Receivables and Inventory Test Practice

Question 1

Debit Card

Answer 1

Debit cards have flat fees: The same charge is applied to a debit sale, regardless of the cost of the good.
For example, $1 flat fee per transaction

Question 2

Credit card

Answer 2

Credit cards have service fees: These charges are based on a % of the sale
For example, a service fee of 3% is applied to every sale.

Question 3

Sold 10 basketballs to various customers at a cost of $25 each on August 1

All the transactions had a $0.50 fee charged by the bank

How did these customers pay

What is the appropriate journal entry

Answer 3

Debit card

Debit Card Expense [10 x $0.50]
Cash [$250 – 5]
(Indent) Sales [10 x $25]
To record debit card sales

5
245
(Indent) 250

Question 4

Made sales of $4,000 on August 1 for basketball equipment

A service charge of 2.5% was applied to these sales by the bank.

How did these customers pay

What is the appropriate journal entry

Answer 4

Credit Card Expense [$4,000 x 2.5%]
Cash [$4,000 – 100]
(Indent) Sales
To record credit card sale

100
3,900
(Indent) 4,000

Question 5

Sold $2,000 worth of sports equipment to a customer who agrees to pay at later date.

What type of sale is this

What is the appropriate journal entry

Answer 5

Sale on account

Accounts Receivable
(Indent) Sales
To record sale on account

2,000
(Indent) 2,000

Question 6

If a customer does not pay in full within a certain amount of time, interest may be

Answer 6

Added to the balance due.

This would be recognized as interest revenue

Accounts Receivable
(Indent) Interest Receivable
To record interest on amount due

XX
(Indent) XX

Question 7

Net Realizable Value

Answer 7

Current market value of asset

You’re basically adjusting your books early, based on your best estimate

Question 8

The Allowance Method

Answer 8

When you know a client can’t pay back fully (you guys talk) so you give “discount” in a sense like what papa does

Question 9

Net Realizable Value Calculation

Answer 9

Gross Accounts Receivable - Allowance for Doubtful Accounts = Net Realizable Value

Bad Debts Expense
(Indent) Allowance for Doubtful Accounts
To record estimate of uncollectible accounts

14,500
(Indent) 14,500

Question 10

Recording Write-Off of Uncollectible Accounts

Answer 10

When a company knows for sure that a receivable is no longer collectible, the write-off has to be recorded

Allowance for Doubtful Accounts
(Indent) Accounts Receivable
Write off of uncollectible account

XX
(Indent) XX

Question 11

Collection of a Written-Off Uncollectible Account (Reverse write off stuff)

Answer 11

Sometimes, a customer may pay us an amount that we thought would not be paid

Two journal entries required:
A reversal of the write-off
Collection of the receivable

Accounts Receivable -CN
(Indent) Allowance for Doubtful Accounts
To reverse the write-off

XX
(Indent) XX

Cash
(Indent) Accounts Receivable - CN
To record collection of receivable

XX
(Indent) XX

Question 12

Notes Receivable

Answer 12

There may be cases where:
Companies borrow or lend money
Customers will take a long time to pay back money

As such a note receivable may be created, which is a promissory note

A promissory note is written promise to pay back a specific amount of money when requested or at a specific date.

The person making the promise to pay is the maker

The person receivable the money is the payee

The accounting for note receivables is very similar to accounts receivable

Basic issues are accounting for:
Recognizing notes receivable
Disposing of notes receivable

Notes are always valued at net realizable value – similar process to determine bad debt expense and allowance for doubtful accounts

Question 13

Recognizing Notes Receivable

If a note receivable is created to have an account receivable settled:

Answer 13

Notes Receivable
(Indent) Accounts Receivable
To record acceptance of note for account receivable

XX
(Indent) XX

Question 14

Recognizing Notes Receivable

If a note receivable is exchanged for cash (example: a loan), then the entry would be:

Answer 14

Notes Receivable
(Indent) Cash
To record loan of cash in exchange for a note receivable

XX
(Indent) XX

Question 15

Interest Calculation

Answer 15

Principal Amount of Note x Annual Interest Rate x Time in Terms of One Year = Interest

Question 16

Interest Entry on note receivable

Answer 16

Interest Receivable
(Indent) Interest Revenue
To record accrued interest from a note receivable

XX
(Indent) XX

Question 17

Disposing Notes Receivable

Answer 17

Notes are normally held to their maturity date - the date where the principal and any accrued interest are collected (MEANS DATE PAID)

There are two outcomes that may occur:
Honouring of Notes Receivable – it is paid back to payee
Dishonour of Notes Receivable – it is not paid back

Question 18

Honouring of Notes Receivable

The journal entry to account for this situation is:

