ACCT 201 A chp. 8

Accounts receivable
Amounts customers owe on account.
Accounts receivable turnover
A measure of the liquidity of accounts receivable, computed by dividing net credit sales by average net accounts receivable.
Aging the accounts receivable
A schedule of customer balances classified by the length of time they have been unpaid.
Allowance method
A method of accounting for bad debts that involves estimating uncollectible accounts at the end of each period.
Average collection period
The average amount of time that a receivable is outstanding, calculated by dividing 365 days by the accounts receivable turnover.
Bad Debt Expense
An expense account to record losses from extending credit.
Cash (net) realizable value
The net amount a company expects to receive in cash from receivables.
Concentration of credit risk
The threat of nonpayment from a single large customer or class of customers that could adversely affect the financial health of the company.
Direct write-off method
A method of accounting for bad debts that involves charging receivable balances to Bad Debt Expense at the time receivables from a particular company are determined to be uncollectible.
Dishonored (defaulted) note
A note that is not paid in full at maturity.
Factor
A finance company or bank that buys receivables from businesses for a fee and then collects the payments directly from the customers.
Maker
The party in a promissory note who is making the promise to pay.
Notes receivable
Written promise (as evidenced by a formal instrument) for amounts to be received.
Payee
The party to whom payment of a promissory note is to be made.
Percentage-of-receivables basis
A method of estimating the amount of bad debt expense whereby management establishes a percentage relationship between the amount of receivables and the expected losses from uncollectible accounts.
Promissory note
A written promise to pay a specified amount of money on demand or at a definite time.
Receivables
Amounts due from individuals and companies that are expected to be collected in cash.
Trade receivables
Notes and accounts receivable that result from sales transactions.
What type of receivable is evidenced by a formal instrument and normally requires the payment of interest?
a. An account receivable
b. A trade receivable
c. A note receivable
d. Past-due accounts receivables
c. A note receivable
When is a receivable recorded by a service organization?

a. When the bill is sent to the customer
b. When the related expenses are incurred
c. When the customer pays
d. When service is provided on account

d. When service is provided on account
At what value are accounts receivable reported on the balance sheet?

a. Present value

b. Fair market value

c. Maturity value

d. Cash (net) realizable value

d. Cash (net) realizable value
Net credit sales for the month are $4,000,000 for Marx Clothiers. Its accounts receivable balance is $160,000. The allowance is calculated as 7.5% of the receivables balance using the percentage of receivables basis. The Allowance for Doubtful Accounts has a credit balance of $5,000 before adjustment. How much is the balance of the allowance account after adjustment?

a. $12,000

b. $7,000

c. $17,000

d. $300,000

a. $12,000
(160,000 x 7.5%)
Short-term notes receivable are reported at their cash (net) realizable value.

True

False

True
Which one of these statements about promissory notes is incorrect?
a. A promissory note is not a negotiable instrument.

b. A promissory note is more liquid than an account receivable.

c. The party making the promise to pay is called the maker.

d. The party to whom payment is to be made is called the payee.

a. A promissory note is not a negotiable instrument.
Which of the following is the debit effect of the journal entry to record the dishonor of a note receivable?

a. Loss on Notes Receivable

b. Allowance for Doubtful Accounts

c. Bad Debts Expense

d. Accounts Receivable

d. Accounts Receivable
Which one of the following is not one of the principles of managing accounts receivable?

a. Accelerating cash receipts from receivables when necessary

b. Determining from which vendor credit should be requested

c. Establishing a payment period

d. Monitoring collections

b. Determining from which vendor credit should be requested
Which of these statements about Visa credit card sales is incorrect?

a. The credit card issuer conducts the credit investigation of the customer.

b. The retailer is not involved in the collection process.

c. The retailer receives cash more quickly than it would from individual customers.

d. The retailer must wait to receive payment from the issuer.

d. The retailer must wait to receive payment from the issuer.
What approach does IFRS require when testing whether the value of loans and receivable are impaired?

a. A company should look at specific loans and receivables to determine if impaired, and then evaluate as a group.

b. A company should look at specific loans and receivables to determine if impaired, and then write those off.

c. A company should write off those receivables that are impaired, and then attempt to collect those amounts.

d. A company should estimate how much will not be collected, and then write off amounts not collected.

a. A company should look at specific loans and receivables to determine if impaired, and then evaluate as a group.