Question 1

A high accounts receivable turnover rate in comparison with that of competitors' suggests that the firm should tighten its credit policy.

Accepted Answer

A high accounts receivable turnover rate means that the firm is collecting its receivables quickly, which is generally a good thing. It does not necessarily suggest that the credit policy needs to be tightened. If anything, a low accounts receivable turnover rate might suggest that the credit policy is too lenient.

Question 2

Z-Mart had $12,000 in accounts receivable and $320,000 in net sales for the period. To one decimal, Z-Mart's days' sales uncollected was 13.7 days.

Accepted Answer

Days' Sales Uncollected = (Accounts Receivable / Net Sales) * Number of Days in the Period
Days' Sales Uncollected = (12,000 / 320,000) * 365
Days' Sales Uncollected = 13.65625 or 13.7 rounded to one decimal place. Therefore, the statement is true.

Question 3

Which accounting principle requires reporting expenses in the same period as the sales they helped to produce?

Accepted Answer

The Matching Principle requires reporting expenses in the same period as the sales they helped to produce. This ensures that the income statement provides an accurate reflection of the company's profitability for a specific period. Materiality refers to the importance of an item or event to financial statement users, Going Concern relates to the assumption that the company will continue operating in the future, Cost refers to the value of assets measured by the amount paid for them, and Business Entity refers to the separation of personal and business finances.

Question 4

A credit sale of $2,500 to a customer would result in

Accepted Answer

The answer of A credit sale of $2,500 to a...

Question 5

Hasbro had $750 million in accounts receivable and $2,900 million in net sales for the period. Its days' sales uncollected was 29.8.

Accepted Answer

Days' sales uncollected is calculated as (Accounts Receivable / Net Sales) * 365. Using the given figures, (750 / 2900) * 365 = 94.48 days, not 29.8.

Question 6

The days' sales uncollected ratio measures a company's ability to manage its debt.

Accepted Answer

The days' sales uncollected ratio measures a company's ability to quickly collect on its accounts receivable, not its ability to manage its debt.

Question 7

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

Accepted Answer

The formula for accounts receivable turnover ratio is (Net Sales) ÷ (Average Accounts Receivable). Therefore, the statement is true.

Question 8

Compaq had net sales of $10,500 million. Its average account receivables were $1,750 million. Its accounts receivable turnover was 6.

Accepted Answer

Accounts receivable turnover = Net sales / Average accounts receivable
Therefore, 6 = $10,500 million / $1,750 million, which is true.

Question 9

TechCom factored $35,000 of its accounts receivable and was charged a 2% factoring fee. The journal entry to record this would include a debit to Cash of $35,000; a debit to Factoring Fee Expense of $700; and a credit to Accounts Receivable of $35,700.

Accepted Answer

The correct entry should include a debit to Cash for $34,300 (which is $35,000 minus the 2% fee of $700), a debit to Factoring Fee Expense of $700, and a credit to Accounts Receivable for $35,000.

Question 10

The matching principle requires

Accepted Answer

The matching principle requires that expenses be recognized in the same period as the revenues they helped generate. This applies to bad debt expenses, which should be recognized in the same accounting period as the sales they helped generate. The allowance method of accounting for bad debts is preferred because it provides a more accurate estimate of the amount of bad debts that will not be collected, and therefore recognizes bad debt expenses in the period in which they are incurred. Therefore, choice B, which requires both the recognition of bad debt expenses in the same accounting period as the sales they helped generate and the use of the allowance method of accounting for bad debts, is the best choice.

Question 11

Accounts receivable turnover shows how often a company converts its average accounts receivable balance into cash during the period.

Accepted Answer

Accounts receivable turnover is a ratio that measures the efficiency of a company's credit and collections policies. It is calculated by dividing the net credit sales by the average accounts receivable balance. A higher turnover means that a company is collecting its outstanding debts more quickly, which is generally considered a positive factor for its financial health.

Question 12

The days' sales uncollected ratio measures the liquidity of receivables.

Accepted Answer

The days' sales uncollected ratio is a measure of how long it takes for a company to collect its accounts receivable. It is calculated by dividing the accounts receivable balance by the average daily sales, expressed in days. This ratio is used to assess a company's liquidity and the effectiveness of its credit and collection policies.

Question 13

A company must have less than 30 days' sales uncollected to be adequately liquid.

Accepted Answer

Liquidity is determined by a company's ability to meet its short-term obligations, and while having less than 30 days' sales uncollected can indicate good liquidity, there is no strict rule that this must be the case for a company to be considered adequately liquid. Liquidity is more comprehensively assessed through various metrics such as the current ratio, quick ratio, and cash flow.

Question 14

TechCom had net sales of $480,000 and average accounts receivable of $64,000. Its accounts receivable turnover was 7.5.

Accepted Answer

Accounts receivable turnover is calculated by dividing net sales (or credit sales) by average accounts receivable. Thus, the formula is Accounts Receivable Turnover = Net Sales / Average Accounts Receivable. 
Substituting the values given in the question, we get: 
7.5 = $480,000 / $64,000 
Solving for the missing variable, we get: 
Average Accounts Receivable = $480,000 / 7.5 = $64,000 
Since the calculated average accounts receivable matches the value given in the question, the answer is true.

Question 15

Because pledged receivables only serve as collateral for a loan and are not sold, it is not necessary to disclose the pledging.

Accepted Answer

It is necessary to disclose the pledging of receivables as it can affect the financial position and creditworthiness of the company. It is important information for investors and lenders to know what assets have been pledged as collateral for loans.

Question 16

The days' sales uncollected ratio is calculated by dividing accounts receivable by net sales and multiplying the answer by 365.

Accepted Answer

The days' sales uncollected ratio is calculated by dividing accounts receivable by net sales and multiplying the answer by 365. This helps in assessing how long it takes for a company to collect its accounts receivable.

Question 17

Accounts receivable accounts for specific customers are important because they show

Accepted Answer

Accounts receivable for specific customers are important because they encompass all aspects mentioned: they show how much each customer purchases, how much each has paid, how much each still owes, and they serve as the basis for sending bills to customers.

Question 18

A contingent liability is an obligation to make a future payment if an uncertain future event occurs.

Accepted Answer

This is the correct definition of a contingent liability. It is a potential obligation that depends on the occurrence of some uncertain future event, such as a lawsuit or a warranty claim.

Question 19

When a note is discounted to a bank without recourse, the bank assumes the risk of a bad debt loss and the original payee doesn't have a contingent liability.

Accepted Answer

When a note is discounted without recourse, the bank assumes the risk of bad debt loss, and the original payee is free from any contingent liability.

Question 20

Firms maintain their own credit cards

Accepted Answer

Firms maintain their own credit cards to earn interest on any balances not paid within a specified period, avoid the fees charged by credit card companies such as VISA, speed up receipt of cash from the sale, and grant credit to approved customers. Therefore, all the given options are correct.

Quiz 8: Receivables