Question 1

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 financial ratio that measures the number of times a company's accounts receivable are collected during a specific period. It is calculated by dividing the net credit sales by the average accounts receivable balance. A higher ratio indicates that a company is collecting its receivables more frequently, which is generally seen as a positive sign of efficient cash flow management.

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 previously written off is recorded as a debit to Cash and a credit to the Allowance for Doubtful Accounts (contra-asset account), not to Bad Debts Expense.

Question 3

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 4

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 the account to be uncollectible, rather than estimating and recording bad debt expenses in advance.

Question 5

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 is the correct entry to write off an uncollectible account using the allowance method. It reduces the balance in the Allowance for Doubtful Accounts account and removes the specific amount of the uncollectible account (Harold's in this case) from the Accounts Receivable account.

Question 6

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

Accepted Answer

This is the correct formula for calculating accounts receivable turnover.

Question 7

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 means that the company is collecting its receivables quickly, which is a good sign. It does not necessarily indicate that the credit policy needs to be tightened.

Question 8

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

Accepted Answer

This is true. The direct write-off method records bad debt expense only when a customer's account is deemed uncollectible and the specific account is written off. The allowance method records bad debt expense based on an estimated percentage of the total accounts receivable, creating an allowance for doubtful accounts.

Question 9

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 allowance method of accounting for uncollectible accounts does not identify specific customers who do not pay their bills, but rather estimates a percentage of total accounts receivable that will be uncollectible and creates an allowance for that amount. Individual customer accounts are not specifically identified as uncollectible until they are actually determined to be so.

Question 10

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 not required under the materiality constraint. The materiality constraint requires only significant information to be disclosed in financial statements, which includes estimated bad debts that are material to the overall financial position of the company.

Question 11

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

Accepted Answer

This statement is false. The matching principle allows for the use of either the direct write-off method or the allowance method of accounting for bad debts.

Question 12

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

Accounts receivable turnover = Net Sales / Average Accounts Receivable
= $500,000 / $80,000
= 6.25

Question 13

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 materiality constraint allows the use of the direct write-off method when bad debts are insignificant, not when they are very large.

Question 14

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 15

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 bad debts expense and create an allowance for doubtful accounts. This allowance account is used to reduce the accounts receivable balance to its net realizable value.

Question 16

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

The statement accurately describes the two methods for using the accounts receivable method to estimate bad debts.

Question 17

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

Accepted Answer

Installment accounts receivable refers to accounts receivable that are paid back in installments instead of all at once, whereas aging of accounts receivable refers to the process of tracking and categorizing the age of outstanding balances from customers. They are not the same thing.

Question 18

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

Accepted Answer

The allowance for doubtful accounts is a contra account to accounts receivable which reduces the value of accounts receivable to its estimated realizable value. This adjustment is made to account for the possibility that some of the outstanding receivables may not be collected.

Question 19

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 accurately describes the process of aging of accounts receivable.

Question 20

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

The accounts receivable turnover is calculated by dividing net sales by average accounts receivable. For Compaq, it would be $32,000 million / $6,850 million = 4.67, not 0.21.

Quiz 7: Reporting and Analyzing Receivables