BURNLEY 1e: Chapter 6 Review

Question 1

Accounts receivable

Answer 1

Assets of a seller that represent the promise made by buyers to pay the seller at some date in the future.

Question 2

Accounts receivable turnover ratio

Answer 2

The number of times that accounts receivable are turned over, or how often they are collected in full and replaced by new accounts. It is calculated as the credit sales divided by the average accounts receivable.

Question 3

Acid test ratio

Answer 3

A measure of a company’s short-term liquidity, calculated by dividing the most liquid current assets (primarily cash, short-term investments, and accounts receivable) by the total current liabilities. Synonym for quick ratio.

Question 4

Aging of accounts receivable method

Answer 4

The process of analyzing customers’ accounts and categorizing them by how long they have been outstanding. Usually done as a basis for estimating what amounts may be uncollectible. Also known as the statement of financial position method.

Question 5

Allowance for doubtful accounts

Answer 5

A contra account to accounts receivable, reflecting the estimated amount of accounts receivable that will be uncollectible and eventually have to be written off.

Question 6

Allowance method

Answer 6

A method used to value accounts receivable by estimating the amount of accounts receivable that will not be collected in the future. Makes it possible to recognize bad debts expense in the period of the sale rather than waiting until specific non-paying customers can be identified.

Question 7

Audit trail

Answer 7

Sequence of transactions and events as traced by an auditor or company official through source documents.

Question 8

Average collection period

Answer 8

Average length of time, in days, that it takes a company to collect its receivables, calculated as 365 days divided by the accounts receivable turnover.

Question 9

Bad debts expense

Answer 9

Bad debts resulting from customers who fail to pay their accounts, as a result of selling on account.

Question 10

Bank reconciliation

Answer 10

The procedure that is used to identify the differences between the cash balance recorded in a company’s accounting records and the balance per its bank statement. This enables the company to ensure that everything is correctly recorded and to determine the correct amount of cash available.

Question 11

Carrying amount

Answer 11

The full value of all of a company’s accounts receivable less the allowance for doubtful accounts. In the context of long-term assets, carrying amount or carrying value is equal to the asset’s cost, less accumulated depreciation, less accumulated impairment losses. It represents the portion of the asset’s cost that has yet to be expensed. Synonym for net book value.

Question 12

Cash

Answer 12

Amounts of money a company has on hand, plus balances in chequing and savings accounts, plus cash equivalents.

Question 13

Cash equivalent

Answer 13

Current assets that are very liquid and readily convertible into cash, or current liabilities that may require the immediate use of cash. Examples are short-term investments and bank overdrafts or lines of credit.

Question 14

Collusion

Answer 14

What occurs when two or more employees work together to commit theft, fraud, or another crime, and conceal it.

Question 15

Control account

Answer 15

An account that contains the overall amounts related to a particular item in the financial statements, with the details recorded in a subledger. For example, Accounts Receivable is a control account, containing the total balance for all of a company’s receivables, while the Accounts Receivable subledger would contain the balances for each of the individual customers. The balance in the control account should equal the sum of all the balances in the related subledger.

Question 16

Covenant

Answer 16

Conditions or restrictions placed on a company that borrows money. The covenants usually require the company to maintain certain minimum ratios and may restrict its ability to pay dividends.

Question 17

Credit card discount

Answer 17

Fee charged by credit card companies to merchants making sales.

Question 18

Current ratio

Answer 18

A ratio that is calculated by dividing the total current assets by the total current liabilities and is a measure of short-term liquidity. Synonym for working capital ratio.

Question 19

Direct writeoff method

Answer 19

A method that only recognizes bad debts when the accounts receivable of specific customers are written off. No estimates of future writeoffs are made, and the allowance for doubtful accounts is not required.

Question 20

Electronic funds transfer (EFT)

Answer 20

Receipts or payments made directly between two bank accounts through computer networks.

Question 21

Factor

Answer 21

A company purchasing the accounts receivable of another company.

Question 22

Factoring

Answer 22

The process whereby a company sells its accounts receivable to another company, typically a financial institution (known as the factor). Often done to shorten the cash-to-cash cycle.

Question 23

Internal control system

Answer 23

The set of policies and procedures established by an enterprise to safeguard its assets and ensure the integrity of its accounting system.

Question 24

Liquidity

Answer 24

An organization’s short-term ability to convert its assets into cash to be able to meet its obligations and pay its liabilities.

Question 25

Percentage of credit sales method

Answer 25

A method of estimating bad debts expense by using a percentage of the credit sales for the period. Also known as the statement of income method.

Question 26

Quick assets

Answer 26

A company’s current assets less inventory and prepaid expenses.

Question 27

Quick ratio

Answer 27

A measure of a company’s short-term liquidity, calculated by dividing the most liquid current assets (primarily cash, short-term investments, and accounts receivable) by the total current liabilities. Synonym for acid test ratio.

Question 28

Recovery

Answer 28

The reinstatement and collection of an account receivable that was previously written off.

Question 29

Sales discount

Answer 29

A price reduction that is based on the invoice price less any returns and allowances and is given by a seller for early payment of a credit sale (for example, 2/10; n/30).

Question 30

Subledger

Answer 30

Ledger that contains the details of information included in a general ledger account; for example, with accounts receivable, all of the account details for each customer are specified in the accounts receivable subledger. The total of all accounts in the subledger must equal the total in the related general ledger account, which is known as the control account. Synonym for subsidiary ledger.

Question 31

Uncollectible accounts

Answer 31

Accounts receivable that are deemed to be bad debts. The point at which they are deemed uncollectible is generally established by company policy.

Question 32

Without recourse

Answer 32

Characteristic of a company’s receivables purchased by a factor whereby the factor will bear the loss of any receivable it is unable to collect.

Question 33

With recourse

Answer 33

Characteristic of a company’s receivables purchased by a factor whereby the factor can go back to the seller for payment if it is unable to collect the receivable.

Question 34

Working capital ratio

Answer 34

A ratio that is calculated by dividing the total current assets by the total current liabilities and is a measure of short-term liquidity. Synonym for current ratio.

Question 35

Writeoff

Answer 35

The process of removing an account receivable from a company’s books when the account is deemed uncollectible.