Chapter 06 Reporting and Interpreting Sales Revenue, Receivables, and
Cash Answer Key
True / False Questions
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.
Topic Area: Shipping terms-FOB
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 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.
The year-end journal entry to record bad debt expense reduces current assets and net
income.
16.
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 allowance for doubtful
accounts balance.
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.
Multiple Choice Questions
29.
Which of the following statements is correct?
30.
Which of the following would be included in Latimer Company’s sales in 2016?
31.
A company sells a product FOB destination. The product is shipped on December 29, 2015
and the customer receives the shipment on January 3, 2016. Which of the following is true?
32.
Which of the following is not a reason for the Jones Hardware Store to accept credit cards
from customers?
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?
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?
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
What is the effect of collections from customers on cash flow from operating activities, using
the indirect method?