Answer 18

Cash
(Indent) Notes Receivable*
(Indent) Interest Revenue**
(Indent) Interest Receivable***
To record collection of note

XXX
(Indent) X
(Indent) X
(Indent) X

• • The principal amount of the note receivable
    ** - The interest accrued
    *** - The interest that has already been accrued
    (may not be necessary to include depending on adjustment date)

Question 19

Dishonouring of Notes Receivable – Payment still expected

Answer 19

A note is dishonoured if it is not paid in full at maturity.
A note is no longer negotiable
Payee still has a claim against the person who owes them money
Balance of note receivable is transferred to accounts

Still need to adjust for interest revenue and credit any interest receivable already recorded as an accrual

Accounts Receivable
(Indent) Notes Receivable
(Indent) Interest Revenue
(Indent) Interest Receivable
To record dishonouring of note when collection is expected

XXX
(Indent) X
(Indent) X
(Indent) X

Question 20

Dishonouring of Notes Receivable – Payment no longer expected

If we believe the note receivable will not be collected, we would write off the note receivable

The journal entry for this situation is:

Answer 20

Allowance for Doubtful Accounts
(Indent) Notes Receivable
(Indent) Interest Receivable
To record dishonouring of note when collection is no longer expected

XX
(Indent) X
(Indent) X

Need to write off any interest we already accrued and recorded.

Question 21

Analysis of Receivables- Receivables Turnover

Answer 21

measures the average number of times that receivables are collected during a period.

The higher this number is, the more liquid the company’s receivables are

Net Sales/Average Gross Accounts Receivable = Receivables Turnover

Question 22

Analysis of Receivables- Collection Period

Answer 22

How long it takes to receive money owed to you

365 days/Receivable turnover = collection period

The collection period should not be longer than the credit term period (the time it allows a customer to pay them back)

A low number usually means they collect money quickly

Question 23

Average Cost Formula

Answer 23

An inventory cost formula that assumes all merchandise is very similar and not sold in any particular order. Often used for goods that don’t expire or break down.

To calculate Cost of Goods Sold and Merchandise Inventory:

[Cost of Goods Available for Sale (Total Balance of Inventory)] / [Units Available for Sale (Total Balance of Units)]

Question 24

Days Sales in Inventory

Answer 24

A liquidity measure of the average number of days that inventory is held before being sold.

It is calculated as:
365 Days/Inventory Turnover Ratio

• Lower the better
• Not too low cuz then difficulty keeping up with demand

Question 25

First-In, First Out (FIFO) Cost Formula

Answer 25

An inventory cost formula that assumes that the goods purchased the earliest are the first sold when calculating Cost of Good Sold. Often used for goods that expire quickly. COGS are the earliest inventory, the Merchandise Inventory are the latest goods purchased.

Question 26

Inventory Turnover

Answer 26

How quickly company is selling its inventory Formula: (Costs of Goods Sold) / (Average Inventory) OR (Beginning + Ending Inventory)/2

Question 27

Lower of Cost and Net Realizable Value (LCNRV)

Answer 27

A method for listing inventory at the lower of its original cost and the net realizable value at the end of a fiscal period

Question 28

Specific Identification??

Answer 28

An inventory cost method where goods can be easily identified for the purposes of calculating Cost of Goods Sold and Merchandise Inventory

Question 29

Weighted Average Unit Cost?? is this diff from avg cost formula

Answer 29

(Costs of Goods Available for Sale) / (Number of Units Available for Sale)

Question 30

Determining Inventory Quantities

Answer 30

The amount of inventory a company has is determined in two steps: Taking a physical inventory of goods on hand. By determining the ownership of goods in transit Companies will do this at least once a year, and is used to determine the balance of Merchandise Inventory in the Balance Sheet

Question 31

A Nike store employee counts 100 pairs of running shoes in the store’s stock room. Each pair of shoe cost $40 from the store’s supplier. What’s the value of the Merchandise Inventory

Answer 31

[100 shoes x $40/shoe] = $4,000 When each pair is sold, $40 becomes the Cost of Goods Sold

Question 32

Ownership of Goods in Transit???

Answer 32

Goods they have sold that are still under their ownership Goods that they purchased that are under their ownership

Question 33

Inventory Cost Determination Methods (Specific Identification)

Answer 33

Tracks the actual flow of goods for a business Each inventory item is marked with its cost Used where goods can be specifically and easily identified when sold

Question 34

Inventory Cost Determination Methods (Cost Formulas)

Answer 34

Used when identifying specific inventory is not possible We use a “Cost Formula” instead: First-in, First-out (FIFO) Average Cost The flow of costs may not match physical flow, but it’s the best guess as per the cost principle.