chapter 8

Question 1

what are the three types of receivables?

Answer 1

accounts receivable, notes receivable and other receivables

Question 2

what are accounts recievable?

Answer 2

amounts owed by customers, collected within 30 to 60 days and are current assets. credit terms set out the time period in which a receivable is due

Question 3

what are notes receivable?

Answer 3

arewritten promises to repay debt. These notes normally require the payment of interest and are due after 30 days or longer, may be current or non current assets

Question 4

what are other non trade receivables?

Answer 4

Receivables (such as interest receivable, loans to company officers, and income tax receivable) that do not result from the operations of the business.

Question 5

in general, how are accounts recievable recorded for a service company and a merchandising company?

Answer 5

For a service company, a receivable is recorded when a service is provided on account.For a merchandising company, a receivable is recorded at the point of sale of merchandise on account.

Question 6

what is a subsidiary ledger?

Answer 6

A ledger that is used to manage the detailed information that would be difficult to track in a general ledger account.

Question 7

what is the control account?

Answer 7

An account in the general ledger that summarizes the details for a subsidiary ledger and controls it.

Question 8

what is the allowance method?

Answer 8

Companies will use the allowance method to account for their expected credit losses.

Question 9

how do you account for allowance method

Answer 9

Dr. bad debt expense
Cr. doubtful accounts

Question 10

what are credit losses

Answer 10

(aka Bad debt expense) are presented on the Statement of Income in the operating expenses section.

Question 11

what is allowance for expected credit loses/

Answer 11

Allowance for expected credit losses is a contra asset account, it is linked to the accounts receivable account and the net amount (aka carrying amount) is presented on the Statement of Financial position.

Question 12

what is aging of accounts recievable?

Answer 12

This is an analysis where different percentages are applied to receivables that have been classified by length of time outstanding.

Question 13

how do you record uncollectible accounts?

Answer 13

Dr. Allowance for expected credit losses XXX
Cr. Accounts receivable

Question 14

how do you record if you randomly get money from someone who you thought was going bankrupt

Answer 14

Dr. Accounts receivable XXX
Cr. Allowance for expected credit losses XXX
Dr. Cash XXX
Cr. Accounts receivable

Question 15

what are similarities between an accounts receivable and notes receivable?

Answer 15

financial asset, credit instrument, reported on a balance sheet at according amount, related credit losses reported on a abalone sheet

Question 16

what are differences between accounts receivable and nites receivable?

Answer 16

AR: informal premise to pay, bears interest only after due date, shprt term, current asset
notes reciebvanle: formal writen promise, bears interest from the date issued, can be short term of long term, can be non current or current

Question 17

on a balance sheet, where are short term receivables reported

Answer 17

in the current assets section, after cash and trading investments (if from most to least liquid ), at carrying amount

Question 18

on the balance sheet, where are trade receivables recorded?

Answer 18

must be reported separately from receivables from related parties and other types of receivables. Trade receivables are reported at their carrying amoun

Question 19

how are receivables due more than a year from now recorded on the balance sheet?

Answer 19

must be presented separately in the non-current assets section of the statement

Question 20

which statement do you use to record a credit lose

Answer 20

are reported as an operating expense on statement of income

Question 21

what are the four steps for managing accounts receivable?

Answer 21

• Determine who to extend credit to (how much and which customers should receive credit)
• Establish a payment period (should be consistent with competitors)
• Monitor collections (prepare aging schedules on regular basis)
• Evaluate liquidity of receivables (using liquidity ratios)

Question 22

If the credit policy is too tight

Answer 22

the company may lose revenue because customers who are denied credit may do business elsewhere.

Question 23

if credit policy is too loose?

Answer 23

the company may end up extending credit to risky customers who pay late or do not pay at all.

Question 24

what should a credit period be like?>

Answer 24

consistent to one like its competitors

Question 25

what are the uses of the aging schedule?

Answer 25

• helping estimate the allowance for expected credit losses
• The aging schedule helps management estimate the timing of future cash inflows, which is very important when preparing a cash budget
• It also provides information about the company’s overall collection experience, and it identifies problem accounts

Question 26

when can credit risk increase?

Answer 26

during periods of economic downturn

Question 27

what is the receivables turnover ratio and how do you calculate it?

Answer 27

A measure of the liquidity of receivables
.dividing credit sales by the average gross accounts receivable during the year. higher the amount, more liquid it is

Question 28

what is gross accounts receivable?

Answer 28

Gross accounts receivable is the amount reported in the Accounts Receivable account (before deducting allowance for expected credit losses)

Question 29

how do you calculate the average gross accounts recievable>?

Answer 29

Unless seasonal factors are significant, average gross accounts receivable can be calculated by adding together the beginning and ending balances and dividing by 2

Question 30

what is the average collection period and how do you calculate it?

Answer 30

The average amount of time that a receivable is outstanding. It is calculated by dividing 365 days by the receivables turnover. want it to be lower because more liquid

Question 31

what is the average cllecton period used for?

Answer 31

used to assess the effectiveness of a cpmaies credit and collection policies.

Question 32

what is the general rule for the average collection period

Answer 32

that the collection period should not greatly exceed the credit term period (the time allowed for payment).

Question 33

The higher the receivables turnover and the lower the average collection period,

Answer 33

the more liquid the company’s receivables generally are.