Financial Accounting, 5e (Spiceland)
Chapter 5 Receivables and Sales
1) Credit sales transfer products and services to a customer today while bearing the risk of
collecting payment from that customer in the future.
2) At the time of a credit sale, a company would record an increase in assets and an increase in
revenues.
3) A sale on account is recorded as a debit to Service Revenue and a credit to Accounts Receivable.
4) Accounts receivable represent the amount of cash owed to the company by its customers from
the sale of products or services on account.
5) Trade discounts represent a discount offered to the purchaser for quick payment.
6) When a company sells a $100 service with a 20% trade discount, $80 of revenue is recognized.
7) A sales discount represents a reduction, not in the selling price of a good or service, but in the
amount to be paid by a credit customer if payment is made within a specified period of time.
8) A sale on account for $1,000 offered with terms 2/10, n/30 means that the customers will get a
$2 discount if payment is made within 10 days; otherwise, full payment is due within 30 days.
9) The Sales Discounts account is an example of a contra revenue account.
10) The Sales Discounts account is an expense account.
11) Sales returns and allowances occur when the buyer returns the goods or the seller reduces the
customer’s balance owed.
12) A sales allowance is recorded as a debit to Accounts Receivable and a credit to Sales
Allowances.
13) The Sales Returns account is an expense account.
14) If a company has total revenues of $100,000, sales discounts of $3,000, sales returns of $4,000,
and sales allowances of $2,000, the income statement will report net revenues of $91,000.
15) Accounts receivable are reported at the net amount expected to be collected.
16) The net amount of accounts receivable is the full amount owed by customers.
17) Customers’ accounts that we no longer consider collectible are referred to as uncollectible
accounts (or bad debts).
18) The adjustment to account for future bad debts has the effect of (1) reducing assets and (2)
increasing liabilities.
19) The adjustment for uncollectible accounts involves a debit to Bad Debt Expense and a credit to
the Allowance for Uncollectible Accounts.
20) The Allowance for Uncollectible Accounts is a contra asset account representing the amount
of accounts receivable that we do not expect to collect.
21) Bad debt expense represents the cost of the estimated future bad debts and is reported as an
expense on the income statement.
22) If a company is owed $10,000 by its customers, but it expects that $1,000 will not be collected,
accounts receivable in the balance sheet are reported at the net amount of $9,000.
23) One disadvantage of the allowance method (over the direct write-off method) for recording
uncollectible accounts is that it generally records accounts receivable for the net amount of cash
expected to be collected.
24) The percentage-of-receivables method for estimating uncollectible accounts is commonly
referred to as the balance sheet method, because the estimate of bad debts is based on a balance
sheet amount—accounts receivable.
25) Under the allowance method, when a company writes off an account receivable as an actual
bad debt, it reduces total assets.
26) Under the allowance method, when a company writes off an account receivable as an actual
bad debt, it records an expense.
27) Under the allowance method, the write-off of an actual bad debt is recorded with a debit to the
Allowance for Uncollectible Accounts and a credit to Accounts Receivable.
28) Under the allowance method, when a company collects cash from an account previously
written off, total assets increase.
29) The aging method for estimating uncollectible accounts considers that a higher percentage of
“older” accounts will not be collected compared to “newer” accounts.
30) A company expects 5% of its newer accounts receivable to be uncollectible and 20% of its
older accounts to be uncollectible. If the company has $40,000 of newer accounts and $5,000 of
older accounts, the total estimate of uncollectible accounts is $2,000.
31) A credit balance in the Allowance for Uncollectible Accounts before adjustment indicates that
last year’s estimate of uncollectible accounts may have been too high.
32) A debit balance in the Allowance for Uncollectible Accounts before adjustment indicates that
last year’s estimate of uncollectible accounts was too low.
33) The direct write-off method involves recording an adjustment at the end of each period to
account for the possibility of future uncollectible accounts.
34) Under the direct write-off method, bad debt expense is recorded at the time accounts are
known to be uncollectible.
35) The direct write-off method is used for tax purposes but is generally not permitted for financial
reporting.
36) The direct write-off method violates the concept of timeliness.
37) Under the direct write-off method, recording an estimate of future uncollectible accounts
includes a debit to Bad Debt Expense and a credit to the Allowance for Uncollectible Accounts.
38) Notes receivable are similar to accounts receivable but are more formal credit arrangements
evidenced by a written debt instrument, or note.
39) Notes receivable typically arise from sales to customers.
40) Notes receivable are assets and are reported in the balance sheet.
41) Interest on a note receivable is calculated as the face value of the note times the annual interest
rate stated on the note times the fraction of the year the note is outstanding.
42) A $10,000 note that has a stated interest rate of 10% and is due in six months would have
interest of $1,000.
43) Accrued interest on a note receivable is interest earned by the end of the year but not yet
received.
