Accounts Payable

Question 1

What is the definition of accounts payable?

Answer 1

A liability to a creditor, carried on open account, usually for purchases of goods and services.

Definition from Webster’s New Universal Unabridged Dictionary.

Question 2

What does it mean when a company purchases goods on account?

Answer 2

The company orders and receives goods in advance of paying for them.

Question 3

What is recorded in the Accounts Payable account?

Answer 3

Vendor’s bill or invoice when goods are received on credit.

Question 4

What type of balance does Accounts Payable normally have?

Answer 4

A credit balance.

Question 5

What happens when an account payable is paid?

Answer 5

Accounts Payable is debited and Cash is credited.

Question 6

Under the accrual method of accounting, when must a company report a liability?

Answer 6

No later than the date they were received.

Question 7

What is the primary role of the accounts payable process?

Answer 7

To ensure that only legitimate and accurate vendor invoices are entered into the accounting system.

Question 8

What documents are reviewed in the accounts payable process?

Answer 8

Purchase orders, receiving reports, invoices, contracts.

Question 9

True or False: An account payable at one company is an account receivable for the vendor.

Answer 9

True.

Question 10

What is a purchase order (PO)?

Answer 10

A document prepared by a company to communicate and document its order from a vendor.

Question 11

What is a receiving report?

Answer 11

Documentation of the goods a company has received.

Question 12

What is the three-way match in accounts payable?

Answer 12

Comparison of the purchase order, receiving report, and vendor invoice.

Question 13

What is a voucher in the accounts payable process?

Answer 13

A document that ‘vouches for’ the completeness of the approval process.

Question 14

What should companies do to prevent duplicate payments?

Answer 14

Pay only from vendor invoices; never pay from vendor statements.

Question 15

Fill in the blank: The accounts payable process should have _______ to safeguard a company’s cash and assets.

Answer 15

[internal controls]

Question 16

What can happen if vendor invoices are not paid when due?

Answer 16

Supplier relationships could be strained and vendors may demand cash on delivery.

Question 17

What happens if a vendor invoice is recorded twice?

Answer 17

Liabilities will be overstated and repairs expense will be overstated.

Question 18

True or False: A vendor invoice may involve a bill for a repair service.

Answer 18

True.

Question 19

What is the treatment for a vendor invoice for expensive equipment?

Answer 19

Recorded as an asset in the balance sheet section property, plant, and equipment.

Question 20

What is the impact of paying bills too soon?

Answer 20

There may not be cash available to pay other bills by their due dates.

Question 21

What is typically included in a purchase order?

Answer 21

PO number, date prepared, company name, vendor name, item description, quantity, unit prices.

Question 22

What is the consequence of a poorly run accounts payable process?

Answer 22

Inaccurate financial feedback on the company’s performance and financial position.

Question 23

What does the balance in the Accounts Payable account indicate?

Answer 23

Amounts owed for vendor invoices that have been recorded but not yet paid.

Question 24

Where are vendor invoices for property, plant, and equipment reported?

Answer 24

In the company’s balance sheet section property, plant, and equipment.

Question 25

What happens to the cost of equipment as it is utilized?

Answer 25

Its cost is moved from the balance sheet to the income statement account Depreciation Expense.

Question 26

What is a common example of a vendor invoice requiring advance payment?

Answer 26

An insurance company’s invoice for premiums covering future insurance.

Question 27

When a vendor invoice for prepaid expenses is received, what is the initial accounting treatment?

Answer 27

Debited to a current asset such as Prepaid Expenses.

Question 28

How is the cost of insurance allocated as it expires?

Answer 28

Allocated to Insurance Expense.

Question 29

Fill in the blank: A prepaid expense is initially recorded in a current asset account and will be allocated to _______ as the cost expires.

Answer 29

expense.

Question 30

What is the total insurance premium paid in December for coverage from January 1 to June 30?

Answer 30

$6,000.

Question 31

How much of the insurance premium is expensed each month from January to June?

Answer 31

$1,000.

Question 32

What should the accounts payable staff be instructed regarding vendor invoices?

Answer 32

Proper accounts to be debited when vendor invoices are entered as credits to Accounts Payable.

Question 33

True or False: Generally, a cost that is used up and has no future economic value is debited immediately to expense.

Answer 33

True.

Question 34

What is the accounting treatment for vendor invoices for property, plant, and equipment?

Answer 34

Recorded in a balance sheet asset account and expensed in increments during the asset’s useful life.

Question 35

What is crucial for the accounts payable processing at the end of every accounting period?

Answer 35

It must be up-to-date.

Question 36

What may happen if the accounts payable processing is not up-to-date at the end of an accounting period?

Answer 36

Omitting some expenses from the income statement and some liabilities from the balance sheet.

Question 37

What should accounts payable staff examine closely during the first few days after an accounting period ends?

Answer 37

Incoming vendor invoices.

Question 38

What is the significance of a $900 repair bill received on January 6?

Answer 38

It may be a December repair expense and a liability as of December 31.

Question 39

What can a vendor invoice received on January 6 indicate if it was not an obligation as of December 31?

Answer 39

It is actually a January expense.