FAR - Receivables Flashcards
A receivable is an asset recognized to reflect a claim against another party for the receipt of money, goods, or services.
TRUE
A receivable is an asset recognized to reflect a claim against another party for the receipt of money, goods, or services. The recording of a receivable, which often coincides with revenue recognition, is consistent with accrual accounting.
A receivable is a current asset if it is reasonably expected to be collected within the shorter of 1 year or the entity’s normal operating cycle.
FALSE A receivable is a current asset if it is reasonably expected to be collected within the longer of 1 year or the entity’s normal operating cycle. Otherwise, it should be classified as noncurrent.
Trade receivables arise from credit sales to customers as part of the ordinary revenue-producing activities of an entity.
TRUE Trade receivables are the majority of receivables. They arise from credit sales to customers as part of the ordinary revenue-producing activities of an entity. Nontrade receivables include all receivables not classified as trade receivables.
Trade discounts are used to differentiate alternative prices among different classes of customers.
TRUE Trade discounts are used to differentiate alternative prices among different classes of customers. The trade discount is a means of adjusting the gross (list) price for different buyers, varying quantities, or changes in costs. Net price after the trade discount is the basis for recognition.
Related party receivables, loss contingencies, and pledged or assigned receivables should be disclosed in the notes to the financial statements.
TRUE Disclosure should be made of related party receivables, e.g., those arising from loans to employees or affiliates, pledged or assigned receivables, and concentrations of credit risk. Loss contingencies, such as those from transfers with recourse, also should be disclosed.
A cash discount with terms of 1/15, n/40 means that the buyer can take a 1% discount off the invoice amount if paid within 40 days.
FALSE A cash discount with terms of 1/15, n/40 means that the buyer can take a 1% discount off the invoice amount if paid within 15 days, or the entire balance is due in 40 days.
The periodic journal entry to record bad debt expense is DR: Bad debt expense $XXX CR: Accounts receivable $XXX
FALSE DR: BAD DEBT EXPENSE $XXX CR: ALLOWANCE FOR DOUBTFUL ACCTS $XXX
The aging schedule of accounts receivable is used to calculate the periodic bad debt expense according to the income-statement approach.
FALSE Under the balance-sheet approach, the allowance for uncollectible accounts is periodically adjusted to reflect a percentage of accounts receivable. An entity rarely experiences a single rate of uncollectibility on all of its accounts. For this reason, entities using the balance-sheet approach to estimate bad debt expense generally prepare an aging schedule of accounts receivable.
When specific accounts receivable are written off, the following journal entry is recorded: DR: Bad Debt Exp $XXX CR: Accounts Receivable $XXX
FALSE The write-off of a particular bad debt has no effect on expenses. The following journal entry is recorded: DR: Allowance for Uncollectible Accounts $XXX CR: Accounts Receivable $XXX
Both approaches to accounting for bad debts, the direct write-off method and the allowance method, are acceptable under GAAP and can be used at management’s discretion.
FALSE The two approaches to accounting for bad debts are the direct write-off method and the allowance method. The direct write-off method is not acceptable under GAAP. The allowance method is required under GAAP.
The direct write-off method expenses bad debts when they are determined to be uncollectible.
TRUE The direct write-off method expenses bad debts when they are determined to be uncollectible. It is not acceptable under GAAP because it is subject to manipulation.
The essence of the allowance method of accounting for uncollectible receivables is that it attempts to match bad debt expense with the related revenue.
TRUE The allowance method attempts to match bad debt expense with the related revenue and to determine the net realizable value of the accounts receivable. This method systematically records bad debt expense as a percentage of either sales or the level of accounts receivable on an annual basis.
Under the income-statement approach, periodic bad debt expense is computed as a percentage of cash sales.
FALSE Under the income-statement approach, periodic bad debt expense is computed as a percentage of sales on account.
Under the balance-sheet approach, bad debt expense is a function of both sales and collections, reporting accounts receivable at their net realizable value (NRV).
TRUE Under the balance-sheet approach, bad debt expense is a function of both sales and collections, reporting accounts receivable at their net realizable value (NRV). An entity rarely experiences a single rate of uncollectibility on all its accounts. For this reason, firms using the balance-sheet approach to estimate bad debt expense generally prepare an aging schedule of accounts receivable.
Under the allowance method, when a customer pays on an account previously written off, bad debt expense is not affected.
TRUE Under the allowance method, when a customer pays on an account previously written off, bad debt expense is not affected.
