385
Chapter 8—Receivables
Multiple
Choice
Learning
Goal(s)
Level of
Difficulty
AACSB
Tag
AICPA
Tag
Multiple
Choice
Learning
Goal(s)
Level of
Difficulty
AACSB
Tag
1
1
Easy
Analytic
Reporting
35
4
Difficult
Analytic
2
1
Easy
Analytic
Reporting
36
4
Difficult
Analytic
3
1
Easy
Analytic
Reporting
37
4
Difficult
Analytic
4
1
Easy
Analytic
Reporting
38
4
Difficult
Analytic
5
2
Easy
Reflective
Reporting
39
4
Difficult
Analytic
6
2
Easy
Reflective
Reporting
40
4
Difficult
Analytic
7
2
Easy
Reflective
Reporting
41
4
Difficult
Analytic
8
2
Easy
Reflective
Reporting
42
4
Difficult
Analytic
9
2
Easy
Reflective
Reporting
43
4
Difficult
Analytic
10
3
Difficult
Analytic
Measure
44
4
Difficult
Analytic
11
3
Moderate
Analytic
Reporting
45
4
Easy
Reflective
12
3
Difficult
Analytic
Measure
46
4
Easy
Reflective
13
3
Moderate
Analytic
Measure
47
4
Moderate
Analytic
14
4
Moderate
Analytic
Reporting
48
4
Moderate
Analytic
15
4
Difficult
Analytic
Measure
49
5
Moderate
Analytic
16
4
Difficult
Analytic
Measure
50
5
Moderate
Analytic
17
4
Easy
Analytic
Reporting
51
6
Moderate
Analytic
18
4
Easy
Analytic
Measure
52
6
Moderate
Analytic
19
4
Easy
Analytic
Measure
53
6
Moderate
Analytic
20
4
Easy
Analytic
Measure
54
6
Moderate
Analytic
21
4
Moderate
Analytic
Measure
55
6
Easy
Analytic
22
4
Moderate
Analytic
Measure
56
6
Moderate
Analytic
23
4
Moderate
Reflective
Reporting
57
6
Moderate
Analytic
24
4
Difficult
Analytic
Measure
58
6
Moderate
Analytic
25
4
Difficult
Analytic
Measure
59
6
Moderate
Analytic
26
4
Difficult
Analytic
Measure
60
6
Moderate
Analytic
27
4
Difficult
Analytic
Measure
61
6
Difficult
Analytic
28
4
Moderate
Analytic
Measure
62
7
Easy
Analytic
29
4
Moderate
Analytic
Measure
63
7
Moderate
Analytic
30
4
Difficult
Analytic
Measure
64
7
Easy
Analytic
31
4
Difficult
Analytic
Measure
65
8
Easy
Reflective
32
4
Difficult
Analytic
Measure
66
9
Moderate
Analytic
33
4
Difficult
Analytic
Measure
67
9
Moderate
Analytic
34
4
Difficult
Analytic
Measure
386 ♦ Chapter 8
True/
False
Learning
Goal(s)
Level of
Difficulty
AACSB
Tag
1
1
Moderate
Analytic
2
1
Moderate
Analytic
3
1
Moderate
Analytic
4
1
Moderate
Analytic
5
1
Moderate
Analytic
6
2
Moderate
Analytic
7
2
Moderate
Analytic
8
3
Difficult
Analytic
9
3
Difficult
Analytic
10
4
Difficult
Analytic
11
4
Difficult
Analytic
12
4
Difficult
Analytic
13
4
Moderate
Analytic
14
4
Moderate
Analytic
15
4
Difficult
Analytic
16
4
Moderate
Analytic
17
4
Difficult
Analytic
18
4
Difficult
Analytic
19
4
Moderate
Analytic
20
4
Moderate
Analytic
21
4
Moderate
Reflective
22
4
Difficult
Analytic
23
4
Difficult
Reflective
24
5
Easy
Analytic
25
5
Easy
Analytic
26
6
Moderate
Analytic
27
6
Moderate
Analytic
28
7
Moderate
Analytic
29
7
Moderate
Analytic
30
8
Moderate
Reflective
31
8
Moderate
Reflective
32
8
Moderate
Reflective
33
8
Moderate
Reflective
34
9
Easy
Analytic
35
9
Easy
Analytic
36
9
Moderate
Analytic
Problem(s)
Learning
Goal(s)
Level of
Difficulty
AACSB
Tag
1
3
Moderate
Analytic
2
4
Difficult
Analytic
3
4
Difficult
Analytic
4
4
Difficult
Analytic
5
4
Difficult
Analytic
6
4
Difficult
