CHAPTER 6: RECEIVABLES AND INVENTORIES
1. All receivables that are expected to be realized in cash within a year are presented in the
current assets section of the balance sheet.
a. True
b. False
2. Receivables not expected to be collected within one year are reported in the fixed assets
section of the balance sheet.
a. True
b. False
3. Both accounts receivable and notes receivable represent claims that are expected to be
collected in cash.
a. True
b. False
4. The due date of a 60-day note dated July 10 is September 9.
a. True
b. False
5. The sum of the face amount and the interest that must be paid at the due date of the note is
called maturity value.
a. True
b. False
6. The person who is to be paid when a note matures is called the payee.
a. True
b. False
7. The maturity value of a 12%, 60-day note for $1,000 is $1,020. (Assume 360 days in a year)
a. True
b. False
Chapter 6: Receivables and Inventories
8. The interest at 6%, on a 60-day note for $5,000 is $300. (Assume 360 days in a year)
a. True
b. False
9. The due date of a 90-day note dated July 15 is October 13. (Assume 360 days in a year)
a. True
b. False
10. The party promising to pay a note at maturity is the payee.
a. True
b. False
11. When companies sell their receivables to other companies, the transaction is called factoring.
a. True
b. False
12. Under the direct write-off method, an attempt is made to match Bad Debt Expense to sales
revenues in the same accounting period.
a. True
b. False
13. Generally accepted accounting principles do not normally allow the use of the allowance
method of accounting for uncollectible accounts.
a. True
b. False
14. The direct write-off method records uncollectible accounts expense in the year the specific
account receivable is determined to be uncollectible.
a. True
b. False
15. Allowance for Doubtful Accounts is a contra liability account.
a. True
b. False
Chapter 6: Receivables and Inventories
16. Net income is reduced when a specific receivable is written off under the analysis of
receivables method.
a. True
b. False
17. The difference between the total receivables and the balance in Allowance for Doubtful
Accounts at the end of a period is referred to as the net realizable value of the receivables.
a. True
b. False
18. At the end of a period before the accounts are adjusted, Allowance for Doubtful Accounts has
a balance of $250, and net sales on account for the period total $500,000. If uncollectible
accounts expense is estimated at 1% of net sales on account, the current provision to be made
for uncollectible accounts expense is $4,997.50.
a. True
b. False
19. The estimate of uncollectible accounts receivable based on the sales method violates the
matching principle.
a. True
b. False
20. Inventories of merchandising and manufacturing businesses are reported as current assets on
the balance sheet.
a. True
b. False
21. The FIFO method of costing inventory is based on the assumption that costs should be charged
against revenues in the order in which they were incurred.
a. True
b. False
22. Of the three widely used inventory costing methods (FIFO, LIFO, and average), the FIFO
method of costing inventory is based on the assumption that costs are charged against revenues
in the order in which they were incurred.
a. True
b. False
Chapter 6: Receivables and Inventories
23. During inflationary periods, the use of the FIFO method of costing inventory will result in a
greater amount of net income than would result from the use of the LIFO method of costing
inventory.
a. True
b. False
24. During inflationary periods, the value of inventory that appears on the balance sheet using
FIFO method will be more than its current replacement cost.
a. True
b. False
25. During inflationary periods, the use of the LIFO method of costing inventory will result in a
lesser amount of net income than would result from the use of the average method of inventory
costing.
a. True
b. False
26. During deflationary periods, the use of the LIFO method of costing inventory will result in a
greater amount of net income than would result from the use of the FIFO method of inventory
costing.
a. True
b. False
27. The balance of the allowance for doubtful accounts is added to accounts receivable on the
balance sheet.
a. True
b. False
28. The net realizable value is used for purposes of valuing out of date merchandise in inventory.
a. True
b. False
29. Lower-of-cost-or-market is a method of inventory valuation.
a. True
b. False
Chapter 6: Receivables and Inventories
30. In valuing damaged merchandise for inventory purposes, net realizable value is the estimated
selling price less any direct cost of disposal.
