Reporting Interpreting Sales Revenue Receivables Cash

Chapter 06
Reporting and Interpreting Sales Revenue, Receivables, and Cash

True / False Questions

1. "F.O.B. destination" means that title to the shipped goods passes to the buyer on the shipment date.
True False

2. Most companies record revenue when they ship goods to customers not when they are delivered to customers.
True False

3. Credit terms "2/10, n/30" mean that if payment is made in two days, a 10% discount will be given; if not paid within two days, the full invoice price will be due in thirty days.
True False

4. The sales returns and allowances account should be reported as a deduction from sales revenue because it is a contra-revenue account.
True False

5. Sales returns and allowances should be included as a selling expense.
True False

6. Many merchants accept credit cards for the sale of goods because it can increase the number of customers.
True False

7. A company is thinking of borrowing money at an 18% annual interest rate in order to pay a $30,000 invoice within the discount period. The invoice terms are 2/10, n/30. They should borrow the money because they will still have a net savings of 19.2%.
True False

8. An entry to bad debts expense and the allowance for doubtful accounts is made to write off a customer's account during the year when it is determined to be uncollectable.
True False

9. When a particular account receivable is determined to be uncollectible, the entry to write off the account requires a debit to the allowance for doubtful accounts.
True False

10. The allowance for doubtful accounts normally has a debit balance after the year-end adjustment.
True False

11. An entry to write off an uncollectible account does not change the net realizable value (book value) of accounts receivable.
True False

12. Accounts Receivables turnover is computed as net credit sales divided by net trade accounts receivable at the end of the accounting period.
True False

13. When a company reports a higher accounts receivable turnover ratio, then the number of days it takes to collect the receivables has also increased.
True False

14. While preparing the statement of cash flows, the reason that we must adjust sales revenue for the change in accounts receivables to convert the figure to cash collected from customers is that accounts receivable represent sales revenue not collected from customers at the beginning and end of the accounting year.
True False

15. Effective internal control of cash should include the separation of the duties for receiving and disbursing cash.
True False

16. If a check received from a customer that has been deposited by the seller is returned with the bank statement marked not sufficient funds (NSF), it would appear on the seller's bank reconciliation as a deduction from the ending bank statement balance.
True False

17. The primary purpose of preparing a bank reconciliation is to reconcile the bank balance at the end of the period with the company's book balance at the end of the period.
True False

18. When completing a bank reconciliation, bank service charges should be deducted from the company's cash balance.
True False

19. If a customer pays for merchandise using a credit card, the Sales Revenue recorded by the retailer will be more than the amount of Cash recorded.
True False

20. Under the completed-contract method of accounting for long-term construction projects, revenue is not recognized until the project is complete.
True False

Multiple Choice Questions

21. Which of the following statements is true?
A. revenue is usually recorded when goods are shipped
B. revenue is recorded when cash collection is made.
C. revenue is usually recorded upon delivery to the customer.
D. revenue is recorded either when the sale is made, collection occurs and/or delivery is made. It is the company's decision.

22. A company that sells magazines and collects subscription fees prior to the publication and distribution of the magazine. As the cash is received in advance from the customers, the company should record a debit to Cash and a credit to
A. Sales revenue.
B. Prepaid expenses.
C. Unearned revenue.
D. Accounts payable.

23. Most companies usually recognize revenue as earned and record the revenue when
A. the customer's order is received
B. the order is shipped
C. the order is delivered
D. the return period is over.

24. When a company ships product to a customer with the terms FOB (free on board) destination, which of the following is true?
A. The seller will pay the shipping charges and title will not be exchanged until goods are received by the customer.
B. The buyer will pay the shipping charges and title is exchanged at point of shipment.
C. The seller will pay the shipping and title is exchanged at point of shipment.
D. The buyer will pay the shipping and title is exchanged when the goods are received by the customer.

25. On the income statement, the amount of sales returns and allowances is normally
A. added into selling expenses.
B. subtracted from gross margin to determine net sales.
C. added in the calculation of cost of goods sold.
D. subtracted from gross sales to determine net sales.

26. Which of the following statements is false?
A. Sales returns and allowances is always treated as a contra-revenue.
B. Sales returns and allowances, sales discounts and credit card discounts are always treated as selling expenses.
C. Credit card discounts and sales discounts can be treated as contra-revenue accounts or as selling expenses.
D. Sales discounts are used to encourage early payment by customers.

