Chapter 8

Question 1

Trade receivables

Answer 1

Accounts and note receivables that result from sales transactions.

Question 2

Nontrade receivables

Answer 2

Receivables (such as interest receivable, income tax receivable, loans to company officers) that do not result from the operations of the business.

Question 3

Subsidiary ledger

Answer 3

A ledger that is used to manage the detailed information that would be difficult to track in a general ledger account. A control account in the general ledger summarizes the information in the subsidiary ledger.

Question 4

Control account

Answer 4

An account in the general ledger that summarizes the details for a subsidiary ledger and controls it.

Question 5

Credit term period

Answer 5

The interest-free period (usually 30 days) provided to customers purchasing on credit.

Question 6

Allowance method

Answer 6

A method of accounting for bad debts that involves estimating uncollectible accounts at the end of each period.

Question 7

Percentage of receivables method

Answer 7

A method of determining bad debts expense using a percentage of accounts receivable that are likely to be uncollectible.

Question 8

Aging of accounts receivable method

Answer 8

A method of determining bad debts expense and allowance for doubtful accounts based on an analysis of customer balances by the length of time they have been outstanding.

Question 9

Bad debt recovery

Answer 9

Accounting for a payment by a customer whose account had previously been written off.

Question 10

Promissory note

Answer 10

A written promise to pay a specified amount of money on demand, or at a fixed date in the future.

Question 11

Receivables turnover ratio

Answer 11

A measure of the liquidity of receivables. It is expressed as the number of times per year that the accounts receivable are collected.

RTR = Net credit sales / Average gross accounts receivables

Question 12

Average collection period

Answer 12

The average amount of time that a receivable is outstanding.

Average Collection Period = 365 days / Receivables Turnover Ratio

Question 13

How do we manage accounts receivable?

Answer 13

• Determine whom to extend credit to;
• Establish a payment (credit term) period;
• Monitor the collection of the accounts receivable;
• Evaluate the liquidity of receivables.