8 - Reporting & Analyzing Receivables

Question 1

Receivables are claims that are expected to be collected in cash, and they are frequently classified as

(1) A
(2) N
(3) O

Answer 1

Receivables are claims that are expected to be collected in cash, and they are frequently classified as

(1) accounts receivable,
(2) notes receivable, and
(3) other receivables.

Question 2

Accounts receivable are amounts _____ by customers on account. They result from the _____ of goods and services.

Answer 2

Accounts receivable are amounts owed by customers on account. They result from the sale of goods and services.

Question 3

Receivables are normally evidenced by a sales ______ issued to a customer rather than any separate formal document. They are generally expected to be collected within ____ days or so, and are classified as ______ ______.

Answer 3

Receivables are normally evidenced by a sales invoice issued to a customer rather than any separate formal document. They are generally expected to be collected within 30 days or so, and are classified as current assets.

Question 4

Notes receivable are claims where formal instruments of ______—(__________)—are issued as evidence of the debt.

Answer 4

Notes receivable are claims where formal instruments of credit—a written promise to repay—are issued as evidence of the debt.

Question 5

Notes receivable may be either _______ assets or _______ assets, depending on their due dates.

Answer 5

Notes receivable may be either current assets or non-current assets, depending on their due dates.

Question 6

Accounts and notes receivable that result from sales transactions are often called _____ ______.

Answer 6

Accounts and notes receivable that result from sales transactions are often called trade receivables.

Question 7

Examples of other types of receivables:

Answer 7

Interest receivable, loans to company officers, advances to employees, sales tax recoverable, and income tax receivable.

Question 8

Accounts receivable are recognized or recorded when revenue has been ______, but payment has yet to be ______ from the customer.

Answer 8

Accounts receivable are recognized or recorded when revenue has been earned, but payment has yet to be received from the customer.

Question 9

For a service company, a receivable is recorded when a service is ________ on account.

For a merchandising company, a receivable is recorded at the _____ ___ _____ of merchandise on account.

Answer 9

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 10

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

Answer 10

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

Question 11

A subsidiary ledger contains the _______ account ______ for each of a company’s _______.

Answer 11

A subsidiary ledger contains the individual account detail for each of a company’s customers.

Question 12

Each subsidiary ledger is controlled by a ______ general ledger account, which is known as the ______ _______.

This means that the balance in the control account must always _____ the total of the subsidiary ledger.

Answer 12

Each subsidiary ledger is controlled by a single general ledger account, which is known as the control account.

This means that the balance in the control account must always equal the total of the subsidiary ledger.

Question 13

A subsidiary ledger is also known as a _______.

Answer 13

A subsidiary ledger is also known as a subledger.

Question 14

Credit losses from ________ _______ are _______ to an account called Bad Debts Expense.

Answer 14

Credit losses from uncollectible receivables are debited to an account called Bad Debts Expense.

Question 15

Under the ________ method, management estimates the uncollectible _______ at the end of each period.

Answer 15

Under the allowance method, management estimates the uncollectible accounts at the end of each period.

Question 16

To record bad debts, Bad Debts Expense is ________ and the Allowance for Doubtful Accounts is _________.

Answer 16

To record bad debts, Bad Debts Expense is debited and the Allowance for Doubtful Accounts is credited.

Question 17

The _________ amount of accounts receivable is the amount at which the receivables are presented on the statement of financial position and reflects management’s estimate of the receivables that will ultimately be collected.

Answer 17

The carrying amount of accounts receivable is the amount at which the receivables are presented on the statement of financial position and reflects management’s estimate of the receivables that will ultimately be collected.

Question 18

The most common method of determining the allowance for doubtful accounts uses a ________ of _______ receivables.

Answer 18

The most common method of determining the allowance for doubtful accounts uses a percentage of outstanding receivables.

Question 19

Under the percentage of receivables method, management estimates what percentage of receivables is likely to be _______.

Answer 19

Under the percentage of receivables method, management estimates what percentage of receivables is likely to be uncollectible.

*Normally based on the company’s past experience/industry averages if new company

Question 20

This stratification process is known as the aging the accounts receivable because of its emphasis on _______.

Answer 20

This stratification process is known as the aging the accounts receivable because of its emphasis on time.

Question 21

Under the allowance method, every accounts receivable write off entry is ______ to the allowance account and not to bad debts expense.

Answer 21

Under the allowance method, every accounts receivable write off entry is debited to the allowance account and not to bad debts expense.

Question 22

Two entries are required to record the recovery of a bad debt:

(1) ______ the write-off entry to _____ the customer’s account, and
(2) record the _____ cash collection.

Answer 22

Two entries are required to record the recovery of a bad debt:

(1) reverse the write-off entry to reinstate the customer’s account, and
(2) record the subsequent cash collection.

