Current Assets

Question 1

In your own words, what is the Asset Section of the Balance Sheet trying to communicate?

How would you explain 1) what assets are; and 2) what their valuation represents?

Answer 1

The assets section is just stating what you have; whether you have paid for them or not. Assets are things, tangible and intangible, that you own that you are hoping to make into profits. Their valuation is not at market value, it’s at book value. Depending on how it is expensed, the depreciation of the asset can be consistent over the projected life of the asset or it can be expenses more quickly.

Question 2

In your own words, in what order are current assets listed on the balance sheet and why is that important for us to understand?

Answer 2

Current assets are listed this way based on liquidity or how quickly this asset can be turned into cash. This is important because when you start looking at current liabilities, do they have enough cash or assets (such as inventory) that can be quickly turned into cash to cover liabilities.

Question 3

In your own words, what does the account Accounts Receivable represent? What is the business transaction that increases this account? What is the business transaction that decreases this asset?

Answer 3

Accounts receivable is money you expect to receive from customers that have received your product. Sales on account increase accounts receivable. Payments or bad credit expense decrease this asset.

Question 4

In your own words, what does the account Allowance for Uncollectible Accounts (or Allowance for Bad Debts) represent? What does the valuation assigned to it represent?

Answer 4

A certain percentage of your customers aren’t going to pay you. Whether they go out of business or are just shady people, not everyone will pay you what they owe you. In the beginning, the valuation of Uncollectible accounts is just a guess. Over time, this valuation should become more accurate as more data has been collected.

Question 5

In your own words, what is the relationship between Inventory and the Matching Principle?

Answer 5

The matching principle is making sure that revenue is recorded with the costs associated with making a sale. Until sales are made for the product, no revenue is recorded. Inventory sitting on a shelf is just tying up money that can be used for other activities.

Question 6

The allowance for doubtful accounts is reported as a contra-asset on the balance sheet. T/F?

Answer 6

True

Allowance for doubtful accounts is deducted from accounts receivable on the balance sheet. Therefore, it is a contra-asset account.

Question 7

The journal entry to write off an uncollectible account does not change the net realizable value (book value) of accounts receivable. T/F?

Answer 7

True

The journal entry to write off an account receivable includes a debit to allowance for doubtful accounts and a credit to accounts receivable; this entry reduces both accounts equally and therefore does not change net realizable value (accounts receivable minus allowance for doubtful accounts).

Question 8

When using the allowance method, the year-end journal entry to record bad debt expense reduces current assets and net income. T/F?

Answer 8

True

The journal entry increases the allowance for doubtful accounts balance, which decreases current assets and the journal entry increases expenses, which decrease net income.

Question 9

When using the allowance method, the year-end journal entry to record bad debt expense reduces the accounts receivable account and increases net income. T/F?

Answer 9

False

The journal entry increases the allowance for doubtful accounts balance, not accounts receivable. The journal entry also increases expenses, which decrease net income.

Question 10

If the accounts receivable turnover ratio increases, the number of days it takes to collect the receivables also increases. T/F?

Answer 10

False

The higher the receivables turnover ratio, the faster receivables are collected. This means there are fewer days in the collection period.

Question 11

Effective internal control of cash should include the separation of the duties for receiving and disbursing cash. T/F?

Answer 11

True

Question 12

Which of the following is not a reason for the Jones Hardware Store to accept credit cards from customers?

a) Jones can receive its money faster than if it directly extended credit to the customer by an account receivable.
b) The credit card company offers a discount to Jones so that Jones will have more money available for operations.
c) Jones will not have to be concerned with nonsufficient funds checks from customers.
d) Jones will not have to have extra office workers to make phone calls to customers requesting collections on accounts.

Answer 12

b) The credit card company offers a discount to Jones so that Jones will have more money available for operations.

The credit card charges a discount fee. This discount is deducted from the total sales revenue, which results in less money available for the company’s operation. However, the fee charged by the credit card company would offset the costs of having an internal department for collections and of bank fees for NSF checks, and allows the company to receive its money immediately from the credit card company rather than waiting for customers to pay the company directly.

Question 13

• Cash sales, $450,000
• Credit sales, $1,350,000
• Selling and administrative expenses, $330,000
• Sales returns and allowances, $90,000
• Gross profit, $1,360,000
• Increase in accounts receivable, $55,000
• Bad debt expense, $33,000
• Sales discounts, $43,000

• Net income, $1,030,000

How much cash was collected from customers?

a) Cash flow increased $1,295,000.
b) Cash flow increased $1,745,000.
c) Cash flow decreased $1,855,000.
d) Cash flow increased $1,405,000.

Answer 13

b) Cash flow increased $1,745,000.

An increase in accounts receivable decreases cash flow from operating activities and cash collections from customers. Cash sales, $450,000, plus credit sales, $1,350,000, less the increase in accounts receivable, $55,000 = cash collections from customers, $1,745,000.

Cash Sales + Credit Sales - A/R = Cash collected

Question 14

• Accounts receivable written-off as uncollectible during the year amounted to $11,500.
• The accounts receivable balance at the beginning of the year was $150,000.
• The accounts receivable balance at the end of the year was $210,000.
• The allowance for doubtful accounts balance at the beginning of the year was $14,000.
• The allowance for doubtful accounts balance at the end of the year after the recording of bad debt expense was $12,900.
• Credit sales during the year totaled $900,000.

How much was CHS Company’s bad debt expense?

a) $11,500.
b) $12,900.
c) $10,400.
d) $14,000.

Answer 14

c) $10,400.

