Chapter 8

Question 1

Accounts Receivable

Answer 1

amounts customers owe on account
results from sale of goods and services
receive within 30-60 days
most significant type of claim

Question 2

Notes receivable

Answer 2

written promises for amounts to be received

requires the collection of interest and extends for 60-90 days

Question 3

Notes and accounts receivable that result form a sales transaction are called

Answer 3

TRADE receivables

Question 4

other receivables

Answer 4

nontrade receivables

example: interest, loans to company officers, advances to employees, income tax refundable

Question 5

Recognizing accounts receivable

Answer 5

record when perform service, the point of sale of merchandise.

Question 6

Valuing accounts receivable

Answer 6

record on balance sheet as an asset

determining amount is difficult

Question 7

Service organization

Answer 7

records a receivable when it performs service on account

Question 8

Merchandiser

Answer 8

records accounts receivable at the point of sale of merchandise on account

Question 9

Bad debt expense

Answer 9

seller records this as a loss when customer is unable to pay extended credit

Question 10

Direct write off

Answer 10

When a company determines receivables from a particular company to be uncollectible it changes the loss to bad debt expense (debit expense credit receivables)
NO matching

Question 11

Direct write off is not

Answer 11

acceptable in financial reporting

Question 12

Allowance method

Answer 12

estimating uncollectible accounts at the end of each period- provides better matching of expenses with revenues on the income statement

Question 13

recording allowance method

Answer 13

Debit Bad Debts Expense and credit Allowance for Doubtful Accounts

Question 14

Allowances for doubtful accounts

Answer 14

contra asset account to accounts receivable debit allowance for doubtful accounts and credit accounts receivable

Question 15

Do you close allowance for doubtful accounts at the end of the fiscal year

Answer 15

no

Question 16

Promissory note

Answer 16

a promise to pay a specified amount of money on demand or at a definite time

Question 17

when to use promissory note

Answer 17

1. individuals and companies lend/borrow money
2. when amount transaction and credit exceed normal limits
3. in settlement of accounts receivable

Question 18

Payee

Answer 18

whom payment is made to (note receivable)

Question 19

maker

Answer 19

party making promise to pay (note payable)

Question 20

Maturity date

Answer 20

(month or days)

1. on demand
2. stated date
3. at the end of the stated period of time

Question 21

Computing interest

Answer 21

face value of note x annual interest rate x time in terms of one year = interest

Question 22

face value

Answer 22

the value shown on the face of the note

Question 23

Cash (net) realizable value

Answer 23

report short-term notes receivable

Question 24

disposing of notes receivable

Answer 24

1. notes may be held at their maturity date
2. maker may default and payee must make an adjustment
3. holder speeds up conversion to cash by selling the note receivable

Question 25

Honored

Answer 25

note is honored when its maker pays in full at its maturity date

Question 26

maturity value

Answer 26

face value + interest rate

Question 27

Dishonored (defaulted) note

Answer 27

note that is not paid in full at maturity

is no longer negotiable

Question 28

if credit policy is too tight

Answer 28

loose sales

Question 29

if credit policy is too loose

Answer 29

sell to customer who will pay either very late or not at all

Question 30

establishing payment period

Answer 30

companies should determine a required payment period and communicate that policy with customers
should be consistent with that of competitors

Question 31

Accounts receivable turn over (equation)

Answer 31

net credit sales (net sales-cash sales) / average net accounts receivable (beginning + end receivable/2)

Question 32

what does accounts receivable turn over measure

Answer 32

the number of times on average a company collects receivables during the period AND assesses the liquidity of receivables

Question 33

average collection period

Answer 33

365/ accounts receivable turn over

Question 34

what does average collection period measure

Answer 34

the average time receivable is outstanding

assesses effectiveness of credit and collection policies

Question 35

what should average collection period never exceed

Answer 35

credit term period

Question 36

Alternating cash receipts

Answer 36

1. size (don’t want to hold large amount of receivable)
2. companies may sell receivables because that may be the only reasonable source of cash
3. billing and collection are often time consuming and costly

Question 37

factor

Answer 37

finance company or bank that buys receivables from business for a fee and then collects the payments directly form the customer

Question 38

credit card sales: 3 parities involved

Answer 38

1. credit card user
2. retailer
3. customer

Question 39

Retailer considers credit card sales as

Answer 39

cash sale

no bad debt is recorded and in exchange retailer pays card issuer a fee of 2%-4% of price