a. True
b. False
31. Average cost is a method of inventory valuation.
a. True
b. False
32. “Market,” as used in the phrase “lower of cost or market” for valuing inventory, refers to the
price at which the inventory is being offered for sale by its owner.
a. True
b. False
33. The use of the lower-of-cost-or-market method of inventory valuation increases the gross
profit for the period in which the inventory replacement price declined.
a. True
b. False
34. Merchandise Inventory is presented on the balance sheet in the current assets section.
a. True
b. False
35. Receivables are usually a significant portion of:
a. total current liabilities.
b. total sales.
c. total current assets.
d. total stockholders’ equity.
36. A note receivable due in 90 days is listed on the balance sheet under:
a. long-term liabilities.
b. fixed assets.
c. current liabilities.
d. current assets.
Chapter 6: Receivables and Inventories
37. A note receivable due in five years is listed on the balance sheet under the caption:
a. investments.
b. current assets.
c. fixed assets.
d. stockholders’ equity.
38. A written promise to pay a sum of money on demand or at a definite time is called a(n):
a. letter of credit.
b. deferred note.
c. credit memorandum.
d. promissory note.
39. Credit purchase is taken into account while calculating accounts receivable turnover ratio.
a. True
b. False
40. In reference to a promissory note, the person who makes the promise to pay is called the:
a. maker.
b. payee.
c. seller.
d. receiver.
41. In reference to a promissory note, the person who is to receive payment is called the:
a. maker.
b. payee.
c. seller.
d. payer.
42. The amount of the promissory note plus the interest earned on the due date is called the:
a. market value.
b. maturity value.
c. face value.
d. discounted value.
Chapter 6: Receivables and Inventories
43. The due date of a 90-day note dated July 5 is:
a. September 30.
b. October 2.
c. October 3.
d. October 1.
44. The due date of a 60-day note dated July 12 is:
a. September 11.
b. September 8.
c. September 9.
d. September 10.
45. A note receivable due in 18 months is listed on the balance sheet under the caption:
a. long-term liabilities.
b. fixed assets.
c. current assets.
d. investments.
46. A 90-day, 10% note for $10,000 dated March 15 is received from a customer on account. The
face value of the note is:
a. $10,250.
b. $9,000.
c. $9,750.
d. $10,000.
47. A 90-day, 10% note for $10,000 dated April 1 is received from a customer on account. The
face value of the note is:
a. $10,000.
b. $11,000.
c. $1,000.
d. $9,000.
Chapter 6: Receivables and Inventories
48. A 90-day, 8% note for $10,000 dated May 1 is received from a customer on account. The
maturity value of the note is (Assume 360 days in a year):
a. $10,000.
b. $10,800.
c. $10,200.
d. $9,800.
49. A 60-day, 12% note for $15,000 dated May 1 is received from a customer on account. The
maturity value of the note is (Assume 360 days in a year):
a. $15,300.
b. $15,000.
c. $14,700.
d. $16,800.
50. Taxes receivable is classified as:
a. other receivable.
b. notes receivable.
c. accounts receivable.
d. trade receivables.
51. The process of a company selling its accounts receivable to another company is referred as:
a. discounting.
b. adjusting.
c. assignment.
d. factoring.
52. The two methods of accounting for uncollectible receivables are the:
a. direct method and the indirect method.
b. allowance method and the direct write-off method.
c. cash method and the accrual method.
d. percent of sales method and the analysis of receivables method.
Chapter 6: Receivables and Inventories
53. One of the weaknesses of the direct write-off method is that it:
a. understates accounts receivable on the balance sheet.
b. violates the matching principle.
c. adjusts allowance account the end of the year.
d. is based on estimates.
54. Allowance for Doubtful Accounts is listed on the balance sheet under the caption:
a. stockholders’ equity.
b. investments.
c. fixed assets.
d. current assets.