Analytic
7
4
Difficult
Analytic
8
4
Difficult
Analytic
9
4
Difficult
Analytic
10
6
Moderate
Analytic
11
6
Moderate
Analytic
12
6
Moderate
Analytic
13
6
Moderate
Analytic
14
9
Difficult
Analytic
15
9
Difficult
Analytic
Essay
Learning
Goal(s)
Level of
Difficulty
AACSB
Tag
AICPA
Tag
1
1
Moderate
Analytic
Reporting
2
2
Moderate
Reflective
Reporting
3
3
Moderate
Analytic
Reporting
4
3
Moderate
Analytic
Reporting
5
4
Moderate
Reflective
Reporting
6
4
Moderate
Reflective
Measure
7
4
Moderate
Analytic
Reporting
8
5
Moderate
Analytic
Reporting
9
5
Moderate
Analytic
Reporting
10
6
Moderate
Analytic
Reporting
11
8
Moderate
Reflective
Reporting
12
9
Moderate
Reflective
Measure
13
9
Moderate
Reflective
Measure
Cases
Learning
Goal(s)
Level of
Difficulty
AACSB
Tag
AICPA
Tag
1
3,4
Difficult
Analytic
Measure
2
7,8
Difficult
Reflective
Reporting
3
8,9
Difficult
Analytic
Measure
4
8,9
Difficult
Analytic
Measure
5
6,2,4
Moderate
Reflective
Reporting
Difficulty Ratings
Guide:
Easy
Taken nearly verbatim
from the text
Moderate
Using different expression
or application of concept
Difficult
Several reasoning steps
Receivables ♦ 387
MULTIPLE CHOICE
1. Receivables are usually a significant portion of
a.
total current liabilities
b.
total liabilities
c.
total current assets.
d.
total assets
2. Accounts receivable are receivalbes from selling merchandise that are expected to be collected in
a.
short time periods of 30 to 60 days.
b.
short periods of time of a year or less.
c.
periods of one to 5 years.
d.
periods greater than one year.
3. When customers owe money supported by a formal written credit instrument, the account debited
is
a.
accounts receivable
b.
notes receivable.
c.
trade receivables
d.
accounts payable
4. Other receivables do NOT include
a.
accounts receivable
b.
interest receivable
c.
taxes receivable
d.
receivables from officers or employees
5. The process of a company selling its accounts receivable to another company is referred to as
__________.
a.
Discounting
b.
Adjusting
c.
Assignment
d.
Factoring
388 ♦ Chapter 8
6. A company may shift the risk of uncollectible receivables by
a.
issuing an accounts receivable
b.
only accepting credit cards.
c.
issuing a note receivable
d.
all of these are correct
7. The operating expense recorded from uncollectible receivables is recorded as
a.
bad debt expense
b.
uncollectible accounts expense
c.
doubtful accounts expense
d.
all of these are correct
8. Which of the following is NOT an indicator of partial or total uncollectibility of a customer’s
account?
a.
closing of the customer’s business
b.
a recent payment on the account
c.
inability to locate or contact a customer
d.
bankruptcy
9. Which of the following is not a method of accounting for receivables that appear to be
uncollectible?
a.
the direct write-off method
b.
percent of sales method
c.
the allowance method
d.
all of these are correct
10. When an account is written off under the direct write-off method __________.
a.
Net income, assets and stockholders’ equity (retained earnings) will decrease
b.
