978-1337276337 Test Bank Chapter 7 Part 1

Chapter 7

Page 1

True / False

1. The reason the allowance method of recognizing bad debts is used is primarily because it recognizes the maximum

amount of write-off in each period.

a. True

b. False

2. Bad Debts Expense is increased and Accounts Receivable is decreased at the end of the period to recognize bad debts

under the allowance method.

a. True

b. False

3. The percentage of net credit sales approach for recognizing bad debts considers any existing balance in Allowance for

Doubtful Accounts.

a. True

b. False

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4. Selling on credit protects a company from the risk that some of its receivables will never be collected.

a. True

b. False

5. Accounts receivable are shown on the balance sheet at their net realizable value.

a. True

b. False

6. The use of the allowance method is an attempt by accountants to match bad debts as an expense with the revenue of the

period in which a sale on credit takes place.

a. True

b. False

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7. One of the problems with the use of the allowance method to account for bad debts is that it often violates the matching

principle.

a. True

b. False

8. Under the allowance method of accounting for bad debts, the company estimates the amount of bad debts before those

debts actually occur.

a. True

b. False

9. Bad Debts Expense is a contra account that is used to reduce accounts receivable to its net realizable value.

a. True

b. False

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10. Because the allowance method results in better matching, accounting standards require its use rather than the direct

write-off method, unless bad debts are immaterial.

a. True

b. False

11. An aging schedule typically categorizes the various accounts by the length of time each invoice is outstanding.

a. True

b. False

12. The accounts receivable turnover ratio is a measure of how well a company manages its receivables.

a. True

b. False

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13. The accounts receivable turnover ratio is computed by dividing net income by average accounts receivable.

a. True

b. False

14. Typically, the lower the accounts receivable turnover ratio, the better.

a. True

b. False

15. If Ash Company had sales during the year of $10,000,000, an average accounts receivable of $2,000,000, and net

income of $500,000, its accounts receivable turnover ratio would be 0.25.

a. True

b. False

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16. If accounts receivable are turned over faster, this means that fewer days are required to collect receivables.

a. True

b. False

17. The accounts receivable turnover ratio is used to evaluate how well a company does in collecting its accounts

receivable.

a. True

b. False

18. A high accounts receivable turnover ratio could mean that the company’s credit policies may be too stringent.

a. True

b. False

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19. Lewisburg Corp. had sales during the year of $15,000,000 and an average accounts receivable of $5,000,000. Its

accounts receivable turnover ratio is 0.33 times.

a. True

b. False

20. The maker of a note recognizes a note receivable on the balance sheet and interest revenue on its income statement.

a. True

b. False

21. The maker of a note recognizes a note payable on the balance sheet and interest expense on its income statement.

a. True

b. False

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22. The payee of a note recognizes a note payable on the balance sheet and interest expense on its income statement.

a. True

b. False

23. The payee of a note recognizes a note receivable on the balance sheet and interest revenue on its income statement.

a. True

b. False

24. When a note is discounted at a bank, it is normally done with recourse.

a. True

b. False

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25. If a company accepts a major credit card such as VISA from a customer, then the company is responsible for the

amount of the sale in case of nonpayment from a cardholder.

a. True

b. False

26. When a company discounts a promissory note at the bank, it receives cash at the same time it would if it held the note

to maturity.

a. True

b. False

27. The alternate term for a credit card draft is an invoice.

a. True

b. False

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28. Promissory notes are non-negotiable.

a. True

b. False

29. A note discounted with recourse means that if the original customer fails to pay the bank the total amount due on the

maturity date of the note, the company that transferred the note to the bank is liable for the full amount.

a. True

b. False

30. Whether investments are reported as current or noncurrent assets depends on the company’s intent.

a. True

b. False

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31. A subsidiary is a separate legal entity that is owned or controlled by another entity.

a. True

b. False

32. Securities issued by corporations as a form of ownership in the business, such as common and preferred stock, are

called equity securities.

a. True

b. False

33. When Company X buys stock in Company Y, Company X is referred to as the investee.

a. True

b. False

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34. The equity method of accounting is used if the investor owns at least 20% of the investee and the investor is able to

secure influence over the investee.

a. True

b. False

35. Purchases and sales of cash equivalents are reported as investing activities on a statement of cash flows.

a. True

b. False

36. Baggs buys $100,000 of Vista Company bonds on January 1, 2017, at face value. The bonds pay 10% interest

semiannually on June 30 and December 31. If Baggs sells the bonds at 99 on July 1, 2017, there will be a loss reported on

the income statement.

a. True

b. False

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37. Both stock and bond investments have maturity dates.

a. True

b. False

38. A company invests excess cash in a certificate of deposit. At the end of an accounting period before the CD matures,

the company will recognize interest expense.

a. True

b. False

39. A decrease in accounts receivable represents an increase in a company’s cash flow from operating activities.

a. True

b. False

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40. An increase in accounts receivable is reported on the statement of cash flows under the indirect method as an addition.

a. True

b. False

41. The most common type of receivables is accounts receivable.

a. True

b. False

42. The direct write-off method estimates the amount of bad debts before they occur.

a. True

b. False

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43. Cash flows from purchases, sales, and maturities of investments are usually classified as operating activities.

a. True

b. False

44. Which one of the following is not an accurate description of Allowance for Doubtful Accounts?

a. Contra account

b. Balance sheet account

c. Income statement account

d. Current asset account

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45. The data presented below are for Falconi, Inc. for 2017.

