Question 1

The accounts receivable method to estimate bad debts obtains the estimated balance in the Allowance for Doubtful Accounts in one of two ways: (1)the percent uncollectible from the total accounts receivable or (2)aging accounts receivable.

Accepted Answer

This statement is true. The accounts receivable method can be used to estimate bad debts by either calculating a percentage of the total accounts receivable that are expected to be uncollectible or by using an aging schedule to determine the estimated amount of bad debts based on how long the accounts have been outstanding. The estimated balance is then recorded in the Allowance for Doubtful Accounts.

Question 2

When using the allowance method of accounting for uncollectible accounts,the recovery of a bad debt would be recorded as a debit to Cash and a credit to Bad Debts Expense.

Accepted Answer

The recovery of a bad debt is recorded as a debit to Cash and a credit to the allowance account (for uncollectible accounts) not Bad Debts Expense. Bad Debts Expense is only used when recording the estimated amount of uncollectible accounts during the period.

Question 3

The aging of accounts receivable involves classifying each account receivable by how long it is past its due date and estimating the amount that is uncollectible.

Accepted Answer

The statement is true. The aging of accounts receivable helps in tracking overdue payments and estimating the likelihood of collecting them. It also helps to identify which accounts may require further follow-up and how to allocate resources to collect outstanding debts. Additionally, aging of accounts receivable aids in calculating the provision for bad debts or uncollectible accounts.

Question 4

The matching principle requires use of the direct write-off method of accounting for bad debts.

Accepted Answer

The matching principle states that expenses should be matched with the revenues they helped generate. While the direct write-off method is one way to account for bad debts, there are other methods like the allowance method that also adhere to the matching principle.

Question 5

During a given year,Compaq had net sales of $32,000 million and average account receivables of $6,850 million.Its accounts receivable turnover is equal to 0.21.

Accepted Answer

$32,000/$6,850 = 4.7

Question 6

The materiality constraint permits the use of the direct write-off method of accounting for uncollectible accounts when bad debts are very large in comparison to the company's other financial statement items such as sales and net income.

Accepted Answer

The answer of The materiality constraint permits the use of...

Question 7

After adjustment,the allowance for doubtful accounts has the effect of reducing accounts receivable to its estimated realizable value.

Accepted Answer

This is correct. The allowance for doubtful accounts is a contra asset account that represents an estimate of the amount of accounts receivable that may not be collected. By subtracting the allowance from accounts receivable, the estimated realizable value of the accounts receivable is calculated.

Question 8

The direct write-off method of accounting for bad debts records the loss from an uncollectible account receivable when the company determines it to be uncollectible.

Accepted Answer

The direct write-off method records the loss when the company determines that an account receivable is uncollectible.

Question 9

Companies follow both the matching principle and the materiality principle when applying the direct write-off method.

Accepted Answer

The direct write-off method does not match expenses with revenues and does not consider materiality, so it does not follow either principle.

Question 10

During a given year,a company had net sales of $500,000 and average accounts receivable of $80,000.Its accounts receivable turnover is equal to 6.25.

Accepted Answer

$500,000/$80,000 = 6.25

Question 11

Under the allowance method of accounting for uncollectible accounts receivable,no estimate is made to predict bad debts expense.

Accepted Answer

Under the allowance method, an estimate is made to predict the amount of bad debts expense that will be incurred in a given period. This estimate is used to create an allowance for doubtful accounts, which is used to offset the accounts receivable balance and provide for potential bad debts.

Question 12

The use of an allowance for bad debts is required under the materiality constraint.

Accepted Answer

The use of an allowance for bad debts is required under the matching principle, not the materiality constraint. The materiality constraint requires that financial information be reported if it is likely to influence the decisions of a reasonable person.

Question 13

When using the allowance method of accounting for uncollectible accounts,the entry to record the bad debts expense is a debit to Bad Debts Expense and a credit to Accounts Receivable.

Accepted Answer

The entry to record the bad debts expense under the allowance method is a debit to Bad Debts Expense and a credit to Allowance for Doubtful Accounts, not directly to Accounts Receivable.

Question 14

The accounts receivable turnover ratio indicates how often accounts receivable are received and collected during the period.

Accepted Answer

The accounts receivable turnover ratio is a measure of how quickly a company collects payments from its customers. It is calculated as net credit sales divided by the average accounts receivable balance during the period. The higher the accounts receivable turnover ratio, the more efficiently a company is collecting its accounts receivable. Thus, the statement is true.

Question 15

Installment accounts receivable is another name for aging of accounts receivable.

Accepted Answer

Installment accounts receivable refers specifically to accounts where the customer has agreed to make payments over time, while aging of accounts receivable refers to the process of categorizing outstanding customer invoices by the length of time they have been overdue. They are not interchangeable terms.

Question 16

There are two methods of accounting for uncollectible accounts: the direct write-off method and the allowance method.

Accepted Answer

This statement is true. The direct write-off method involves waiting until a specific account is deemed uncollectible and then directly writing it off as a bad debt expense. The allowance method involves estimating the amount of uncollectible accounts receivable and creating an allowance for doubtful accounts to reflect this estimate.

Question 17

The advantage of the allowance method of accounting for uncollectible accounts is that it identifies the specific customers who do not pay their bills.

Accepted Answer

The advantage of the allowance method is not that it identifies specific customers who do not pay their bills, but rather that it allows for an estimation of uncollectible accounts, which can then be recorded as a bad debt expense and matched with the corresponding revenue.

Question 18

A company that has a high accounts receivable turnover in comparison with competitors should tighten its credit policy.

Accepted Answer

A high accounts receivable turnover ratio indicates that the company is collecting its receivables quickly, which is generally a positive sign. This would not be a reason to tighten credit policy.

Question 19

When using the allowance method of accounting for uncollectible accounts,the entry to write off Harold's uncollectible account is a debit to Allowance for Doubtful Accounts and a credit to Accounts Receivable- Harold.

Accepted Answer

This entry is correct for the allowance method of accounting for uncollectible accounts.

Question 20

The accounts receivable turnover is calculated by dividing net sales by average accounts receivable.

Accepted Answer

This is the correct formula for calculating the accounts receivable turnover ratio.

Quiz 7: Accounts and Notes Receivable