Financial Accounting, 10e (Libby)
Chapter 6 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.
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.
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) Gross profit is calculated as gross sales less cost of sales.
9) Gross profit decreases when sales discounts increase.
10) The journal entry to record bad debt expense is made during the year in which it is
determined that a particular receivable is uncollectible, regardless of the year of sale.
11) When using an allowance for doubtful accounts and a particular account receivable is
determined to be uncollectible, the journal entry to write off the account reduces net income.
12) When a particular account receivable is determined to be uncollectible, the journal entry to
write off the account reduces cash.
13) The allowance for doubtful accounts is reported as a contra-asset on the balance sheet.
14) The journal entry to write off an uncollectible account does not change the net realizable
value (book value) of accounts receivable.
15) When using the allowance method, the year-end journal entry to record bad debt expense
reduces current assets and net income.
16) When using the allowance method, the year-end journal entry to record bad debt expense
reduces the accounts receivable account and increases net income.
17) When using the percentage of credit sales method, net sales multiplied by a historical
percentage for credit losses equal bad debt expense.
18) 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 existing balance in the allowance
for doubtful accounts.
19) Prior year financial statements are adjusted when it is determined that prior year bad debt
expense was too low.
20) If the accounts receivable turnover ratio increases, the number of days it takes to collect the
receivables also increases.
21) When preparing the statement of cash flows, the reason that net sales revenue is adjusted for
the change in accounts receivables is to convert net sales to cash collected from customers, since
accounts receivable represents sales revenue not collected from customers at the beginning and
end of the accounting year.
22) Cash equivalents such as treasury bills are reported as investments on the balance sheet.
23) Cash equivalents on the balance sheet include certificates of deposit with maturities of 90
days or more.
24) Effective internal control of cash should include the separation of the duties for receiving and
disbursing cash.
25) If a check received from a customer has been deposited by the seller and is marked on the
bank statement as a nonsufficient funds (NSF) amount, then it would appear on the seller’s bank
reconciliation as a deduction from the ending bank statement balance.
26) Deposits in transit are deducted from the bank balance when preparing the bank
reconciliation.
27) 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.
28) When completing the bank reconciliation, bank service charges should be deducted from the
company’s cash balance.
29) Which of the following statements is correct?
A) Revenue is recognized at the time of shipment when goods are shipped FOB destination.
B) Sales returns and allowances are reported as operating expenses on an income statement.
C) A seller records revenue when title and risks of ownership transfer to the buyer.
D) Sales discounts are reported as cost of sales on an income statement.
30) Which of the following would be included in Latimer Company’s sales in 2019?
A) Goods shipped from a supplier in 2019 with terms of FOB shipping point. Latimer received
the goods in 2019.
B) Goods shipped to customers in 2019 with terms of FOB destination. The customer received
the goods in 2020.
C) Goods shipped to customers in 2018 with terms of FOB destination. The customer received
the goods in 2019.
D) Goods shipped to customers in 2018 with terms of FOB shipping point. The customer
received the goods in 2019.
31) A company sells a product FOB destination. The product is shipped on December 29, 2018
and the customer receives the shipment on January 3, 2019. Which of the following is true?
A) The sale will be recorded when the customer’s credit card information is received.
B) The sale will be recorded when the shipment is received by the customer.
C) The sale will be recorded when the shipment is shipped.
D) The sale will be recorded when it is known there will be no returns or allowances.
32) Which of the following is not a reason for the Jones Hardware Store to accept credit cards
from customers?
A) Jones can receive its money faster than if it directly extended credit to the customer by an
account receivable.
B) The credit card company offers a discount to Jones so that Jones will have more money
available for operations.
C) Jones will not have to be concerned with nonsufficient funds checks from customers.
D) Jones will not have to have extra office workers to make phone calls to customers requesting
collections on accounts.
33) 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
• Gross profit, $1,360,000
• Increase in accounts receivable, $55,000
• Bad debt expense, $33,000
• Sales discounts, $43,000
• Net income, $1,030,000
How much are Newark’s net sales?
A) $1,634,000.
B) $1,800,000.
C) $1,667,000.
D) $1,745,000.
34) 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
• Gross profit, $1,360,000
• Increase in accounts receivable, $55,000
• Bad debt expense, $33,000
• Sales discounts, $43,000
• Net income, $1,030,000
How much is Newark’s cost of sales?
A) $307,000.
B) $252,000.
C) $440,000.
D) $340,000.
35) 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
• Gross profit, $1,360,000
• Increase in accounts receivable, $55,000
• Bad debt expense, $33,000
• Sales discounts, $43,000
• Net income, $1,030,000
How much cash was collected from customers?
A) Cash flow increased $1,295,000.
B) Cash flow increased $1,745,000.
C) Cash flow decreased $1,855,000.
D) Cash flow increased $1,405,000.
36) Flyer Company has provided the following information prior to any year-end bad debt
adjustment:
• 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 prepares an aging of accounts receivable and the result shows that 5% of accounts
receivable is estimated to be uncollectible. How much is bad debt expense?
A) $5,500.
B) $6,700.
C) $4,240.
D) $4,300.
37) Flyer Company has provided the following information prior to any year-end bad debt
adjustment:
• 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 prepares an aging of accounts receivable and the result shows 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?
A) $5,500.
B) $6,700.
C) $4,240.
D) $4,300.
38) Flyer Company has provided the following information prior to any year-end bad debt
adjustment:
• 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 1.5% of credit sales have historically been
uncollectible. How much is Flyer’s bad debt expense?
A) $7,950.
B) $6,750.
C) $5,550.
D) $7,800.
39) Flyer Company has provided the following information prior to any year-end bad debt
adjustment:
• 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 1.5% of credit sales have historically been
uncollectible. What is the balance in the allowance for doubtful accounts after bad debt expense
is recorded?
A) $7,950.
B) $6,750.
C) $5,550.
D) $7,800.
40) Which of the following is correct when bad debt expense is recorded at year-end?
A) Current assets will increase.
B) Gross profit will decrease.
C) Income from operations will decrease.
D) Current liabilities will decrease.
41) Which of the following statements is false?
A) The journal entry to record bad debt expense decreases current assets.
B) The journal entry to record bad debt expense decreases retained earnings.
C) The journal entry to write off an uncollectible account receivable decreases operating income.
D) The journal entry to write off an uncollectible account receivable does not affect current
assets.