed for the month are deducted from the
company’s bank account by the processor, often on the last day of the month.
8. When a business factors its receivables, it sells its receivables to a finance company or bank
(often called a factor). The business receives cash less an applicable fee from the factor for
the receivables. The factor, instead of the business, now collects the cash on the receivables.
The business no longer has to deal with the recordkeeping and collection of the receivables.
10. Bad Debts Expense is the account associated with the cost of the uncollectible receivables.
11. Under the direct write-off method, accounts receivables are written off and bad debts expense
is recorded when the business determines that it will never collect from a specific customer.
12. Limitations of the direct write-off method are that it violates the matching principle and is
not preferred by GAAP. The matching principle requires that the expense of uncollectible
accounts be matched with the related revenue. Under the direct write-off method the expense
can occur in future months or years. In addition, the accounts receivable (asset) are
overstated on the balance sheet.
13. Under the allowance method, bad debts expense is estimated and recorded in the same period
as the sales revenue as an adjusting entry at the end of the accounting period.
14. Under the allowance method, accounts receivable are shown at the net realizable value. Net
realizable value is the net value that the company expects to collect from its receivables
(Accounts Receivable less Allowance for Bad Debts).
15. When using the allowance method, the Allowance for Bad Debts is debited when writing off
uncollectible accounts. This is different than the direct write-off method, which would debit
Bad Debts Expense. The allowance method does not affect net income when an account is
written off.
16. When an account is written off with the allowance method, there is no change in the net
realizable value shown on the balance sheet.
17. The percent-of-sales method computes bad debts expense as a percentage of net credit sales.
18. In both the percent-of-receivables method and aging-of-receivables method, the business
determines the balance of the Allowance for Bad Debts account based on a percentage of
accounts receivable. This target balance is then used to determine the amount of bad debts
expense after considering the remaining balance in the Allowance for Bad Debts.
19. In the percent-of-receivables method, the business uses only one percentage to determine the
balance of the Allowance for Bad Debts account. However, in the aging-of-receivables
method, the business groups individual accounts according to how long the receivable has
been outstanding. They then apply a different percentage to each aging category.
21. The interest revenue earned on the note up to year-end is part of that year’s earnings. Interest
revenue is earned over time, not just when cash is received. Because of the revenue
recognition principle, a business must record the earnings from the note in the year in which
they were earned.
22. The acid-test is a ratio of the sum of cash (and cash equivalents) plus short-term investments
plus net current receivables to total current liabilities. The acid-test ratio reveals whether the
entity could pay all its current liabilities if they were to become due immediately.
23. The accounts receivable turnover ratio measures the number of times the company collects
the average accounts receivable balance in a year. The higher the ratio, the faster the cash
collections. It is calculated by taking net credit sales divided by average net accounts
receivable.
24. Days’ sales in receivables, also called the collection period, indicates how many days it takes
to collect the average level of accounts receivable. The number of days’ sales in receivables
should be close to the number of days customers are allowed to pay when credit is extended.
The shorter the collection period, the more quickly the organization can use its cash. The
longer the collection period, the less cash is available for operations. It is calculated by taking
365 days divided by the Accounts receivable turnover ratio.
Short Exercises
S9-1
The company’s credit department should not take customer payments or have any other cash-
handling responsibilities. For example, if a credit department employee also handles cash, the
company would have no separation of duties. The employee could pocket money received from a
customer. He or she could then label the customer’s account as uncollectible, and the company
would stop billing that customer. The employee may be able to cover his or her theft.
Requirement 2
S9-3
Requirement 1
Requirement 2
Accounts Receivable
Jan 31 Bal 15,000 19,000 collected
revenue 18,000 1,800 wrote off
Bal 12,200
S9-5
Requirement 1
b. Cash 224,000
Accounts Receivable 224,000
Requirement 3
GARCIA COMPANY
Balance Sheet−Partial
December 31, 2015
Assets
Current Assets:
Accounts Receivable $ 49,100
Less: Allowance for Bad Debts (1,100) $ 48,000
S9-6
Requirement 1
Kun András tuli sisään, oli huone melko hämärä, sillä viileältä
näyttävät viheriät uutimet estivät auringonsäteitä tunkeutumasta
huoneeseen. Aivan ikkunan ääressä, jossa oli niin valoisaa, että
voitiin työskennellä, istui Keményn Etelka kehräten. Hitaasti pyöritti
hänen paljas jalkansa keskipäivän kuumuudessa rukinratasta
samalla kun hän hiljaisin äänin hyräili surullisia unkarilaisia
kansanlauluja.
»Äiti rakas, olet pyhimys, ja yhtä varma kuin olen siitä, että joskus
ennen olet ollut taivaassa, niin yhtä varmasti tiedän sinun sieltä
oppineen, ettei piru kiinnitä juuri suurtakaan huomiota
harrastuksiimme».
HERRA JA TALONPOIKA.
»Kunniasanasiko»?
Yhtä iloisesti kuin ennenkin, mutta niin ahkerasti, ettei sitä voida
kuvatakaan, häärivät kokit, kyökkipalvelijattaret ja pojat siellä
nauraen, jutellen ja iloiten. Todellinen iloinen yhteinen
hämmästyksen huuto kajahti Andrásta vastaan, kun hän tuli sisään.
»Hajoittaisitko sen»?
»Isäni säästi koko ikänsä. Hän oli hyvin ahkera työmies ja kokosi
minulle suuren perinnön», sanoi András kehuvasti. »Ja kai teidän
korkeutenne sen tietää, että minulla on sitä riittävästi»?
»Ja minä sanon sinulle, hävytön mies, että jos minulle tahi
omaisilleni tapahtuu jotakin, on sinun oma kätesi suunnannut iskun
ja valehteleva kielesi suunnitellut teon. Ymmärrän selvästi alhaisen
saidan talonpoikaisluonteesi, joka on valmis vaikka mihin omaksi
hyödykseen…»