Chapter 8

Question 1

sales returns/discounts

Answer 1

reduce the accounts receivable balance, since the company will no longer be receiving the payment

Question 2

Sales Discounts Journal Entry

Answer 2

Dr Cash
Dr Sales Discount
Cr A/R

Question 3

Sales R/A Journal Entry

Answer 3

Dr Sales R/A

Cr A/R

Question 4

estimated uncollectibles

Answer 4

estimated amount of claims on customers that companies expect will be uncollectable in the future

Question 5

when does a write off occur?

Answer 5

1. after a company exhausts all means of collecting a past due account and collection appears unlikely
2. if a customer is unable to pay the company the amount due

Question 6

net realizable value

Answer 6

the net amount a company expects to receive in cash from receivables

Question 7

direct write off method for uncollectables

Answer 7

bad debts are not estimated/accounts are written off when deemed uncollectable
NOT acceptable under US GAAP-doesn’t follow expense recognition principle/no way to tell the amount of the a/r balance that will actually be realized on the balance sheet since we are directly crediting the a/r

Question 8

journal entry for the direct write off method

Answer 8

Dr Bad Debt Expense

Cr A/R

Question 9

allowance method for uncollectables

Answer 9

at the end of ever reporting period a company estimates the value of accounts that will be uncollectable- follows the expense recognition principle

Question 10

journal entry for the allowance method for uncollectables

Answer 10

Dr Bad Debt Expense

Cr Allowance for Doubtful Accounts

Question 11

Allowance for Doubtful Accounts Account

Answer 11

contra-asset account (normal cr balance)

this acount allows for the a/r account to be displayed at its cash net realizable value

Question 12

Bad Debt Expense

Answer 12

classified as an operating expense on the income statement

Question 13

journal entry for when estimations are actually uncollectable and must be written off

Answer 13

Dr Allowance for Doubtful Accts

Cr A/R

Question 14

recovering a written off account

Answer 14

if a previously written off account is later collected we must reverse the write off account and record the cash

Question 15

journal entry for recovering a written off account

Answer 15

Dr A/R
Cr Allowance for Doubtful Accts
Dr Cash
Cr A/R

Question 16

balance sheet order for current assets

Answer 16

cash
a/r
less allowance for doubtful accts
etc

Question 17

options for estimating balance of allowance for doubtful accts

Answer 17

% of receivables

aging schedules

Question 18

does the allowance for doubtful accounts account get closed out at the end of the period?

Answer 18

NOOOO

Question 19

how to find the amount to fill in for allowance for doubtful accts or bad debt expense

Answer 19

current balance-ending balance-find the whole
Dr BDE
Cr A4DA

Question 20

notes receivable

Answer 20

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

Question 21

when are notes receivable used?

Answer 21

1. when individuals or companies lend or borrow money
2. when the amount of the transaction and the credit period exceed normal limits
3. in settlement of an a/r

Question 22

maturities

Answer 22

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

Question 23

Equation for computing interest

Answer 23

(face value of the note) x (annual interest rate) x (time in terms of one year-360 days)

Question 24

recognizing notes receivable

Answer 24

1. recognized when formally accepted by the company
2. initially recorded at face value
3. interest revenue is not reported when the company accepts the note because the revenue recognition principle does not recognize revenue until earned (interest is earned, accrued, as time passes)

Question 25

Journal entry for recognizing a note receivable

Answer 25

Dr N/R | Cr A/R

Question 26

valuing a ______ n/r is the same as valuing ________

Answer 26

short-term; a/r | n/r are reported at their cash (net) realizable value and have an allowance acct (A4DA)

Question 27

disposing of notes

Answer 27

1. notes may be held to their maturity (honored) 2. notes may be sold (speeds collection of cash) 3. maker of the note may default (dishonored)

Question 28

managing a/r

Answer 28

1. determine to whom to extend credit 2. establish a payment period 3. monitor collections 4. evaluate the liquidity of receivables 5. accelerate cash receipts when necessary (sale of receivables)

Question 29

receivables turnover ratio

Answer 29

1. liquidity ratio 2. measures the number of times, on average, a company collects receivables during the period = (net cr. sales)/(average et receivables)

Question 30

average collection period

Answer 30

1. assess effectiveness of credit/collection policies 2. collection period should not exceed credit term period (365) / Receivable turnover ratio

Question 31

3 reasons for the sale of receivables

Answer 31

1. size of receivable 2. receivables may be the only reasonable source of cash 3. billing/collection are often time consuming and costly

Question 32

National Cr Card Sales

Answer 32

1. issuer does cr investigation of customer 2. issuer maintains customer accts 3. issuer undertakes collectio process/absorbs any losses 4. retailer receives cash more quickly from cr card issuer

Question 33

Cr Card journal entry

Answer 33

Dr Cash Dr Service Charge Cr Sales Revenue

Question 34

basic principle of cash management

Answer 34

1. increase the speed of receivables collection-offer a discount 2. keep inventory levels low-remember just in time inventory 3. monitor payment of liabilities 4. plan timing of major expenditures 5. invest in idle cash

Question 35

liquid investment

Answer 35

someone always willing to buy/sell the investment

Question 36

risk free investment

Answer 36

no concern that the part will default on its promise to pay the principle and interest