Net income and assets will decrease and stockholders’ equity (retained earnings) will be
unaffected
c.
Net income, assets and stockholders’ equity (retained earnings) will be unaffected
d.
Net income will be unaffected, and assets and stockholders’ equity (retained earnings) will
decrease
Receivables ♦ 389
11. When an account is written off under the direct write-off method the entry will include a
__________.
a.
Debit to allowance for doubtful accounts
b.
Credit to allowance for doubtful accounts
c.
Credit to account receivable
d.
No entry is required
12. A company had a beginning balance in Accounts Receivable for $857,000. During the year credit
sales were $5,970,000, cash collections on accounts receivable were $6,100,000 and $125,000 in
accounts receivable was written off. If the company uses the direct write-off method, Accounts
Receivable reported on the balance sheet is __________.
a.
$0
b.
$862,000
c.
$602,000
d.
Cannot be determined from the information given
13. When an account receivable is written off under the direct write-off method, accounts receivable
__________.
a.
Increases
b.
Decreases
c.
Is not affected
d.
Cannot be determined without having dollar amounts
14. The allowance for doubtful accounts represents __________.
a.
Uncollectible accounts written off to date
b.
Estimated uncollectibles on sales to date
c.
Estimated uncollectibles on future sales
d.
Cash set aside for estimated uncollectibles
15. When uncollectible accounts expense is recorded under the allowance method __________.
a.
Net income, assets and stockholders’ equity (retained earnings) will decrease
b.
Net income and assets will decrease and stockholders’ equity (retained earnings) will be
unaffected
c.
Net income, assets and stockholders’ equity (retained earnings) will be unaffected
d.
Net income will be unaffected, and assets and stockholders’ equity (retained earnings) will
decrease
390 ♦ Chapter 8
16. When an account is written off under the allowance method __________.
a.
Net income, assets and stockholders’ equity (retained earnings)will decrease
b.
Net income and assets will decrease and stockholders’ equity (retained earnings) will be
unaffected
c.
Net income, assets and stockholders’ equity (retained earnings) will be unaffected
d.
Net income will be unaffected, and assets and stockholders’ equity (retained earnings) will
decrease
17. Net realizable value equals __________.
a.
Accounts receivable less uncollectible accounts expense
b.
Accounts receivable plus allowance for doubtful account
c.
Accounts receivable plus interest receivable
d.
None of the above
18. The entry to estimate uncollectible accounts expense would include a credit to __________.
a.
Accounts receivable
b.
Allowance for doubtful accounts
c.
Interest revenue
d.
None of the above
19. The entry to write off an uncollectible account under the allowance method will include a credit to
__________.
a.
Allowance for doubtful accounts
b.
Accounts receivable
c.
Uncollectible accounts expense
d.
Cash
20. If an account is reinstated under the allowance method, the entry will include a credit to
__________.
a.
Accounts receivable
b.
Uncollectible accounts expense
c.
Allowance for doubtful accounts
d.
Cash
Receivables ♦ 391
21. When an account receivable is written off under the allowance method, net accounts receivable
__________.
a.
Increases
b.
Decreases
c.
Is not affected
d.
Cannot be determined without having dollar amounts
22. Net accounts receivable before write-offs is $845,000. What is the balance in net accounts
receivable if $22,000 in uncollectible accounts are written off?
a.
$845,000
b.
$867,000
c.
$823,000
d.
Cannot be determined
23. If the Allowance for Doubtful Accounts has a debit balance prior to adjustment, one could infer
that __________.
a.
An error has been made
b.
Estimated uncollectible accounts expense was overstated
c.
More accounts were written off than estimated
d.
The direct write-off method is used
24. Under the allowance method, the entry to reinstate an account previously written off will
__________.
a.
Increase total assets
b.
Decrease total assets
c.
Reduce uncollectible accounts expense
d.
Have no effect on total assets
25. If a company overstates estimated uncollectibles __________.
a.
Net income is overstated and assets are understated
b.
