Financial and Managerial Accounting Study Set 1

Business

Quiz 8 :

Receivables

Quiz 8 :

Receivables

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Accounts receivable turnover and days' sales in receivables Apple Inc. designs, manufactures, and markets personal computers and related personal computing and communicating solutions for sale primarily to education, creative, consumer, and business customers. Substantially all of the company's sales over the last five years are from sales of its Macs, iPods, iPads, and related software and peripherals. For two recent fiscal years, Apple reported the following (in millions): img Assume that the accounts receivable (in millions) were $11,560 at the beginning of fiscal Year 1. 1. Compute the accounts receivable turnover for Year 2 and Year 1. Round to one decimal place. 2. Compute the days' sales in receivables at the end of Year 2 and Year 1. Use 365 days and round to one decimal place. 3. What conclusions can be drawn from (1) and (2) regarding Apple's efficiency in collecting receivables?
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Accounts Receivable turnover measures how frequently during the year accounts receivables are converted into cash.
1. Account Receivable turnover is computed by below mentioned equation:
img Financial statement data of AI designs is as mentioned below:
img Average accounting receivable is the average of opening and closing account receivable.
Account Receivable turnover for year 1 is as follows:
img Account Receivable turnover for year 2 is as follows:
img 2. Number of days sales in receivables is an estimate of the length of time the accounts receivables have been outstanding.
img Average daily sales are computed by dividing sales by 365. (Rounded to one decimal place) img Number of days sales in Receivables for year 1 is as follows:
img Number of days sales in Receivables for year 2 is as follows:
img 3. Account Receivable Turnover is 8.6 in year 1 and 8.9 in year 2.It is increasing which indicate favourable trend.
Number of days sales in receivables is 42.6 in year 1 and 40.8 in year 2.It is decreasing which indicate favourable trend.
Therefore, it can be said that increasing account receivable turnover and decreasing number of days sales in receivables indicates favourable trends in the Apple's efficiency in collecting accounts receivable.

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After the accounts are adjusted and closed at the end of the fiscal year, Accounts Receivable has a balance of $673,400 and Allowance for Doubtful Accounts has a balance of $11,900. Describe how the accounts receivable and the allowance for doubtful accounts are reported on the balance sheet.
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While preparing the balance sheet, the allowance for doubtful accounts is subtracted from accounts receivable under the net method.
Prepare balance sheet section of receivables:
img

