Chapter 5 - Receivables and Sales

Question 1

Trade discounts

Answer 1

Reduction in list price of a product or service

Question 2

Sales returns

What does the seller need to do in the case of a sales allowance? What type of account is it?

Answer 2

Customer returns goods previously purchased

Seller issues a cash refund if original sale was for cash
Seller reduces balance of accounts receivable if the original sale was on account
It is a contra account

Question 3

Sales allowance

What does the seller need to do in the case of a sales allowance? What type of account is it?

Answer 3

The customer doesn’t return the goods

Seller issues a cash refund if the original sale was for cash
Seller reduces balance of accounts receivable if the original sale was on account
It is a contra account

Question 4

Sales discounts

What type of account is it?

Answer 4

Reduction in the amount to be received from a credit customer if collection on account occurs within a specified period

A contra account

Question 5

2/10

Answer 5

Pronounced “two ten” means a customer will receive a 2% discount if the amount owed is paid within 10 days. A sales discount

Question 6

30/n

Answer 6

Pronounced “net thirty” means that if the customer does not take the discount, full payment net of any returns or allowances is due within 30 days

Question 7

Average accounts receivable

Answer 7

Take the average of the accounts receivable from last year and the accounts receivable of this year

Question 8

Receivables Turnover Ratio

Answer 8

Number of times during a year the average accounts receivable balance is collected
Receivables turnover ratio = net credit sales/average accounts receivable

Question 9

Average collection period

Answer 9

Number of days the average accounts receivable balance is outstanding
Average collection period = 365 days/receivables turnover ratio