44) Accrued interest on a note receivable has the effects of increasing assets and increasing
liabilities.
45) Two important ratios that help in understanding the company’s effectiveness in managing
receivables are the receivables turnover ratio and the average collection period.
46) The receivables turnover ratio shows the number of times during a year that the average
accounts receivable balance is collected (or “turns over”).
47) The receivables turnover ratio equals average accounts receivable divided by net credit sales.
48) A lower receivables turnover ratio generally indicates more effective management of accounts
receivable by company managers.
49) The average collection period shows the approximate number of days the average accounts
receivable balance is outstanding.
50) The percentage-of-credit-sales method for estimating uncollectible accounts is commonly
referred to as the income statement method, because it always results in a higher amount of net
income being reported in the income statement.
51) Even though the percentage-of-receivables method and the percentage-of-credit-sales method
use different accounts to estimate future uncollectible accounts, the amount of bad debt expense
reported in the income statement will always be the same under the two methods.
52) From an income statement perspective, the percentage-of-credit-sales method is typically
preferable because it better matches the revenues (credit sales) with their related expenses (bad
debts).
53) From a balance sheet perspective, the percentage-of-receivables method is typically preferred
over the percentage-of-credit-sales method because assets (net accounts receivable) are reported
closer to the amount of cash we expect to collect.
54) The percentage-of-credit-sales method (income statement method) is allowed only if amounts
do not differ significantly from estimates using the percentage-of-receivables method.
55) Which of the following best describes credit sales?
A) Cash sales to customers that are new to the company.
B) Sales to customers using credit cards.
C) Sales to customers on account.
D) Sales with a high risk that the customer will return the product.
56) Credit sales are recorded as:
A) Debit Cash, credit Deferred Revenue.
B) Debit Service Revenue, credit Accounts Receivable.
C) Debit Cash, credit Service Revenue.
D) Debit Accounts Receivable, credit Service Revenue.
57) A company provides services on account. Indicate how this transaction would affect (1) assets,
(2) stockholders’ equity, and (3) revenues.
A) (1) Increase, (2) No effect (3) Increase
B) (1) No effect, (2) Increase (3) Increase
C) (1) Increase, (2) Increase (3) Increase
D) (1) No effect, (2) No effect (3) No effect
58) Which of the following best describes accounts receivable?
A) The amount of cash owed by a company to its vendors for purchases of goods or services on
account.
B) The amount of cash collected by a company from its customers from the sale of goods or
services on account.
C) The amount of cash owed to a company by its customers from the sale of goods or services on
account.
D) The amount of cash not expected to be collected by a company from its customers from the sale
of goods or services on account (bad debts).
59) The amount of cash owed to a company by its customers from the sale of goods or services on
account is commonly referred to as:
A) Cash.
B) Accounts receivable.
C) Revenue.
D) Accounts payable.
60) Identify the primary disadvantage of extending credit to customers.
A) Delay or failure to collect cash.
B) Lower profitability.
C) Lower revenues.
D) Reduced operating efficiency.
61) Identify the likely advantage of extending credit to customers.
A) Lower accounts receivable.
B) Increased sales.
C) Reduced amounts owed to creditors.
D) Fewer expenses.
62) Identify the condition(s) that must exist for a sale and the related receivable to be recognized.
A) Collection of cash is probable.
B) The company must have collected cash from at least one previous sale to the customer.
C) Goods or services have been provided to the customer.
D) Two of the other answers are conditions that must exist.
63) When a company provides services on account, the transaction would be recorded with a debit
to:
A) Retained Earnings.
B) Service Revenue.
C) Accounts Receivable.
D) Cash.
64) When a company provides services on account, the transaction would be recorded with a credit
to:
A) Accounts Payable.
B) Service Revenue.
C) Accounts Receivable.
D) Cash.
65) Which of the following items are classified as receivables?
A) Tax refund claims.
B) Amounts owed by customers.
C) Amounts loaned and expected to be collected.
D) All of the other answers are classified as receivables.
66) A trade discount results in:
A) A contra revenue account being recorded.
B) A contra asset being recorded.
C) Customers delaying cash payment.
D) Revenue being recorded for the discounted price.
67) Barton Health Services provided care to a patient worth $1,200. Because the patient was over
the age of 65, Barton granted the patient a 20% discount and the customer paid the correct amount
in cash. How would Barton record the service transaction?
A.
Cash
960
Service Revenue
960
B.
Cash
960
Trade Discount
240
Service Revenue
1,200
C.
Cash
1,200
Service Revenue
1,200
D.
Cash
1,200
Trade Discount
240
Service Revenue
960
A) Option A
B) Option B
C) Option C
D) Option D
68) When customers purchase goods on account, Spitz Manufacturing offers them a 2% reduction
in the amount owed if they pay within 10 days. This is an example of a:
A) Bad debt.
B) Sales discount.
C) Sales return.
D) Sales allowance.