Unit 6 Cash And Receivables

Question 1

What is the Accounts Receivable Turnover Ratio?

Answer 1

The ratio that measures how efficiently a company is collecting payments from its customers.

Example sentence: A high accounts receivable turnover ratio indicates that a company is collecting payments quickly.

Question 2

What is the journal entry for the Direct Write-Off Method for Uncollectable Accounts

Answer 2

Debit - Bad Debt Expense
Credit - Accounts Receivable

Note: No Allowance for Doubtful Accounts on the Direct Write- Off method

Question 3

Which Method is not accepted by GAAP?
Direct Write-Off Method
Allowance Method

Answer 3

Direct Write-Off Method

Question 4

Net Accounts Receivable Formula

Answer 4

Accounts Receivable - Allowance for doubtful accounts = Net Account Receivables

Question 5

Allowance For Doubtful Accounts

Answer 5

Allowance for doubtful Accounts is a contra-asset account. It has a normal credit balance

Question 6

Average Days to Collect Receivables Formula

Answer 6

365/ AR Turnover Ratio

Result: How many days on average dose it take to collect all receivables during the past year

Question 7

Accounts Receivable Turnover Ration Formula

Answer 7

Net Sales/Average Net Accounts Receivable

Note: Average Receivables is the receivables for the past 2 years divided by 2

Note: Net accounts receivables is net of allowance for doubtful accounts

Question 8

Journal entry for recoding Bad debt with the Allowance Method for uncollectables

Answer 8

Debit - Bad Debt Expense
Credit - Allowance for Doubtful Accounts

Question 9

Accounts Receivable

Answer 9

Oral promises of the purchaser to pay for goods and services sold.

Question 10

Accounts Receivable Turnover

Answer 10

The ratio computed by dividing net sales by average (net) accounts receivable outstanding during the year that measures the number of times, on average, a company collects receivables during the period.

Question 11

Aging Schedule

Answer 11

The analysis of customer balances by the length of time they have been unpaid.

Question 12

Allowance Method

Answer 12

A method for recording uncollectible receivables where an estimate is made of the expected uncollectible receivables.

Question 13

Bank Overdrafts

Answer 13

When a check is written for more than the amount in the cash account.

Question 14

Cash

Answer 14

Resources that consist of coin, currency, money orders, certified checks, cashier’s checks, personal checks, and bank drafts.

Question 15

Cash Discounts (Sales Discounts)

Answer 15

Discounts offered as an inducement for prompt payment communicated in terms that read, for example, 2/10, n/30.

Question 16

Cash Equivalents

Answer 16

Short-term, highly liquid temporary investments that are both (a) readily convertible to known amounts of cash, and (b) so near their maturity that they present insignificant risk of changes in interest rates.

Question 17

Compensating Balances

Answer 17

Minimum cash balances required by a bank in support of bank loans.

Question 18

Direct Write-off Method

Answer 18

A method for recording uncollectible receivables where no entry is made until a specific account has been established as uncollectible.

Question 19

Imputed Interest Rate

Answer 19

An approximate, applicable interest rate that may differ from the stated interest rate.

Question 20

Net Amount Expected to Be Collected

Answer 20

The net amount expected to be collected after estimating uncollectible receivables.

Question 21

Notes Receivable

Answer 21

Written promises to pay a certain sum of money on a specified future date.

Question 22

Promissory Note

Answer 22

A negotiable instrument signed by a maker promising to pay a certain sum of money at a specified future date to a designated payee.

Question 23

Receivables

Answer 23

Claims held against customers and others for money, goods, or services.

Question 24

Trade Discounts

Answer 24

The difference between list or catalog prices and discounted prices which are used to avoid frequent changes in catalogs and to quote different prices for different quantities purchased.

Question 25

Trade Receivables

Answer 25

Amounts owed by customers for goods sold and services rendered as part of normal business operations.

Question 26

Zero-interest-bearing Notes

Answer 26

A note which has no stated interest rate but has effective interest inherent in the instrument because of the difference in the present value of the note and its maturity value.

Question 27

The Matching Principle

Answer 27

when a Company records or accrues revenues, ALL expenses related to those revenues should be recorded at the same time!

Question 28

The Conservatism Principle

Answer 28

-when in doubt, record or accrue expenses which reduce net income
-almost never record especially unrealized gains until realized!

Note: The Conservatism Principle states that gains should be recorded only if their occurrence is certain, but all potential losses, even those with a remote chance of incurrence, are to be recognized.

Question 29

Is Short term notes recorded at face value or present value?

Answer 29

Face Value

Question 30

Is long term notes recorded at face value or present value?

Answer 30

Present Value

Question 31

What is the formula of unknown interest rate?

Answer 31

Formula: PV = FV (PVF, n=5, i=?)

Question 32

Valuation of Short term Notes Receivable

Answer 32

reported at net realizable value (same as accounting for accounts receivable).

Question 33

Valuation of long term Notes Receivable

Answer 33

F A S B requires companies disclose not only their cost but also their fair value in the notes to the financial statements.

Question 34

Valuation of fair value Notes Receivable

Answer 34

Companies have the option to use fair value as the basis of measurement for notes receivable in the financial statements.

Question 35

Cash

Answer 35

Most liquid asset
Standard medium of exchange
Basis for measuring and accounting for all items

Current asset

Examples: Coin, currency, available funds on deposit at the bank, money orders, certified checks, cashier’s checks, personal checks, bank drafts and savings accounts.

Question 36

Cash Equivalent

Answer 36

Short-term, highly liquid investments that are both
(a) readily convertible to cash, and
(b) so, near their maturity that they present insignificant risk of changes in value.
(c) short term (90 or less)

Examples: Treasury bills, Commercial paper, and Money market funds.

Question 37

Sales Returns and Allowances

Answer 37

Contra revenue account to Sales Revenue.

Question 38

Allowance for Sales Return

Answer 38

Allowance for Sales Returns and Allowances is a contra asset account to Accounts Receivable.

Question 39

How do you record a $10,000 Sale on account using the Gross Method?

Answer 39

Debit Accounts Receivable $10,000
Credit Sales Revenue $10,000

Question 40

How do you record a $10,000 Sale on account using the Net Method?

Answer 40

Debit Accounts Receivable $9,800
Credit Accounts Receivable $9,800

Question 41

How do you record a payment of $4,000 of a $10,000 sale on account in the discount period (2/10, n/30) using the Gross Method?

Answer 41

Debit Cash $3,920
Debit Sales Discounts $80
($4,000 x .02)
Credit Accounts Receivables $4,000

Question 42

How do you record a payment of $4,000 of a $10,000 sale on account in the discount period (2/10, n/30) using the Net Method?

Answer 42

Debit Cash $3,920
Credit Accounts Receivable $3,920

Question 43

How do you record a payment of the remaining $6,000 of a $10,000 sale on account after the discount period (2/10, n/30) using the Gross Method?

Answer 43

Debit Cash $6,000
Credit Accounts Receivables $5,880
Credit Discounts Forfeited $120
($6,000 x .02)

Question 44

Net realizable value (NRV)

Answer 44

is an accounting method that estimates the amount of cash a company can expect to receive from selling an asset, minus any costs associated with the sale.

Note: NRV is a conservative way to ensure that an asset’s value isn’t overstated and is used in generally accepted accounting principles (GAAP) and international financial reporting standards (IFRS).