Net income and assets are overstated
c.
Net income and assets are understated
d.
Net income is understated and assets are overstated
392 ♦ Chapter 8
26. If a company fails to estimate uncollectible accounts, then __________.
a.
Net income is overstated and assets are understated
b.
Net income and assets are overstated
c.
Net income and assets are understated
d.
Net income is understated and assets are overstated
27. If estimated uncollectibles are considered material, and the company uses the direct write-off
method __________.
a.
Assets, stockholders’ equity (retained earnings) and net income will be fairly stated
b.
Assets, stockholders’ equity (retained earnings) and net income will be understated
c.
Assets, stockholders’ equity (retained earnings) and net income will be overstated
d.
Assets’ and stockholders’ equity (retained earnings) will be understated but net income will
be overstated
28. When the estimate based on sales approach to estimating uncollectibles is used __________.
a.
Any existing balance in the allowance for doubtful accounts is not taken into consideration
b.
Any existing balance in the allowance for doubtful accounts must be taken into
consideration
c.
Only a credit balance in the allowance for doubtful accounts must be taken into
consideration
d.
Only a debit balance in the allowance for doubtful accounts must be taken into
consideration
29. When the estimate based on analysis of receivables approach to estimating uncollectibles is used
__________.
a.
Any existing balance in the allowance for doubtful accounts is not taken into consideration
b.
Any existing balance in the allowance for doubtful accounts must be taken into
consideration
c.
Only a credit balance in the allowance for doubtful accounts must be taken into
consideration
d.
Only a debit balance in the allowance for doubtful accounts must be taken into
consideration
Receivables ♦ 393
30. Accounts Receivable has a balance of $322,000 and the Allowance for Doubtful Accounts has a
debit balance of $850 at fiscal year end prior to adjustment. If the estimate based on the percentage
of sales approach to estimating uncollectibles is $19,900, the net accounts receivable reported on
the balance sheet after adjustment is __________.
a.
$302,950
b.
$321,150
c.
$302,100
d.
$301,250
31. Accounts receivable has a balance of $850,000 and the allowance for doubtful accounts has a
credit balance of $7,400 at fiscal year end prior to adjustment. If the estimate of uncollectible
accounts determined by aging the receivables is $17,500, the amount of uncollectible accounts
expense is __________.
a.
$17,500
b.
$10,100
c.
$24,900
d.
$7,400
32. Accounts receivable has a balance of $850,000 and the allowance for doubtful accounts has a debit
balance of $7,400 at fiscal year end prior to adjustment. If the estimate of uncollectible accounts
determined by aging the receivables is $17,500, the amount of uncollectible accounts expense is
__________.
a.
$17,500
b.
$10,100
c.
$24,900
d.
$7,400
33. Accounts receivable has a balance of $485,000 and the allowance for doubtful accounts has a
credit balance of $1,450 at fiscal year end prior to adjustment. If the estimate of uncollectible
accounts determined by aging the receivable is $8,900, the balance in the Allowance for Doubtful
Accounts after adjustments is __________.
a.
$1,450
b.
$10,350
c.
$7,450
d.
$8,900
394 ♦ Chapter 8
34. Accounts Receivable has a balance of $265,000 and the Allowance for Doubtful Accounts has a
credit balance of $850 at fiscal year end prior to adjustment. If the estimate of uncollectible
accounts determined by aging the receivable is $6,400, the net accounts receivable reported on the
balance sheet after adjustment is __________.
a.
$258,600
b.
$257,750
c.
$259,450
d.
$265,000
35. Accounts Receivable has a balance of $265,000 and the Allowance for Doubtful Accounts has a
debit balance of $850 at fiscal year end prior to adjustment. If the estimate of uncollectible
accounts determined by aging the receivable is $6,400, the net accounts receivable reported on the
balance sheet after adjustment is __________.
a.
$258,600
b.
$257,750
c.
$259,450
d.