Question 23

Three types of transactions when accounts receivable are measured and recorded using the allowance method:

AE U RE

Answer 23

1. Measuring and recording estimated uncollectible accounts (allowance entry)
2. Recording the write off of an uncollectible account (write-off entry)
3. Recording the recovery of an uncollectible account (recovery entries)

Question 24

A ________ note is a written promise to pay a specified amount of money on demand (whenever the payee demands repayment) or at a fixed date in the future.

Answer 24

A promissory note is a written promise to pay a specified amount of money on demand (whenever the payee demands repayment) or at a fixed date in the future.

Question 25

Promissory notes may be used

(1) when individuals and companies ____ or _______ money,
(2) when the amount of the transaction and the length of the credit period _____ normal limits, and
(3) to ______ an account receivable where payment cannot be made within the established credit period.

Answer 25

Promissory notes may be used

(1) when individuals and companies lend or borrow money,
(2) when the amount of the transaction and the length of the credit period exceed normal limits, and
(3) to settle an account receivable where payment cannot be made within the established credit period.

Question 26

In a promissory note, the party making the promise to pay is called the ______; the party who will be paid is called the _______.

Answer 26

In a promissory note, the party making the promise to pay is called the maker; the party who will be paid is called the payee.

Question 27

A note receivable is sometimes known as a ______ receivable for the payee of the note, although for the maker of the note it is more common for a note payable to be known as a _______ payable.

Answer 27

A note receivable is sometimes known as a loan receivable for the payee of the note, although for the maker of the note it is more common for a note payable to be known as a loan payable.

Question 28

Like accounts receivable, notes receivable are also financial ______ because the company will collect cash in the ________.

Answer 28

Like accounts receivable, notes receivable are also financial assets because the company will collect cash in the future.

Question 29

A ______ receivable is a formal promise to pay an amount that bears interest from
the time it is issued until it is due.

Answer 29

A note receivable is a formal promise to pay an amount that bears interest from
the time it is issued until it is due.

Question 30

An _______ receivable is an informal promise to pay that bears interest only after its due date.

Answer 30

An account receivable is an informal promise to pay that bears interest only after its due date.

*no strong legal claim

Question 31

You will recall that interest rates are always expressed as an ______ rate of interest.

Answer 31

You will recall that interest rates are always expressed as an annual rate of interest.

Question 32

Interest rates may be set as a ________ rate over the period of the note (such as 6% for the duration of the note) or as a ________ (variable) rate that changes monthly over the duration of the note.

Answer 32

Interest rates may be set as a fixed rate over the period of the note (such as 6% for the duration of the note) or as a floating (variable) rate that changes monthly over the duration of the note.

Question 33

Like accounts receivable, notes receivable are reported at their _________ amount. You will recall that ________ amount is the difference between the balance in the receivables account (Notes Receivable, in this case) and the allowance account.

Answer 33

Like accounts receivable, notes receivable are reported at their carrying amount. You will recall that carrying amount is the difference between the balance in the receivables account (Notes Receivable, in this case) and the allowance account.

Question 34

In the normal course of events, the principal amount of a note receivable and its accrued interest are collected when due and then removed from the books, or __________.

Answer 34

In the normal course of events, the principal amount of a note receivable and its accrued interest are collected when due and then removed from the books, or derecognized.

Question 35

When a note receivable is collected in full at its _______ date, it is called an _______ note.

Answer 35

When a note receivable is collected in full at its maturity date, it is called an honoured note.

Question 36

A _____ note is a note that is not paid in full at maturity.

Answer 36

A dishonoured note is a note that is not paid in full at maturity.

Question 37

A dishonoured note receivable is no longer _________.

Answer 37

A dishonoured note receivable is no longer negotiable.

However, the payee still has a claim against the maker of the note for both the principal and any unpaid interest.

Question 38

An accounts receivable aging schedule should be prepared and reviewed at least ________.

Answer 38

An accounts receivable aging schedule should be prepared and reviewed at least monthly.

Question 39

The ratio that is used to assess the liquidity of receivables is the receivables _______ ratio.

Answer 39

The ratio that is used to assess the liquidity of receivables is the receivables turnover ratio.

Question 40

The receivables turnover is calculated by dividing net ______ sales by the average ______ accounts receivable during the year.

Answer 40

The receivables turnover is calculated by dividing net credit sales by the average gross accounts receivable during the year.

Question 41

A popular variant of the receivables turnover is to convert it into an ________ _________ period in terms of days.

Answer 41

A popular variant of the receivables turnover is to convert it into an average collection period in terms of days.

Question 42

The higher the ______ ________ and lower the average ________ period, the more liquid the company’s receivables generally are.

Answer 42

The higher the receivables turnover and lower the average collection period, the more liquid the company’s receivables generally are.