Lesson 6 (Accounts Receivable)

Question 1

Which financial statement accounts are affected by the sale of product on the income statement ?

Answer 1

1. sales revenue
2. cost of goods sold

Question 2

Which financial statement accounts are affected by the sale of a product in the balance sheet ?

Answer 2

1. accounts receivable
2. inventory

Question 3

The realization principle states record revenue when ?

Answer 3

1. the earnings process is complete or virtually compete
2. there is reasonable certainty as to the collectability of the asset to be received

Question 4

The earning process is considered complete in the realization principle when ?

Answer 4

goods are sold or when services are performed, even if cash is not collected at the time the good is sold or service performed

Question 5

If the sale of goods or performance of services occurs prior to the receipt of cash what is it called ?

Answer 5

an accrued revenue and an account receivable is recorded

Question 6

represents revenue earned from selling inventory ?

Answer 6

sales revenue

Question 7

Two adjustments to sales revenue are ?

Answer 7

1. sales returns & allowances
2. sales discounts

Question 8

result when customers are dissatisfied with merchandise and are allowed to return the goods to the seller for a credit or a refund ?

Answer 8

sales returns

Question 9

result when customers are dissatisfied with merchandise and the seller allows a reduction from the selling price. goods are not returned in this case ?

Answer 9

salles allowances

Question 10

offer of a cash discount to a credit customer for the prompt payment of a balance due ?
Ex: 3/10, n/30 or read ‘three, ten, net, thirty’

Answer 10

sales discount

Question 11

What does 3/10, n/30 mean ?
read as ‘three, ten, net, thirty

Answer 11

It means a 3% discount is allowed on all payments made within 10 days. After 10 days there is no discount available, and the remaining balance is due in 30 days

Question 12

sales returns & allowances and sales discounts are both classified as what accounts ?

Answer 12

contra revenue accounts
(so their normal balance will be on the debit side)

Question 13

Sales returns & allowances and sales discounts result in what on the income statement ?

Answer 13

a decrease to revenues (specifically sales revenue)

Question 14

because sales returns & allowances and sales discounts are contra revenue accounts the Normal balance will be on what side ?

Answer 14

debit side

Question 15

represents cash owed to the company ?

Answer 15

accounts receivable

Question 16

accounts receivable come about when the company makes a what sale ?

Answer 16

credit sale

Question 17

Every year the company must record what to acknowledge the fact that not all customers will pay ?

Answer 17

bad debt expense

Question 18

In which year should bad debt expense be recorded ?

Answer 18

recorded in the same year as the credit sale is made

Question 19

You record bad debt expense in the same year as the credit sale is made due to what concept ?

Answer 19

the matching concept
(expense are to be recorded in the same year they help to generate revenue. revenue is earned when the sale is made, thus bad debt expense must be recorded in the same year )

Question 20

What is bad debt expense classified as ?

Answer 20

an estimate

Question 21

Is bad debt expense recorded in a regular journal entry or an adjusted entry ?

Answer 21

adjusted entry
*bc you debit bad debt expense and credit allowance for doubtful accounts

Question 22

*classified as an expense account
*found on the income statement
*reduces net income
What is this ?

Answer 22

bad debt expense

Question 23

*causes a decrease in assets
*classified as a contra asset account
*normal balance is a credit
*found on the balance sheet as a decrease to the accounts receivable
*represents the amount of accounts receivable the company estimates it will not collect
What is this ?

Answer 23

Allowance for doubtful accounts

Question 24

What happens when the company makes the determination that a specific customer will not pay ?

Answer 24

they must write off the customers accounts receivable

Question 25

For a write off what would you debit and credit ?

Answer 25

Debit: allowance for doubtful accounts
Credit: accounts receivable

Question 26

When can a write off occur ?

Answer 26

at any point during the year
represents the actual bad debts of the company

Question 27

Write off have no effect on ?

Answer 27

the income statement *bc it reduces both accounts receivable and allowance for doubtful accounts by the same amount
does not effect bad debt expense

Question 28

write offs also have no effect on what ?

Answer 28

Net realization value (NRV)
bc it reduces both components by the same amount

Question 29

if a customer pays their bills after the company has written-off their account receivable, it is called a ?

Answer 29

recovery

Question 30

To record a recovery what would you debit and credit ?

Answer 30

debit: cash
credit: allowance for doubtful accounts

Question 31

Allowance for doubtful accounts t account will have a debit and credit of what ?

Answer 31

debit: write offs
credit: recoveries & bad debt expense

Question 32

What’s the difference between bad debt expense and write offs ?

Answer 32

bad debt expense is an estimate
write offs are an actual amount

Question 33

What are the 2 financial statement rations relating to accounts receivable ?

Answer 33

1. accounts receivable turnover
2. average collection period

Question 34

measures the number of times, on average, the company collects its accounts receivable ?

Answer 34

accounts receivable turnover

Question 35

the higher the accounts receivable ratio is for average receivable turnover ratio the ?

Answer 35

faster we are collecting cash from out customers

Question 36

measures the number of days, on average, between making a sale on credit and collecting our cash from the customer ?

Answer 36

average collection period

Question 37

the lower the ratio of the average collection period is the ?

Answer 37

the faster you are collecting cash from your credit customers