Chapter 06 – Reporting and Interpreting Sales Revenue, Receivables, and Cash
1. When goods are shipped FOB shipping point, title passes to the buyer on the shipment
date.
2. When goods are shipped FOB destination, the revenue from the sale is recognized on the
shipment date.
3. Credit card discounts are reported as operating expenses on an income statement.
Chapter 06 – Reporting and Interpreting Sales Revenue, Receivables, and Cash
4. Sales discounts are deducted from sales in the calculation of net sales.
5. Sales returns and allowances is a contra-revenue account.
6. Credit terms of “2/10, n/30” mean that if payment is made in two days, a 10% discount will
be given; if not paid within two days, the full invoice price will be due in thirty days.
Chapter 06 – Reporting and Interpreting Sales Revenue, Receivables, and Cash
7. A company is thinking of borrowing money at an 18% annual interest rate in order to pay a
$30,000 invoice within the discount period. The invoice terms are 2/10, n/30. They should
borrow the money because they will have a net savings of 19.2%.
8. The gross profit percentage is calculated by dividing net sales by gross profit.
9. The gross profit percentage decreases when operating expenses increase.
Chapter 06 – Reporting and Interpreting Sales Revenue, Receivables, and Cash
10. The journal entry to record bad debt expense is made during the year that it is determined
that a particular receivable is uncollectible.
11. When a particular account receivable is determined to be uncollectible, the journal entry
to write-off the account reduces net income.
Chapter 06 – Reporting and Interpreting Sales Revenue, Receivables, and Cash
12. The allowance for doubtful accounts is reported as a contra-asset on the balance sheet.
13. The journal entry to write-off an uncollectible account does not change the net realizable
value (book value) of accounts receivable.
14. The year-end journal entry to record bad debt expense reduces current assets and net
income.
Chapter 06 – Reporting and Interpreting Sales Revenue, Receivables, and Cash
15. Net sales multiplied by an historical percentage for bad debt expense, equals bad debt
expense when using the percentage of credit sales method.
16. The accounts receivable aging schedule determines the dollar amount of uncollectible
accounts receivable at year-end; this dollar amount of uncollectible accounts receivable is the
bad debt expense that is recorded for the year regardless of the allowance for doubtful
accounts balance.
Chapter 06 – Reporting and Interpreting Sales Revenue, Receivables, and Cash
17. Prior year financial statements are adjusted when it is determined that prior year bad debt
expense was too low.
18. If the accounts receivable turnover ratio increases, the number of days it takes to collect
the receivables also increases.
Chapter 06 – Reporting and Interpreting Sales Revenue, Receivables, and Cash
19. When preparing the statement of cash flows, the reason that we must adjust net sales
revenue for the change in accounts receivables to convert net sales to cash collected from
customers is that accounts receivable represents sales revenue not collected from customers at
the beginning and end of the accounting year.
20. Cash equivalents such as treasury bills are reported as investments on the balance sheet.
21. Cash equivalents on the balance sheet include certificates of deposit with maturities of 60
days or more.
Chapter 06 – Reporting and Interpreting Sales Revenue, Receivables, and Cash
22. Effective internal control of cash should include the separation of the duties for receiving
and disbursing cash.
23. If a check received from a customer that has been deposited by the seller is returned with
the bank statement as a nonsufficient funds (NSF) check, it would appear on the seller’s bank
reconciliation as a deduction from the ending bank statement balance.
24. Deposits in transit are deducted from the book balance when preparing the bank
reconciliation.
Chapter 06 – Reporting and Interpreting Sales Revenue, Receivables, and Cash
25. An objective of preparing the bank reconciliation is to reconcile the bank balance at the
end of the period with the company’s book balance at the end of the period.
26. When completing the bank reconciliation, bank service charges should be deducted from
the company’s cash balance.
27. Which of the following statements is correct?
Chapter 06 – Reporting and Interpreting Sales Revenue, Receivables, and Cash
28. A company sells magazines and collects subscription fees prior to the publication and
distribution of the magazine. Which of the following correctly describes the impact on the
financial statements when cash is received in advance from customers?