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Estimate uncollectible accounts For several years, Xtreme Co.'s sales have been on a "cash only" basis. On January 1, 2013, however, Xtreme Co. began offering credit on terms of n/30. The amount of the adjusting entry to record the estimated uncollectible receivables at the end of each year has been ½ of 1% of credit sales, which is the rate reported as the average for the industry. Credit sales and the year-end credit balances in Allowance for Doubtful Accounts for the past four years are as follows: img Laurie Jones, president of Xtreme Co., is concerned that the method used to account for and write off uncollectible receivables is unsatisfactory. She has asked for your advice in the analysis of past operations in this area and for recommendations for change. 1. Determine the amount of (a) the addition to Allowance for Doubtful Accounts and (b) the accounts written off for each of the four years. 2. a. Advise Laurie Jones as to whether the estimate of ½ of 1% of credit sales appears reasonable. b. Assume that after discussing (a) with Laurie Jones, she asked you what action might be taken to determine what the balance of Allowance for Doubtful Accounts should be at December 31, 2016, and what possible changes, if any, you might recommend in accounting for uncollectible receivables. How would you respond?
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A ? Percent of sales method At the end of the current year, Accounts Receivable has a balance of $1,975,000; Allowance for Doubtful Accounts has a credit balance of $19,670; and sales for the year total $28,550,000. Bad debt expense is estimated at ¾ of 1% of sales. Determine (a) the amount of the adjusting entry for uncollectible accounts; (b) the adjusted balances of Accounts Receivable, Allowance for Doubtful Accounts, and Bad Debt Expense; and (c) the net realizable value of accounts receivable. B ? Percent of sales method At the end of the current year, Accounts Receivable has a balance of $3,460,000; Allowance for Doubtful Accounts has a debit balance of $12,500; and sales for the year total $46,300,000. Bad debt expense is estimated at ½ of 1% of sales. Determine (a) the amount of the adjusting entry for uncollectible accounts; (b) the adjusted balances of Accounts Receivable, Allowance for Doubtful Accounts, and Bad Debt Expense; and (c) the net realizable value of accounts receivable.
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Compare two methods of accounting for uncollectible receivables Digital Depot Company, which operates a chain of 40 electronics supply stores, has just completed its fourth year of operations. The direct write-off method of recording bad debt expense has been used during the entire period. Because of substantial increases in sales volume and the amount of uncollectible accounts, the firm is considering changing to the allowance method. Information is requested as to the effect that an annual provision of ¼% of sales would have had on the amount of bad debt expense reported for each of the past four years. It is also considered desirable to know what the balance of Allowance for Doubtful Accounts would have been at the end of each year. The following data have been obtained from the accounts: img Instructions 1. Assemble the desired data, using the following column headings: 2. Experience during the first four years of operations indicated that the receivables either were collected within two years or had to be written off as uncollectible. Does the estimate of ¼% of sales appear to be reasonably close to the actual experience with uncollectible accounts originating during the first two years? Explain.
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A ? Direct write-off method Journalize the following transactions, using the direct write-off method of accounting for uncollectible receivables: img B ? Direct write-off method Journalize the following transactions, using the direct write-off method of accounting for uncollectible receivables: img
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Compare two methods of accounting for uncollectible receivables Call Systems Company, a telephone service and supply company, has just completed its fourth year of operations. The direct write-off method of recording bad debt expense has been used during the entire period. Because of substantial increases in sales volume and the amount of uncollectible accounts, the company is considering changing to the allowance method. Information is requested as to the effect that an annual provision of 1% of sales would have had on the amount of bad debt expense reported for each of the past four years. It is also considered desirable to know what the balance of Allowance for Doubtful Accounts would have been at the end of each year. The following data have been obtained from the accounts: img Instructions 1. Assemble the desired data, using the following column headings: img 2. Experience during the first four years of operations indicated that the receivables either were collected within two years or had to be written off as uncollectible. Does the estimate of 1% of sales appear to be reasonably close to the actual experience with uncollectible accounts originating during the first two years? Explain.
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Entries related to uncollectible accounts The following transactions were completed by The Wild Trout Gallery during the current fiscal year ended December 31: img Instructions 1. Record the January 1 credit balance of $50,000 in a T account for Allowance for Doubtful Accounts. 2. Journalize the transactions. Post each entry that affects the following T accounts and determine the new balances: img 3. Determine the expected net realizable value of the accounts receivable as of December 31. 4. Assuming that instead of basing the provision for uncollectible accounts on an analysis of receivables the adjusting entry on December 31 had been based on an estimated expense of ½ of 1% of the sales of $15,800,000 for the year, determine the following: a. Bad debt expense for the year. b. Balance in the allowance account after the adjustment of December 31. c. Expected net realizable value of the accounts receivable as of December 31.
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What are the three classifications of receivables?
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A ? Allowance method Journalize the following transactions, using the allowance method of accounting for uncollectible receivables: img B ? Allowance method Journalize the following transactions, using the allowance method of accounting for uncollectible receivables: img
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Classifications of receivables Boeing is one of the world's major aerospace firms with operations involving commercial aircraft, military aircraft, missiles, satellite systems, and information and battle management systems. As of a recent year, Boeing had $2,788 million of receivables involving U.S. government contracts and $903 million of receivables involving commercial aircraft customers, such as Delta Air Lines and United Airlines. Should Boeing report these receivables separately in the financial statements or combine them into one overall accounts receivable amount? Explain.