$265,000
36. Accounts receivable has a balance of $485,000 and the allowance for doubtful accounts has a debit
balance of $1,450 at fiscal year end prior to adjustment. If the estimate of uncollectible accounts
determined by aging the receivable is $8,900, the balance in the Allowance for Doubtful Accounts
After Adjustments is __________.
a.
$1,450
b.
$10,350
c.
$7,450
d.
$8,900
37. Accounts Receivable has a balance of $378,000 and the Allowance for Doubtful Accounts has a
credit balance of $1,200 at fiscal year end prior to adjustment. If the estimate based on the
percentage of sales approach to estimating uncollectibles is $13,780, the amount of uncollectible
accounts expense is __________.
a.
$14,980
b.
$12,580
c.
$13,780
d.
$1,200
Receivables ♦ 395
38. Accounts Receivable has a balance of $875,000 and the Allowance for Doubtful Accounts has a
debit balance of $2,120 at fiscal year end prior to adjustment. If the estimate based on the
percentage of sales approach to estimating uncollectibles is $22,500, the balance in the Allowance
for Doubtful Accounts after adjustment is __________.
a.
$20,380
b.
$22,500
c.
$24,620
d.
$2,120
39. At the beginning of the year, Accounts Receivable has a balance of $120,000 and the Allowance
for Doubtful Accounts has a credit balance of $1,400. During the year credit sales were $890,000
and cash collections on accounts receivable were $875,000. If the company estimates $8,900 in
uncollectible accounts expense under the estimate based on the percentage of sales approach and
$7,500 in accounts receivable are written off, the fiscal year end balance of Allowance for
Doubtful Accounts reported on the balance sheet is __________.
a.
$10,300
b.
$2,800
c.
$8,000
d.
$1,400
40. At the beginning of the year, Accounts Receivable has a balance of $120,000 and the Allowance
for Doubtful Accounts has a credit balance of $1,400. During the year credit sales were $890,000
and cash collections on accounts receivable were $875,000. If the company estimates $8,900 in
uncollectible accounts expense under the estimate based on the percentage of sales approach and
$7,500 in accounts receivable are written off, the fiscal year end net amount of Accounts
Receivable reported on the balance sheet is __________.
a.
$135,000
b.
$126,100
c.
$118,600
d.
$124,700
41. Accounts Receivable has a balance of $322,000 and the Allowance for Doubtful Accounts has a
credit balance of $850 at fiscal year end prior to adjustment. If the estimate based on the
percentage of sales approach to estimating uncollectibles is $19,900, the net accounts receivable
reported on the balance sheet after adjustment is __________.
a.
$302,950
b.
$321,150
c.
$302,100
d.
$301,250
396 ♦ Chapter 8
42. A company had a beginning balance in Accounts Receivable for $857,000. During the year credit
sales were $5,970,000, cash collections on accounts receivable were $6,100,000 and $125,000 in
accounts receivable was written off. If the company uses the direct write-off method, uncollectible
accounts expense is __________.
a.
$0
b.
$125,000
c.
$130,000
d.
Cannot be determined from the information given
43. Accounts Receivable has a balance of $378,000 and the Allowance for Doubtful Accounts has a
debit balance of $1,200 at fiscal year end prior to adjustment. If the estimate based on the
percentage of sales approach to estimating uncollectibles is $13,780, the amount of uncollectible
accounts expense is __________.
a.
$14,980
b.
$12,580
c.
$13,780
d.
$1,200
44. Accounts Receivable has a balance of $875,000 and the Allowance for Doubtful Accounts has a
credit balance of $2,120 at fiscal year end prior to adjustment. If the estimate based on the
percentage of sales approach to estimating uncollectibles is $22,500, the balance in the Allowance
for Doubtful Accounts after adjustment is __________.
a.
$20,380
b.
$22,500
c.
$24,620
d.
$2,120
45. When the estimate based on the percentage of sales approach to estimating uncollectibles is used
__________.
a.
The balance sheet is emphasized
b.
The income statement is emphasized
c.
The cash flow statement is emphasized
d.
Both a and b
46. Which of the following methods could best be described as placing most emphasis on the income
statement?
a.
