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The advantage of relating a company’s bad debt experience to its accounts receivable is that this approach
Gives a reasonable correct statement of receivables in the balance sheet
Relates bad debts expense to the period of sale
Is the only generally accepted method for valuing accounts receivable
Makes estimates of uncollectible accounts unnecessary
Gives a reasonable correct statement of receivables in the balance sheet
Which one of the following measurement bases applies to receivables?
Historical cost
An approximation of net realizable value
Selling price through factoring
Discounted present value
An approximation of net realizable value
Jamison Corporation’s inventory cost on its statement of financial position was lower using first-in, first-out than last-in, first-out. Assuming no beginning inventory, what direction did the cost of purchases move during the period?
Up
Down
Steady
Cannot be determined
Down
An inventory pricing procedure in which the oldest costs incurred rarely have an effect on the ending inventory valuation is
FIFO
LIFO
Conventional retail
Weighted average
FIFO
When inventory declines in value below original (historical) cost, and this decline is considered other than temporary, what is the maximum amount that the inventory can be valued at?
Sales price net of conversion costs
Net realizable value
Historical cost
Net realizable value reduced by a normal profit margin
Net realizable value
When the allowance method of recognizing bad debt expense is used, the entries at the time of collection of an account previously written off would
Increase net income
Have no effect on total current assets
Increase working capital
Decrease total current liabilities
Have no effect on total current assets
The original cost of an inventory item is above the replacement cost. The replacement cost is below the net realizable value less the normal profit margin. Under the lower of cost or market method the inventory item should be priced at its
Original cost
Replacement cost
Net realizable value
Original cost OR Net realizable value less the normal profit margin
Original cost OR Net realizable value less the normal profit margin
Liquidity is the ability
To increase net assets through regular operations
To generate cash from sources other than regular operations
To convert existing assets into cash
Of financial statement users to predict a company’s cash flows
To convert existing assets into cash
Liquidity ratios measures the
Operating success of a company over a period of time
The ability of a company to survive over a long period of time
The short-term ability of a company to pay its maturing obligations and to meet unexpected needs for cash
The number of times interest is earned
The short-term ability of a company to pay its maturing obligations and to meet unexpected needs for cash
Working capital is a measure of
Financial flexibility
Liquidity.
Profitability.
Solvency.
Liquidity.
A common measure of liquidity is
Return on assets.
Accounts receivable turnover.
Profit margin.
Debt to equity.
Accounts receivable turnover.
The net realizable value of receivables is calculated as the face value of the receivables less adjustments for
Credit sales
Actual uncollected amounts adjusted for purchase discounts.
Bad debts already written off.
Estimated uncollectible accounts
Estimated uncollectible accounts
Under what circumstances should a company with high rate of return on sales consider the inventory sold?
When the retailer gives a confirmation that the goods won’t be returned
When the goods are sold on installment
When it can reasonably estimate the amount of returns
When the payment for goods is received
When it can reasonably estimate the amount of returns
Why is the allowance method preferred over the direct write-off method of accounting for bad debts?
Determining worthless accounts under direct write-off method is difficult to do.
Improved matching of bad debt expense with revenue.
Allowance method is used for tax purposes.
Estimates are used.
Improved matching of bad debt expense with revenue.
Which of the following methods of determining annual bad debt expense best achieves the matching concept?
Percentage of average accounts receivable
Direct write-off
Percentage of sales
Percentage of ending accounts receivable
Percentage of sales
The accounts receivable turnover and inventory turnover ratios are used to analyze
Long-term solvency
Profitability
Liquidity
Leverage
Liquidity
During the year Snedicker reported net sales of $1,920,000. The company had accounts receivable of $150,000 at the beginning of the year and $240,000 at the end of the year Compute Snedicker’s average collection period (assume 365 days a year.)
28.5 days
45.7 days.
37.1 days.
74.2 days.
37.1 days
(150,000+240,000)/2=195,000
(365/1,920,000)*195,000=37.1 days
What is a possible reason for accounts receivable turnover to increase from one year to the next year?
Improved collection process.
Granting credit to customers with lower credit quality.
Decreased credit sales during a recession.
Write-off uncollectible receivables.
Improved collection process.
A high accounts receivable turnover ratio indicates
Customers are making payments quickly
A large portion of the company’s sales are on credit
Many customers are not paying their receivables in a timely manner
The company’s sales have increased
Customers are making payments quickly
Increasing a credit period from 30 to 60 days, in response to a similar action taken by company’s competitors, would likely result in:
An increase in the average collection period.
A decrease in bad debt losses.
An increase in sales.
Higher profits.
An increase in the average collection period.