Credit sales during the year $2,100,000

Accounts receivable—December 31, 2017 395,000

Allowance for doubtful accounts—December 31, 2017 20,000

Bad debts expense for the year 17,000

What amount will Falconi show on its year-end balance sheet for the net realizable value of its accounts receivable?

a. $378,000

b. $375,000

c. $358,000

d. $ 20,000

46. The data presented below are for Falconi, Inc. for 2017.

Credit sales during the year $2,100,000

Accounts receivable—December 31, 2017 295,000

Allowance for doubtful accounts—December 31, 2017 28,000

Bad debts expense for the year 17,000

What is the effect on net accounts receivable when Falconi records its estimate for bad debts expense using the allowance

method?

a. Net accounts receivable decrease.

b. Net accounts receivable increase.

c. Net accounts receivable stay the same.

d. Net accounts receivable both increase and decrease.

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47. The following information was presented on the balance sheet of Gloria Company as of December 31, 2017:

Trade accounts receivable, net of allowance for uncollectibles of $100,000 $1,600,000

Which one of the following statements is true?

a. Gloria expects that $1,700,000 of accounts receivable will be collected after year-end.

b. The balance in the Accounts Receivable account in Gloria’s general ledger is $1,600,000.

c. The net realizable value of Gloria’s accounts receivable is $1,600,000.

d. Gloria expects to collect only $1,500,000 from its customers.

48. On January 15, 2017, the accounts receivable balance was $7,000 and the balance in Allowance for Doubtful

Accounts was $700. On January 16, 2017, a $200 uncollectible account was written off. The net realizable value of

accounts receivable on January 16 immediately after the write-off is

a. $6,300.

b. $6,800.

c. $6,500.

d. $7,900.

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49. Which one of the following is an accurate description of Allowance for Doubtful Accounts?

a. Contra account

b. Liability account

c. Revenue account

d. Expense account

50. Which one of the following statements is true?

a. When a company uses a subsidiary ledger, the balance in the control account, Accounts Receivable, shows only the

amount the company expects to collect from the accounts receivable, net of any expected uncollectible accounts.

b. An accounts receivable subsidiary ledger represents amounts due to vendors and suppliers.

c. The balance in the control account, Accounts Receivable, should be equal to the sum of the balances in the

subsidiary ledger for accounts receivable.

d. A subsidiary ledger takes the place of the control account for some companies.

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51. If a company uses the direct write-off method of accounting for bad debts,

a. it is applying the matching principle.

b. it will record bad debts expense only when an account is determined to be uncollectible.

c. it will reduce the Accounts Receivable account at the end of the accounting period for estimated uncollectible

accounts.

d. it will report accounts receivable on the balance sheet at their net realizable value.

52. Fenchurch Corp. uses the direct write-off method to account for bad debts. What are the effects of the adjustment to

record the write-off of a customer’s account balance?

a. Assets and liabilities decrease.

b. Assets and stockholders’ equity decrease.

c. Stockholders’ equity decrease and liabilities increase.

d. No effect; assets increase and decrease by the same amount.

53. If a company uses the allowance method of accounting for bad debts, which one of the following statements is true?

a. It will report accounts receivable on the balance sheet at their net realizable value.

b. It will record bad debts only when an account is determined to be uncollectible.

c. It will reduce the accounts receivable at the end of the accounting period for estimated uncollectible accounts.

d. It violates the matching principle.

54. Which one of the following statements is true if a company’s collection period for accounts receivable is

unacceptably long?

a. The company may need to borrow to acquire operating cash.

b. The company may offer trade discounts to lengthen the collection period.

c. Cash flows from operations may be higher than expected for the company’s sales.

d. The company should expand operations with its excess cash.

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55. If a company uses the allowance method to account for bad debts, when will the company’s owners’ equity decrease?

a. At the date a customer’s account is written off

b. At the end of the accounting period when an adjustment for bad debts is recorded

c. At the date a customer’s account is determined to be uncollectible

d. When the accounts receivable amount becomes past due

56. Which one of the approaches for the allowance method of accounting for bad debts emphasizes matching bad debts

expense with revenue on the income statement?

a. The percentage of accounts receivable approach

b. The percentage of net credit sales approach

c. The direct write-off method

d. The uncollectible approach

57. Which one of the approaches for the allowance method of accounting for bad debts emphasizes the net realizable

value of accounts receivable on the balance sheet?

a. The percentage of accounts receivable approach

b. The percentage of net credit sales approach

c. The direct write-off method

d. The uncollectible approach