Estimate based on analysis of receivables
b.
Estimate based on sales
c.
Direct write-off
d.
Both a and b
Receivables ♦ 397
47. Revenues and expenses will be best matched under the __________.
a.
Direct write-off method
b.
Estimate based on the percentage of sales method
c.
Estimate based on analysis of receivables
d.
None of the above
48. The presentation of net accounts receivable on the balance sheet will be most accurate under the
__________.
a.
Direct write-off method
b.
Estimate based on the percentage of sales method
c.
Estimate based on analysis of receivables
d.
None of the above
49. The amount of bad debt expense recorded under the direct write-off method is
a.
the actual amount of the uncollectible account.
b.
an estimated amount based on the percentage of sales method.
c.
an estimated amount based on the analysis of receivables.
d.
the actual amount of the accounts payable.
50. An allowance account is used
a.
in the direct write-off method.
b.
in small companies with few receivables.
c.
when bad debt expense is estimated.
d.
in each of the above situations.
51. What is the maturity value of a 60-day, 9% note for $6,000?
a.
$6,540
b.
$6,000
c.
$6,090
d.
$5,910
52. What is the maturity value of a 120-day, 10% note for $12,000?
a.
$13,200
b.
$12,395
c.
$11,600
d.
$12,400
398 ♦ Chapter 8
53. What is the due date of a $10,000, 60-day, 10% note dated April 14?
a.
June 11
b.
June 14
c.
June 12
d.
June 13
54. What is the due date of an $8,000, 120-day, 12% note dated June 15?
a.
October 13
b.
October 12
c.
October 11
d.
October 10
55. The maturity value of a note receivable equals __________.
a.
Face amount less the discount
b.
Face amount plus the discount
c.
Face amount plus interest
d.
Face amount less interest
56. If a company is holding a $5,000, 90-day, 6% note, dated December 1, the entry to record accrued
interest at December 31, fiscal year end will include a __________.
a.
Debit to interest receivable for $25
b.
Credit interest revenue for $75
c.
Credit note revisable for $5,000
d.
Debit cash for $5,075
57. If a company is holding a note receivable at the end of the fiscal year, the entry to record the
interest earned would include a __________.
a.
Debit to note receivable
b.
Debit to interest revenue
c.
Debit to cash
d.
Debit to interest receivable
58. When a company collects on a $6,000, 90-day, 8% note on the due date, the entry will include a
__________.
a.
Debit to notes receivable for $6,000
b.
Debit to interest revenue for $120
c.
Debit to cash for $6,480
d.
None of the above
Receivables ♦ 399
59. When a company collects on a $10,000, 60-day, 9% note on the due date, the entry will include a
__________.
a.
Credit to interest expense for $150
b.
Credit to interest revenue for $150
c.
Debit a discount on note receivable for $150
d.
Debit cash for $10,000
60. If a company accepts a note in settlement of a past due account for $10,000, the entry would
include a __________.
a.
Credit to interest receivable
b.
Debit to interest receivable
c.
Credit to allowance for doubtful accounts
d.
Credit to accounts receivable
61. Interest Revenue on a note receivable is classified on the __________.
a.
Balance sheet under current assets
b.
Balance sheet under investments
c.
Income statement under other revenues
d.
Income statement under net sales
62. Accounts receivable appears on the balance sheet under current assets __________.
a.
After inventories
b.
Before fixed assets
c.
Combined with cash
d.
After cash
63. Net accounts receivable equals __________.
a.
Accounts receivable less uncollectible accounts expense
b.
Accounts receivable less accounts receivable factored
c.
Accounts receivable less allowance for doubtful accounts
d.
Accounts receivable less past due receivables
64. The allowance for doubtful accounts appears on the __________.
a.
Balance sheet under current assets
b.
Income statement under operating expenses
c.
Balance sheet under current or noncurrent assets
d.
Income statement under other expenses
400 ♦ Chapter 8
65. All of the following are basic steps in managing accounts receivable except __________.
a.
