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5-1
ANSWERS TO QUESTIONS - CHAPTER 5
1. Accounts receivable are the expected future receipts that arise
when a company permits its customers to buy now and pay later.
rate, and other credit terms.
2. The net realizable value is the amount expected to be collected
3. Allowance for Doubtful Accounts is a contra asset account.
4. Estimating uncollectible accounts expense improves the accuracy
5. When using the allowance method, uncollectible accounts
6. The most common format for reporting accounts receivable on
the balance sheet is gross receivables less the allowance for
7. The practice of reestablishing a previously written off account,
5-2
8. Factors for use in estimating uncollectible accounts include:
(1) the percentage of uncollectible accounts from years past.
9. Recognizing uncollectible accounts expense reduces accounts
10. A write-off of an uncollectible account when the allowance
11. The recovery of an uncollectible account when the allowance
12. The primary advantage of using the allowance method is that it
13. If the company is an established business, it will examine its
credit history; that is, the actual write-offs for the previous year as
14. The percent of receivables is a more accurate measure because it
5-3
15. An aging of accounts receivable schedule classifies all receivables
by their due date. When using an aging schedule for estimating
16. A promissory note is a legal document that sets forth credit terms
17. a. Maker: The borrower or debtor.
b. Payee: The person to whom the note is made
payable.
e. Maturity date: The date on which the maker must repay
the principal and any unpaid interest.
18. Interest is computed as:
Principal x Annual interest rate x Time outstanding
20. The matching concept matches revenue and expenses to the
period in which they are earned or incurred. By accruing interest,
5-4
21. Liquidity refers to how quickly assets are expected to be
22. The adjusting entry for accrued interest is generally recorded
23. Big Corp. would report interest revenue of $360 for 2014
computed as follows:
24. When Big Corp. collects the $12,720, $12,000 will be reported as
25. It is generally beneficial to accept major credit cards because the
26. The acceptance of major credit cards enables a business to avoid
the cost of uncollectible accounts and the clerical costs of
27. (1) First In, First Out - The inventory cost flow method that
assumes that the first items purchased are the first items
sold for the purpose of computing cost of goods sold and
inventory.
5-5
(4) Specific Identification - The inventory cost flow method that
assigns cost to cost of goods sold based on the specific cost
of each unit sold.
28. One advantage of the specific identification method is that both
the inventory account and cost of goods sold reflect the actual
29. FIFO allocates the cost of the first units purchased to the first
units sold; consequently, in a period of rising prices, this would
30. LIFO allocates the cost of the last units purchased to the first
units sold; consequently, in a period of rising prices, this would
5-6
31. In an inflationary period, i.e., a period where prices are
consistently rising, FIFO will produce the highest amount of
income. This is true because the items purchased first (and at the
32. In an inflationary period, FIFO will produce the largest amount of
total assets. (Refer to the discussion for Question 31.) The
33. Flow of costs refers to the assumption that is made for the
purpose of determining the cost of inventory items that are sold
when preparing financial statements. The cost flow assumption
that a business makes may have nothing to do with the actual
34. In a world where there is no income tax, the choice of cost flow
method would not affect the statement of cash flows because it
is simply allocating some of the cost of inventory purchased to
5-7
35. Key Company (first year of operations):
Beginning inventory $ -0-
Merchandise purchased 1,000 units @ $25 25,000
Cost of Goods Sold 850 units @ $25 21,250
36. The amount of cost of goods sold for Key Company will be
different using different cost flow assumptions because the units
purchased during the second year have a different cost than
those purchased the previous year.
Beginning inventory 150 units @ $25 $ 3,750
Merchandise purchased 1,500 units @ $27 40,500
Total 1,650 $44,250
Units sold 1,500
5-8
Cost of Goods Sold $40,500
Weighted Average: Total Cost Total Units = Cost per unit
37. It may be advantageous to use FIFO for financial statement
purposes because it produces the smallest cost of goods sold and
consequently, the highest gross margin and net income. It also
38. In an inflationary period, for a business subject to income tax,
39. A deflationary period, i.e., a period of falling prices, would
produce results opposite of those for an inflationary period. FIFO
SOLUTIONS TO EXERCISES - CHAPTER 5
EXERCISE 5-1
a.
Michelle’s Accounting Service
5-9
Horizontal Statements Model
Balance Sheet
Acct. Titles
Event
Assets
=
Equity
for R/E
Cash
+
Acct. Rec.
−
Allow.
Ret. Ear.
2014
1.
NA
96,000
NA
96,000
Svc. Rev.
2.
80,000
(80,000)
NA
NA
3.
(32,000)
NA
NA
(32,000)
Sal. Exp.
4.
NA
NA
1,600
(1,600)
Uncoll. Accts. Exp.
Bal.
48,000
+
16,000
−
1,600
=
62,400
b.
Michelle’s Accounting Service
Income Statement
For the Year Ended December 31, 2014
Service Revenue
$96,000
Operating Expenses
Salaries Expense
$32,000
Uncollectible Accounts Expense
1,600
Total Operating Expenses
(33,600)
Net Income
$62,400
EXERCISE 5-1 b. (cont.)
Michelle’s Accounting Service
Balance Sheet
As of December 31, 2014
Assets
Cash
$48,000
Accounts Receivable
$16,000
5-10
Less: Allowance for Doubtful Accounts
(1,600)
14,400
Total Assets
$62,400
Liabilities
$ -0-
Stockholders’ Equity
Retained Earnings
$62,400
Total Stockholders’ Equity
62,400
Total Liabilities and Stockholders’ Equity
$62,400
Michelle’s Accounting Service
Statement of Cash Flows
For the Year Ended December 31, 2014
Cash Flows From Operating Activities:
Inflow from Customers
$80,000
Outflow for Expenses
(32,000)
Net Cash Flow from Operating Activities
$48,000
Cash Flows From Investing Activities
-0-
Cash Flows From Financing Activities
-0-
Net Change in Cash
48,000
Plus: Beginning Cash Balance
-0-
Ending Cash Balance
$48,000
EXERCISE 5-2
Event
Assets
=
Liab.
+
Equity
Rev.
–
Exp.
=
Net Inc.
Cash Flow
1.
+
=
NA
+
+
+
−
NA
=
+
NA
2.
+/−
=
NA
+
NA
NA
−
NA
=
NA
+ OA
3.
−
=
NA
+
−
NA
−
+
=
−
NA
5-11
4.
+/−
=
NA
+
NA
NA
−
NA
=
NA
NA
5-12
EXERCISE 5-3
a. Analyze the Accounts Receivable account:
Accounts Receivable
Beginning Balance
$ 4,000
Plus: Revenue on Account
21,000
Less: Write-off
(180)
Less: Ending Balance
(4,500)
Collections of Accounts Rec.
$20,320
b. Analyze the Allowance for Doubtful Accounts account:
Allowance for Doubtful Accounts
Beginning Balance
$150
Less: Write-off
(180)
Less: Ending Balance
(250)
Uncollectible Accounts Expense
$280
EXERCISE 5-4
a.
Balance Sheet
Acct. Titles for
Event
Assets
=
Equity
Retained Earnings
Cash
+
Acct. Rec.
−
Allow.
Ret. Ear.
2014
1.
NA
45,000
NA
45,000
Service Rev.
2.
32,000
(32,000)
NA
NA
3.
NA
NA
450
(450)
Uncoll. Accts. Exp.
Bal.
32,000
+
13,000
−
450
=
44,550
5-13
Balance Sheet
Acct. Titles for
Event
Assets
=
Equity
Retained Earnings