29. Newark Company has provided the following information:
• Cash sales, $450,000
• Credit sales, $1,350,000
• Selling and administrative expenses, $330,000
• Sales returns and allowances, $90,000
• Depreciation expense, $101,000
• Gross profit, $1,360,000
• Increase in accounts receivable, $55,000
• Bad debt expense, $33,000
• Sales discounts, $43,000
How much is Newark’s cost of goods sold?
Chapter 06 – Reporting and Interpreting Sales Revenue, Receivables, and Cash
30. Newark Company has provided the following information:
• Cash sales, $450,000
• Credit sales, $1,350,000
• Selling and administrative expenses, $330,000
• Sales returns and allowances, $90,000
• Depreciation expense, $101,000
• Gross profit, $1,360,000
• Increase in accounts receivable, $55,000
• Bad debt expense, $33,000
• Sales discounts, $43,000
How much is Newark’s gross profit percentage?
Chapter 06 – Reporting and Interpreting Sales Revenue, Receivables, and Cash
31. Newark Company has provided the following information:
• Cash sales, $450,000
• Credit sales, $1,350,000
• Selling and administrative expenses, $330,000
• Sales returns and allowances, $90,000
• Depreciation expense, $101,000
• Gross profit, $1,360,000
• Increase in accounts receivable, $55,000
• Bad debt expense, $33,000
• Sales discounts, $43,000
How much are Newark’s net sales?
Chapter 06 – Reporting and Interpreting Sales Revenue, Receivables, and Cash
32. Flyer Company has provided the following information:
• Cash sales, $150,000
• Credit sales, $450,000
• Selling and administrative expenses, $110,000
• Sales returns and allowances, $30,000
• Gross profit, $490,000
• Accounts receivable, $110,000
• Sales discounts, $14,000
• Allowance for doubtful accounts credit balance, $1,200
How much is bad debt expense assuming that 5% of accounts receivable is estimated to be
uncollectible?
Chapter 06 – Reporting and Interpreting Sales Revenue, Receivables, and Cash
33. Flyer Company has provided the following information:
• Cash sales, $150,000
• Credit sales, $450,000
• Selling and administrative expenses, $110,000
• Sales returns and allowances, $30,000
• Gross profit, $490,000
• Accounts receivable, $110,000
• Sales discounts, $14,000
• Allowance for doubtful accounts credit balance, $1,200
Flyer estimates bad debt expense assuming that 5% of accounts receivable is estimated to be
uncollectible. What is the balance in the allowance for doubtful accounts after bad debt
expense is recorded?
Chapter 06 – Reporting and Interpreting Sales Revenue, Receivables, and Cash
34. Flyer Company has provided the following information:
• Cash sales, $150,000
• Credit sales, $450,000
• Selling and administrative expenses, $110,000
• Sales returns and allowances, $30,000
• Gross profit, $290,000
• Accounts receivable, $110,000
• Sales discounts, $14,000
• Allowance for doubtful accounts credit balance, $1,200
Flyer estimates bad debt expense assuming that 1.5% of credit sales are uncollectible. What is
the balance in the allowance for doubtful accounts after bad debt expense is recorded?
Chapter 06 – Reporting and Interpreting Sales Revenue, Receivables, and Cash
35. Flyer Company has provided the following information:
• Cash sales, $150,000
• Credit sales, $450,000
• Selling and administrative expenses, $110,000
• Sales returns and allowances, $30,000
• Gross profit, $290,000
• Accounts receivable, $110,000
• Sales discounts, $14,000
• Allowance for doubtful accounts credit balance, $1,200
How much is Flyer’s bad debt expense assuming that 1.5% of credit sales have historically
been uncollectible.
Chapter 06 – Reporting and Interpreting Sales Revenue, Receivables, and Cash
36. Which of the following is correct when bad debt expense is recorded at year-end?
37. Which of the following statements is false?
Chapter 06 – Reporting and Interpreting Sales Revenue, Receivables, and Cash
38. Which of the following journal entries correctly records bad debt expense?
Chapter 06 – Reporting and Interpreting Sales Revenue, Receivables, and Cash
39. Which of the following journal entries correctly records the write-off of an uncollectible
account receivable?