Monitoring collections
b.
Separation of credit approval and recording functions
c.
Screening customers
d.
Determining credit terms
66. A company reports the following information:
Dec. 31, 2006
Dec. 31, 2005
Net Sales
$976,000
$892,000
Accounts Receivable
84,000
78,000
The accounts receivable turnover ratio for 2006 is __________. (round to 2 decimal places)
a.
11.6
b.
11.5
c.
12.1
d.
11
67. A company reports the following information:
Dec. 31, 2006
Dec. 31, 2005
Net Sales
$2,450,000
$2,310,000
Accounts Receivable
205,000
199,000
The number of days’ sales in receivables for 2006 is __________. (round to 2 decimal places)
a.
30.1 days
b.
30.5 days
c.
29.7 days
d.
31.4 days
TRUE/FALSE
1. The term receivables includes all money claims by other entities on an organization including
people, business firms, and other organizations.
2. Accounts receivable are classified as a current asset on the income statement.
Receivables ♦ 401
3. Notes receivable are classified as a current asset on the balance sheet when they are expected to be
collected within a year..
4. Notes receivable are often used to settle a customer’s accounts receivable..
5. If other receivables are expected to be collected beyond one year, they are classified as
Investments.
6. The allowance method is used by small companies and companies with few receivables.
7. The allowance method is required for companies with large amounts of receivables under
generally accepted accounting principles..
8. When uncollectible accounts expense is recorded under the direct write-off method, cash flows
also decrease.
9. Under the direct write-off method, bad debt expense is matched against sales of the current period.
10. Under the allowance method, the adjusting entry to record uncollectible accounts expense results
in a decrease in assets.
11. The allowance method estimates uncollectible accounts expense prior to write-off.
12. When an account is written off under the allowance method, net accounts receivable will decrease.
402 ♦ Chapter 8
13. The net realizable value of accounts receivable equals accounts receivable less uncollectible
accounts expense.
14. Interest revenue is normally reported on the income statement under other income.
15. Cash flows are decreased when an account receivable is written-off under the allowance method.
16. Allowance for doubtful accounts is a contra-asset account with a credit balance.
17. The entry to write off an uncollectible account under the allowance method has no effect on net
income.
18. It is possible to have a debit or credit balance on the allowance account prior to adjustment.
19. When an account is reinstated under the allowance method, the prior write-off entry must be
reversed.
20. The estimate based on the percentage of sales approach and direct write-off approach are two
ways to estimate uncollectible accounts expense under the allowance method.
21. The estimate based on the percentage of sales method places more emphasis on the balance sheet.
Receivables ♦ 403
22. The direct write-off method fails to accurately match revenues and expenses but emphasizes the
current net realizable value of the receivables.
23. The estimate based on analysis of receivables method places more emphasis on the matching of
revenues and expenses.
24. No adjusting entry is required at the end of the period under the direct write-off method.
25. The direct write-off method and the allowance methods are different names for the same
accounting technique.
26. A claim supported by a note has a stronger legal claim than an account receivable.
27. If a note matures in a later fiscal period, the company holding the note must accrue interest in the
period the note is received.
28. Unusual risks about receivables must be disclosed in the notes to the financial statements.
29. Net receivables are reported after inventories.
30. Businesses grant credit in order to attract customers that would not otherwise purchase the
company’s goods and services.
31. Screening customers involves assessing the credit terms for sale.
404 ♦ Chapter 8
32. Credit limits are determined by the credit worthiness of the customer.
33. One means of monitoring receivables and collections is the direct write-off method.
34. The accounts receivable turnover ratio is calculated by dividing average accounts receivable by
net sales on account.
35. The number of days’ sales in receivables is a measure of the time receivables have been
outstanding.
36. If accounts receivable increase from one period to the next, the cash flows from revenue activities
must increase.
ESSAY
1. What guidelines do accountants employ when classifying receivables under current assets versus
noncurrent assets?
2. Explain what is meant by the term “factoring” receivables and discuss any advantages.