27. Credit terms of 2/10, n/30 indicate that a
A. two percent discount for early payment is available if the invoice is paid before the tenth day of the month following the month to of sale.
B. two percent discount for early payment is available within ten days of the date of sale.
C. ten percent discount for early payment is available if the invoice is paid within two days of the date of the invoice.
D. two percent discount for early payment is available if the invoice is paid after the tenth day, but before the thirtieth day of the invoice date.

28. Miranda Corp. received an order from a customer on October 1. The toys were shipped on October 15. The customer sent a check for full payment on November 5. Miranda received the check on November 10 and deposited it in the bank account. Miranda should record sales revenue related to this series of transactions on
A. October 1.
B. October 15.
C. November 5.
D. November 10.

29. A customer purchased $5,000 of goods on credit from Discount Paper Supply on September 1. The customer received the bill on September 13 and mailed a $5,000 check on September 30. Discount Paper Supply received the check on October 4. In recording this transaction, Discount Paper Supply should credit Sales Revenue for $5,000 on
A. September 1.
B. September 13.
C. September 30.
D. October 4.

30. When a credit sale is made with terms of 2/10, net 30 on May 10 and the customer's check is received on May 19, which of the following is true about the May 19 journal entry?
A. The debit to cash will equal the credit to accounts receivable because the discount was recorded on May 10.
B. There will be a debit to sales discounts on May 10.
C. The debit to cash will be less than the credit to accounts receivable on May 19.
D. There will be a credit to sales discounts on May 19.

31. When goods are sold to a customer with credit terms of 2/10, n/30, the customer will receive a
A. 10% discount if they pay within 2 days.
B. 2% discount if they pay 10% of the amount due within 30 days.
C. 10% discount if they pay within 30 days.
D. 2% discount if they pay within 10 days.

32. A company had the following partial list of account balances at year-end:

The amount of Net Sales shown on the income statement would be
A. $91,900.
B. $90,700.
C. $89,900.
D. $88,600.

33. A company purchased goods on credit with credit terms of 3/15, n/45. Although the company does not have cash available to pay within the discount period, the manager of the company is considering borrowing money to take advantage of the discount. In order to make the appropriate decision, the manager computed the annual interest rate associated with the sales discount. This annual rate is approximately
A. 56%.
B. 38%.
C. 25%.
D. 18%.

34. When credit terms for a sale are 2/15, n/40, the customer saves by paying the bill early. Approximately what percent would this savings amount to on an annual basis?
A. 18%.
B. 20%.
C. 30%.
D. 37%.

35. What is the annual interest rate of a sales discount of 3/10, n/60?
A. 21.9%
B. 22.6%
C. 18.8%
D. 14.6%

36. Which of the following accounts is not treated as a contra-revenue?
A. Sales discounts
B. Credit card discounts
C. Sales returns and allowances
D. Purchase discounts

37. By treating sales returns and allowances, sales discounts, and credit card discounts as contra-revenues, we have the following impact
A. Gross margin is reduced by sales returns and allowances, sales discounts and credit card discounts
B. Gross margin is increased by sales returns and allowances, sales discounts and credit card discounts
C. Gross margin is unchanged by sales returns and allowances, sales discounts and credit card discounts
D. Net income is increased by sales returns and allowances, sales discounts and credit card discounts

38. In 2006, Deckers gross profit percentage was 46.4% while their competitor, Timberland's percentage was 47.3%. Which was the most likely reason for Timberland's higher percentage?
A. Higher selling prices
B. Lower product cost as a percentage of sales
C. Ability to differentiate their product in consumers' eyes
D. Lower cost of goods sold

39. Which of the following is the most likely cause of a decrease in a company's gross profit percentage?
A. They discounted their prices.
B. They reduced product cost as a percentage of sales.
C. They reduced their operating costs.
D. They sold fewer products.

40. Which of the following is the most likely cause of an increase in gross profit percentage?
A. selling products for higher prices
B. selling products with lower margins
C. higher product costs
D. selling fewer products

41. In 2009, Worldwide Waffles reported net operating revenues of $18.2 billion and cost of goods sold for $10.8 billion. Their gross profit percentage for 2009 was
A. 29.9%
B. 40.7%
C. 69.6%
D. None of these

42. Dillon Company uses the allowance method to account for bad debts. The entry to write-off a bad account (one that will never be collected) should be:

A.
B.
C.
D.

43. When using the allowance method for accounting for bad debts, accounts receivable is reported on the balance sheet at the expected net realizable value. When a particular receivable from a customer ultimately is determined to be uncollectible and is written off, the recording of this event will
A. decrease the net realizable value of the accounts receivable.
B. have an effect that is not determinable from the information given.
C. increase the net realizable value of the accounts receivable.
D. have no effect on the net realizable value of the accounts receivable.