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Accounts receivable turnover and days' sales in receivables Best Buy is a specialty retailer of consumer electronics, including personal computers, entertainment software, and appliances. Best Buy operates retail stores in addition to the Best Buy, Media Play, On Cue, and Magnolia Hi-Fi Web sites. For two recent years, Best Buy reported the following (in millions): img Assume that the accounts receivable (in millions) were $2,020 at the beginning of fiscal Year 1. 1. Compute the accounts receivable turnover for Year 2 and Year 1. Round to one decimal place. 2. Compute the days' sales in receivables at the end of Year 2 and Year 1. Use 365 days and round to one decimal place. 3. What conclusions can be drawn from (1) and (2) regarding Best Buy's efficiency in collecting receivables? 4. What assumption did we make about sales for the Best Buy ratio computations that might distort the ratios and therefore cause the ratios not to be comparable for Year 2 and Year 1?
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Aging of receivables; estimating allowance for doubtful accounts Trophy Fish Company supplies flies and fishing gear to sporting goods stores and outfitters throughout the western United States. The accounts receivable clerk for Trophy Fish prepared the following partially completed aging of receivables schedule as of the end of business on December 31, 2015: img The following accounts were unintentionally omitted from the aging schedule: img Trophy Fish has a past history of uncollectible accounts by age category, as follows: img Instructions 1. Determine the number of days past due for each of the preceding accounts. 2. Complete the aging of receivables schedule by adding the omitted accounts to the bottom of the schedule and updating the totals. 3. Estimate the allowance for doubtful accounts, based on the aging of receivables schedule. 4. Assume that the allowance for doubtful accounts for Trophy Fish Company has a debit balance of $3,600 before adjustment on December 31, 2015. Journalize the adjusting entry for uncollectible accounts. 5. Assume that the adjusting entry in (4) was inadvertently omitted, how would the omission affect the balance sheet and income statement?
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Entries related to uncollectible accounts The following transactions were completed by The Irvine Company during the current fiscal year ended December 31: img Instructions 1. Record the January 1 credit balance of $26,000 in a T account for Allowance for Doubtful Accounts. 2. Journalize the transactions. Post each entry that affects the following selected T accounts and determine the new balances: img 3. Determine the expected net realizable value of the accounts receivable as of December 31. 4. Assuming that instead of basing the provision for uncollectible accounts on an analysis of receivables, the adjusting entry on December 31 had been based on an estimated expense of ¼ of 1% of the sales of $18,200,000 for the year, determine the following: a. Bad debt expense for the year. b. Balance in the allowance account after the adjustment of December 31. c. Expected net realizable value of the accounts receivable as of December 31.
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Nature of uncollectible accounts MGM Resorts International owns and operates hotels and casinos including the MGM Grand and the Bellagio in Las Vegas, Nevada. As of a recent year, MGM reported accounts receivable of $592,937,000 and allowance for doubtful accounts of $101,207,000 Johnson Johnson manufactures and sells a wide range of healthcare products including Band-Aids and Tylenol. As of a recent year, Johnson Johnson reported accounts receivable of $11,775,000,000 and allowance for doubtful accounts of $466,000,000. a. Compute the percentage of the allowance for doubtful accounts to the accounts receivable for MGM Resorts International. Round to one decimal place. b. Compute the percentage of the allowance for doubtful accounts to the accounts receivable for Johnson Johnson. Round to one decimal place. c. Discuss possible reasons for the difference in the two ratios computed in (a) and (b).
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What kind of an account (asset, liability, etc.) is Allowance for Doubtful Accounts, and is its normal balance a debit or a credit?
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Entries for uncollectible accounts, using direct write-off method Journalize the following transactions in the accounts of Midwest Medical Co., a medical equipment company that uses the direct write-off method of accounting for uncollectible receivables: img
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Ethics in Action Bev Wynn, vice president of operations for Dillon County Bank, has instructed the bank's computer programmer to use a 365-day year to compute interest on depository accounts (liabilities). Bev also instructed the programmer to use a 360-day year to compute interest on loans (assets). Discuss whether Bev is behaving in a professional manner.
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Dan's Hardware is a small hardware store in the rural township of Twin Bridges. It rarely extends credit to its customers in the form of an account receivable. The few customers who are allowed to carry accounts receivable are long-time residents of Twin Bridges with a history of doing business at Dan's Hardware. What method of accounting for uncollectible receivables should Dan's Hardware use? Why?
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Aging of receivables; estimating allowance for doubtful accounts Wig Creations Company supplies wigs and hair care products to beauty salons throughout Texas and the Southwest. The accounts receivable clerk for Wig Creations prepared the following partially completed aging of receivables schedule as of the end of business on December 31, 2015: img The following accounts were unintentionally omitted from the aging schedule: img Wig Creations has a past history of uncollectible accounts by age category, as follows: img Instructions 1. Determine the number of days past due for each of the preceding accounts. 2. Complete the aging of receivables schedule by adding the omitted accounts to the bottom of the schedule and updating the totals. 3. Estimate the allowance for doubtful accounts, based on the aging of receivables schedule 4. Assume that the allowance for doubtful accounts for Wig Creations has a credit balance of $7,375 before adjustment on December 31, 2015. Journalize the adjustment for uncollectible accounts. 5. Assume that the adjusting entry in (4) was inadvertently omitted, how would the omission affect the balance sheet and income statement?
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