U4, AOS 1 - Bad Debts Flashcards
What is a bad debt?
A bad debt is a receivable that is unlikely to be collected.
True or False: Bad debts are always written off immediately.
False
What is the purpose of recognizing bad debts?
To accurately reflect the financial position of a business and ensure that assets are not overstated.
Fill in the blank: Bad debts are typically classified as _______ on a company’s balance sheet.
expenses
What is one common example of a bad debt?
A loan given to a customer who has declared bankruptcy.
True or False: All debts that are overdue are considered bad debts.
False
What accounting method is often used to account for bad debts?
The allowance method.
Multiple Choice: Which of the following is NOT a characteristic of bad debts? A) Uncollectible B) Recorded as an asset C) Written off D) Estimated
B) Recorded as an asset
What is the journal entry to write off a bad debt?
Debit Bad Debt Expense and Credit Accounts Receivable.
True or False: A company can recover a bad debt after it has been written off.
True
What is the difference between bad debts and doubtful debts?
Doubtful debts are debts that may become uncollectible, while bad debts are already determined to be uncollectible.
Fill in the blank: The _______ method estimates bad debts based on a percentage of sales.
percentage of sales
True or False: Bad debts can impact a company’s cash flow.
True
What is the impact of bad debts on net income?
Bad debts reduce net income due to the recognition of bad debt expense.
Multiple Choice: Which of the following is a way to minimize bad debts? A) Offering discounts for early payment B) Extending credit without checks C) Ignoring overdue accounts D) None of the above
A) Offering discounts for early payment
What is the term for an estimate of uncollectible accounts?
Allowance for Doubtful Accounts.
True or False: Bad debts only affect the income statement.
False
What is a common reason for bad debts?
Customer insolvency or financial difficulties.
Fill in the blank: Companies often use _______ to assess the risk of bad debts before extending credit.
credit checks
What financial statement reflects bad debts?
The income statement.