44. Assuming the allowance method for bad debts is used, when a customer's uncollectible account is written off, a credit should be made to
A. Bad debt expense.
B. Allowance for doubtful accounts.
C. Sales revenue.
D. Accounts receivable.

45. On January 31, 2009, Klein Company wrote off an uncollectible account of $5,000. The allowance method is used. The write-off would cause bad debt expense to
A. decrease by $5,000.
B. increase by $5,000.
C. increase by $10,000.
D. not change.

46. Accrual accounting requires that the loss resulting from the failure of credit customers to pay their bills should
A. not be recorded until cash is collected from the customer in settlement of the account because that is the only sure event.
B. be estimated in the period in which sales are made but should not be recorded until the customer defaults because of the matching principle.
C. be estimated and recorded in the period in which sales are made so that expenses are matched with revenues.
D. be recognized in the period in which the account receivable proves to be uncollectible because that is the only date when the loss will really be known.

47. Which generally accepted accounting principle best supports the establishment of the account, allowance for doubtful accounts?
A. Matching principle.
B. Continuity principle.
C. Exception principle.
D. Revenue principle.

48. When the allowance method is used, the entry which is appropriate when a particular account is written off as uncollectible should include a
A. debit to accounts receivable.
B. debit to bad debt expense.
C. debit to allowance for doubtful accounts.
D. debit to sales revenue.

49. Oakwood Company had accounts receivable of $750,000 and an allowance for doubtful accounts of the $21,500 just prior to writing off as worthless an account receivable for Hyland Company of $5,000. The net realizable value of accounts receivable as shown by the accounting record before and after the write-off was as follows:

A.
B.
C.
D.

50. Woodland Company uses the allowance method to account for bad debts. During 2009, a customer became bankrupt and a receivable of $10,000 was deemed uncollectible. The entry to record the uncollectible amount is:
A.
B.
C.
D.

51. At year end, Chief Company has a balance of $10,000 in accounts receivable of which $1,000 is more than 30 days overdue. Chief has a credit balance of $100 in the allowance for doubtful accounts before any year-end adjustments. Chief estimates its bad debts losses at 1% of current accounts and 10% of accounts over thirty days. What adjustment should Chief make to the allowance for doubtful accounts?
A. $120 (credit).
B. $100 (credit).
C. $90 (credit).
D. No adjustment as the current balance is correct.

52. Which of the following is not an accurate description of allowance for doubtful accounts?
A. contra-account.
B. balance sheet account.
C. offset account.
D. income statement account.

53. LRP Company uses the allowance method to record its bad debt expense. When the account of a particular customer is deemed to be uncollectible and is written off, LRP will prepare a journal entry with a
A. debit to bad debt expense.
B. credit to bad debt expense.
C. debit to accounts receivable.
D. debit to allowance for doubtful accounts.

54. If a customer pays her bill after her account has already been written off, the company receiving the payment should record the account reinstatement with
A. a credit to bad debt expense.
B. a credit to allowance for doubtful accounts.
C. a credit to cash.
D. a debit to bad debt expense.

55. When using the allowance method of accounting for bad debts, bad debt expense should be recorded
A. as an adjusting entry at the end of the accounting period.
B. when a particular account is written off.
C. whenever the allowance for doubtful accounts has a debit balance.
D. whenever the allowance for doubtful accounts has a zero balance.

56. Bad debt expense should
A. appear on the balance sheet as a contra-asset.
B. appear on the income statement as part of selling expenses.
C. appear on the income statement as a contra-revenue.
D. not appear in the financial statements.

57. Upon completing an aging analysis of accounts receivable, the accountant for Rosco Works estimated that $5,000 of the current $98,000 of accounts receivable would be uncollectible. The allowance for doubtful accounts had a $400 debit balance at year-end prior to adjustment. The amount of bad debt expense that should appear in Rosco's income statement for the year is
A. $5,000.
B. $5,400.
C. $4,600.
D. $0.

