Chapter 7-8 Questions.docx

Mya Walker Financial Accounting Chapters 7-8 Questions

Chapter 7 1. The term “accounts receivable” was introduced to report amounts owed to a company by its customers. Individual balances are generated by sales made on credit. According to U.S. GAAP, the figure that is presented on a balance sheet for accounts receivable is its net realizable value—the amount of cash the company estimates will be collected over time from these accounts. 2. This amount is often called the "allowance for doubtful accounts" or "allowance for uncollectible accounts." Subtract the amount of the doubtful-accounts allowance from the total accounts receivable. The result is the net realizable value of accounts receivable. 3. Historical experience of the company in collecting its receivables • Efficiency of the company’s credit verification policy • Current economic conditions 4. A second account (often called the allowance for doubtful accounts or the allowance for uncollectible accounts) reflects the estimated amount that will eventually have to be written off as uncollectible. 5. The allowance for doubtful accounts is an example of a “contra account,” one that always appears with another account but as a direct reduction to lower the reported value. 6. For convenience, accountants wait until financial statements are to be produced before making their estimation of net realizable value. 7. Subsequently, whenever a specific account is deemed to be worthless, the balance is removed from both the accounts receivable and the allowance for doubtful accounts Taccounts. The related expense has been recognized previously and is not affected by the removal of the uncollectible account 8. Based on U.S. GAAP, when the company produces financial statements at the end of Year One, an adjusting entry is made to (1) reduce the receivables balance to its net realizable value and (2) recognize an expense in the same period as the related revenue. 9. Because the revenue was reported at the time of sale in Year One, the related expense must also be recognized in that year 10. The two basic steps in the recording of doubtful accounts are: 1. The amount of bad accounts is estimated whenever financial statements are to be produced. An adjusting entry then recognizes the expense in the same period as the sales

Mya Walker Financial Accounting Chapters 7-8 Questions

revenue. It also increases the allowance for doubtful accounts (to reduce the reported receivable balance to its anticipated net realizable value). 2. Subsequently, whenever a specific account is deemed to be worthless, the balance is removed from both the accounts receivable and the allowance for doubtful accounts Taccounts. The related expense has been recognized previously and is not affected by the removal of the uncollectible account. 11. The subsidiary ledger allows the company to access individual account balances so that appropriate action can be taken if specific receivables grow too large or become overdue. 12. The basic problem with reporting foreign currency balances is that exchange rates are constantly in flux. 13. For over twenty-five years, U.S. GAAP has required that monetary assets and liabilities denominated in a foreign currency be reported at the current exchange rate as of the balance sheet date. 14. those that will be used or consumed within one year 15. those that will be paid within one year 16. current ratio = current assets/current liabilities These figures reflect a company’s ability to pay its debts and have enough monetary resources still available to generate profits in the near future. 17. It requires twenty-nine days on the average to collect a receivable. True Or False 1. __T__ Companies use two separate accounts in order to report accounts receivable at its net realizable value. 2. __T__ Bad debt expense is reported on the balance sheet as a contra account to accounts receivable. 3. __T__ The matching principle says that expenses should be recorded the same period as the revenues they help generate. 4. _F_ Once an account has been written off, it can never be reinstated on the books, even if it is later collected. 5. __F_ The net accounts receivable number on the balance sheet represents the exact amount the company will collect in cash. 6. __F_ All companies perform their estimation of uncollectible accounts in the same manner.

Mya Walker Financial Accounting Chapters 7-8 Questions

7. _T__ Frequently, bad debt expense and the ending balance in the allowance for doubtful accounts will differ. 8. __T__ The older a receivable, the less likely it is to be collected. 9. __T__ The higher that receivables turnover is, the slower the receivables are being collected. 10. __T__ To make statements more accurate, bad debt expense is recorded when a specific account is deemed uncollectible and written off.

Multiple Choice 1. B 2. A 3. C 4. C 5. B 6. A 7. A Chapter 8 Questions 1. In accounting for the acquisition of inventory, cost includes all normal and necessary amounts incurred to get the item into the condition and position to be sold. 2. A cash discount is a deduction allowed by the seller of goods or by the provider of services in order to motivate the customer to pay within a specified time. The seller or provider often refers to the cash discount as a sales discount. The buyer often refers to the same discount as a purchase discount. 3. It informs the buyer that a 3 percent discount can be taken if the invoice is paid by the tenth day. Any net amount that remains unpaid (after merchandise returns or partial cash payments) is due on the thirtieth day. 4. It is reduced 5. Perpetual inventory is a method of accounting for inventory that records the sale or purchase of inventory immediately through the use of computerized point-ofsale systems and enterprise asset management software.

Mya Walker Financial Accounting Chapters 7-8 Questions

6. Periodic inventory is a system of inventory in which updates are made on a periodic basis. This differs from perpetual inventory systems, where updates are made as seen fit. In a periodic inventory system no effort is made to keep up-to-date records of either the inventory or the cost of goods sold. 7. Perpetual inventory systems have come to dominate because they provide valuable information to company officials. 8. Simplicity 9. It signifies the appropriate date for recording. 10. When the item leaves the seller’s possession 11. The seller maintains ownership until the item arrives at the store. 12. (a) The amount of merchandise being held and (b) the cost of goods sold for the year to date. 13. In a periodic system, three costs are used to arrive at the amount reported as a company’s cost of goods sold. It is important to understand how each of these figures is derived. • Beginning inventory was determined by a physical inventory taken at the end of the previous year. The count was followed by a calculation of the cost of those units still present. This balance was recorded in the inventory account at that time and has remained unchanged until the end of the current year. A periodic system only updates the general ledger when financial statements are prepared. • The purchases figure has been maintained throughout the year in the general ledger to provide a record of the amounts expended for all normal and necessary costs (invoice price, discounts, transportation-in, assembly costs, and the like) needed to get the inventory items into position and condition to be sold. • Ending inventory is found by making a new physical count at the end of the current period. The number of units on hand is determined (one, in this case) and then the cost of those items ($260) is used to arrive at the proper inventory total. 14. Whenever inventory appears to have lost value for any reason, the accountant compares the cost of the item to its market value and the lower figure then appears on the balance sheet. 15. The company need to do a physical inventory at least once a year for a comparison.

Mya Walker Financial Accounting Chapters 7-8 Questions

Multiple Choice 1. C 2. A 3. B 4. B 5. C 6. D