Ending allowance for doubtful accounts, $12,900 = Beginning allowance for doubtful accounts, $14,000 − Accounts receivable write-offs, $11,500 + Bad debt expense, $10,400.

12900
-14000
= -1100 + 11500 = 10400

Question 15

• Accounts receivable written-off as uncollectible during the year amounted to $11,500.
• The accounts receivable balance at the beginning of the year was $150,000.
• The accounts receivable balance at the end of the year was $210,000.
• The allowance for doubtful accounts balance at the beginning of the year was $14,000.
• The allowance for doubtful accounts balance at the end of the year after the recording of bad debt expense was $12,900.
• Credit sales during the year totaled $900,000.

How much cash was received from collections of accounts receivable?

a) $888,500.
b) $828,500.
c) $690,000.
d) $701,500.

Answer 15

b) $828,500.

Ending accounts receivable, $210,000 = Beginning accounts receivable, $150,000 − Accounts receivable write-offs, $11,500 + Credit sales, $900,000 − Cash collections, $828,500.

150000 -11500 + 900000 - 210000 = $828,500

Question 16

What would be incorrect about reporting accounts receivable in the balance sheet?

a) Presenting accounts receivable net of allowance for doubtful accounts.
b) Presenting accounts receivable at estimated net realizable value.
c) Presenting accounts receivable less bad debt expense and write-offs.
d) Presenting accounts receivable at gross amount, less allowance for doubtful accounts.

Answer 16

c) Presenting accounts receivable less bad debt expense and write-offs.

Bad debts and write-offs, if material, are reported on a schedule included in Form 10-K for public companies but not on the balance sheet.

Question 17

Which of the following correctly describes the following transaction which generated this journal entry?

Cash xxx
Sales discounts xxx
Accounts receivable xxx

a) Our company made a sale to a customer.
b) Our company is taking advantage of a discount on debt.
c) A customer that owed us is paying us, and taking advantage of a discount.
d) A customer that owed us is paying us.

Answer 17

c) A customer that owed us is paying us, and taking advantage of a discount.

Question 18

The LIFO inventory method will result in the lowest gross profit in comparison with the FIFO method when unit costs are decreasing. T/F?

Answer 18

False

LIFO reports the lowest cost of goods sold because the newest units which are the lower cost units are sold first. Therefore, LIFO has the highest gross profit during periods of decreasing unit costs.

Question 19

The FIFO inventory method will result in the lowest net income in comparison with the LIFO method when costs are decreasing. T/F?

Answer 19

True

FIFO reports the highest cost of goods sold because higher-cost units are sold first. Therefore, FIFO has the lowest net income during periods of decreasing unit costs.

Question 20

A company can use the LIFO inventory method for income tax purposes and the FIFO inventory method for financial reporting purposes during a given year. T/F?

Answer 20

False

The LIFO conformity rule requires the use of LIFO for financial statement preparation if LIFO is used for tax purposes.

Question 21

A grocery store would likely use the specific identification inventory costing method for most of the items in its inventory. T/F?

Answer 21

False

The specific identification method is used when expensive unique items are sold.

Question 22

The FIFO inventory method allocates the earliest inventory purchase costs to ending inventory. T/F?

Answer 22

False

FIFO ending inventory consists of the newest inventory acquisitions.

Question 23

The LIFO inventory method allocates the oldest inventory purchase costs to cost of goods sold. T/F?

Answer 23

False

The LIFO inventory method allocates the oldest inventory purchase costs to cost of goods sold.

Question 24

During periods of decreasing unit costs, use of the LIFO inventory method will result in a higher amount of ending inventory than will the use of the FIFO inventory method. T/F?

Answer 24

True

LIFO ending inventory consists of the older inventory purchases, which were at higher unit costs.

Question 25

During periods of increasing unit costs, the LIFO inventory method will result in a higher inventory amount on the balance sheet and a lower net income than will the FIFO inventory method. T/F?

Answer 25

False

During periods of increasing unit costs, LIFO cost of goods sold is at newest, i.e., higher, unit costs which results in a lower net income. However, LIFO ending inventory consists of the older purchases, which were at lower unit costs. Therefore during periods of increasing unit costs, LIFO will result in a lower ending inventory than FIFO for the balance sheet.

Question 26

During periods of increasing unit costs, the LIFO inventory method results in lower income taxes. T/F?

Answer 26

True

LIFO cost of goods sold results in a lower taxable income and, therefore, lower income taxes.

Question 27

During periods of decreasing unit costs, use of the FIFO inventory method results in lower gross profit than would use of the LIFO method. T/F?

Answer 27

True

FIFO cost of goods sold is higher than LIFO when unit costs are decreasing. A higher cost of goods sold results in a lower gross profit.

Question 28

An understatement of ending inventory results in an overstatement of net income. T/F?

Answer 28

False

An understatement of ending inventory results in an overstatement of cost of goods sold and therefore an understatement of net income.

Question 29

In the year of an overstatement of ending inventory, cost of goods sold will be understated and net income will be overstated. T/F?

Answer 29

True

An overstatement of ending inventory results in an understatement of cost of goods sold and therefore an overstatement of net income.

Question 30

Which of the following costs is not included as inventory on the balance sheet?

a) Raw materials to be used in the manufacturing process.
b) Work in process.
c) Finished goods.
d) Freight-out costs for finished goods sent to retailers.

Answer 30

d) Freight-out costs for finished goods sent to retailers.

Freight-in costs for delivery to the warehouse are included in inventory. Freight-out costs for delivery to retailers are not included in inventory. Freight-out costs are a component of operating expenses. Conversely, raw materials, work in process, and finished goods are inventory categories.