55. After the accounts are adjusted and closed at the end of the fiscal year, Accounts Receivable
has a balance of $500,000 and Allowance for Doubtful Accounts has a balance of $25,000.
What is the net realizable value of the accounts receivable?
a. $25,000
b. $525,000
c. $500,000
d. $475,000
56. What type of account is Allowance for Doubtful Accounts?
a. Contra asset account
b. Asset account
c. Liability account
d. Expense account
57. Allowance for Doubtful Accounts has an unadjusted balance of $800 at the end of the year,
and an analysis of accounts in the customers’ ledger indicates doubtful accounts of $15,000.
Which of the following records the proper provision for doubtful accounts?
a. Increase Uncollectible Accounts Expense, $800; increase Allowance for Doubtful
Accounts, $800
b. Increase Uncollectible Accounts Expense $15,000; increase Allowance for Doubtful
Accounts, $15,000
c. Increase Uncollectible Accounts Expense, $14,200; increase Allowance for Doubtful
Accounts, $14,200
d. Increase Uncollectible Accounts Expense, $15,800; increase Allowance for Doubtful
Accounts, $15,800
Chapter 6: Receivables and Inventories
58. Allowance for Doubtful Accounts has an unadjusted balance of $500 at the end of the year,
and an analysis of accounts in the customers’ ledger indicates doubtful accounts of $15,000.
Compute the adjusted balance in the allowance for doubtful accounts?
a. $15,000
b. $14,500
c. $14,000
d. $15,500
59. After the accounts are adjusted at the end of the fiscal year, Accounts Receivable has a balance
of $430,000 and Allowance for Doubtful Accounts has a balance of $30,000. What is the net
realizable value of the receivables?
a. $30,000
b. $460,000
c. $430,000
d. $400,000
60. Allowance for Doubtful Accounts has an unadjusted balance of $1,100 at the end of the year,
and an analysis of customers’ accounts indicates doubtful accounts of $12,900. Which of the
following records the proper provision for doubtful accounts?
a. Increase Uncollectible Accounts Expense, $14,000; increase Allowance for Doubtful
Accounts, $14,000
b. Decrease Allowance for Doubtful Accounts, $14,000; decrease Uncollectible Accounts
Expense, $14,000
c. Decrease Allowance for Doubtful Accounts, $11,800; decrease Uncollectible Accounts
Expense, $11,800
d. Increase Uncollectible Accounts Expense, $11,800; increase Allowance for Doubtful
Accounts, $11,800
61. Allowance for Doubtful Accounts has an unadjusted balance of $500 at the end of the year,
and uncollectible accounts expense is estimated at 1% of net sales. If net sales are $950,000,
the amount of the adjustment to record the provision for doubtful accounts is:
a. $9,500.
b. $500.
c. $8,500.
d. $9,000.
Chapter 6: Receivables and Inventories
62. Allowance for Doubtful Accounts has an unadjusted balance of $400 at the end of the year,
and uncollectible accounts expense is estimated at 1% of net sales. If net sales are $300,000,
compute the amount of the adjustment to record the provision for doubtful accounts.
a. $400.
b. $3,400.
c. $3,000.
d. $2,600.
63. The presentation of net accounts receivable on the balance sheet will be most accurate under
the:
a. direct write-off method.
b. cash basis accounting.
c. estimate based on analysis of receivables.
d. allowance method.
64. When an account is written off under the allowance method:
a. accounts receivable decreases.
b. bad debt expense is increased.
c. accounts receivable remains unchanged.
d. accounts receivable increases.
65. Inventory refers to the:
a. merchandise held for sale in the normal course of business.
b. materials sold during the year.
c. fixed assets purchased to assist the production process.
d. claims arising from the purchase of raw material.
66. The inventory costing method that considers the ending inventory to be composed of units of
the merchandise acquired earliest is called:
a. first-in, first-out.
b. highest-in, first-out.
c. lowest-in, first-out.
d. last-in, first-out.