58. Which of the following entries will affect both the balance sheet and the income statement?
A. A debit to bad debts expense and a credit to the allowance for doubtful accounts
B. A debit to the allowance for doubtful accounts and a credit to accounts receivable
C. A debit to accounts receivable and a credit to the allowance for doubtful accounts
D. None of the entries affects the balance sheet and income statement

59. In 2009, Deckers reported an accounts receivables turnover ratio of 6.8 and their competitor, Timberland's, reported a ratio of 8.4. Which of the following is false?
A. Deckers needs to increase their ratio in order to improve collection time.
B. Deckers needs to focus on improving their credit and collection process.
C. Deckers has done a better job of collecting their accounts receivables than Timberland's.
D. Deckers requires more time to collect accounts receivables than Timberland's.

60. An increase in the accounts receivable turnover ratio will have what type of effect on cash?
A. Cause an increase in cash flow from operations
B. Cause a decrease in cash flow from operations
C. Cause no change in cash flow from operations
D. The effect on cash flow cannot be determined with the above information.

61. If Worldwide Waffles accounts receivable balance was $1,973 million in 2009 and $1,814 million in 2008, the impact on the statement of cash flows would be
A. An increase in cash flow from investing activities.
B. A decrease in cash flow from operating activities.
C. An increase in cash flow from operating activities.
D. A decrease in cash flow from investing activities.

62. Net income for Trex Outdoors in 2009 was $9,154 (in thousands). There was an addition to net income on the statement of cash flows for $2,106 (in thousands) for the change in accounts receivable. The accounts receivable balance on December 31, 2008 was $20,851 (in thousands). How much was the accounts receivable balance on December 31, 2009?
A. $11,260 (in thousands)
B. $18,745 (in thousands)
C. $22,957 (in thousands)
D. $20,851 (in thousands)

63. The Mickey Company reported revenue of $30,752 million for 2009. Their accounts receivable balance was $5,330 million in 2009 and $4,912 million in 2008. Cash collected from customers equals
A. $25,013 million
B. $28,926 million
C. $30,334 million
D. None of the answers is correct

64. For accounting purposes, cash includes
A. notes receivable from employees.
B. supplies.
C. balances on deposit in banks.
D. a note received from a customer in settlement of an overdue account receivable.

65. When a depositor receives a bank statement indicating a "NSF check", he should
A. credit the cash account for the amount of the check.
B. record the amount as an expense of the current period.
C. credit a special receivable for the amount of the check.
D. debit sales revenue.

66. A deposit in transit on a bank reconciliation should be
A. added to the depositor's book cash balance.
B. subtracted from the depositor's book cash balance.
C. added to the bank statement balance.
D. subtracted from the bank statement balance.

67. Linetech Company's bank statement showed an ending balance of $8,000. Items appearing in the bank reconciliation included: outstanding checks, $500; deposits in transit, $1,000; bank service charges, $50; and Driver Company's check erroneously deducted from Linetech's bank account by the bank, $250. The correct cash balance at the end of the month should be reported as
A. $10,600
B. $8,750
C. $8,500
D. $8,250

68. Which of the following demonstrates a poor internal control procedure?
A. The bookkeeper makes cash deposits and records journal entries related to cash, while the treasurer prepares the bank reconciliation.
B. The president, who does no bookkeeping, prepares the bank reconciliation each month.
C. The treasurer signs all checks after the bookkeeper prepares the supporting documents.
D. One bookkeeper prepares cash deposits and the other bookkeeper enters the collections in the journal and ledger.

69. The cash records and the bank statement of Frankel Company showed the following at the end of February 2009: Outstanding checks at the end of January 2009, $8,000; checks written by Frankel Company during February 2009, $50,000; and checks cleared by the bank during February 2009, $54,000. Therefore, the outstanding checks at the end of February 2009, amounted to
A. $2,000.
B. $4,000.
C. $6,000.
D. $8,000.

70. The cash account and the December bank statement of Gomez Company showed the following: Deposits made by Gomez Company during December 2009, $90,000; deposits reflected on the December 2009 bank statement, $88,000; and deposits in transit on November 30, 2009, $5,000. Therefore, the deposits in transit at the end of December 2009 amounted to
A. $10,000.
B. $ 7,000.
C. $ 5,000.
D. $ 2,000.

71. To aid internal control, the individual authorized to sign checks should be the
A. supervisor of receiving.
B. accounts payable bookkeeper.
C. treasurer.
D. purchasing agent.

72. Effective control of cash requires that
A. one person handle the receipts and disbursements of cash.
B. cash be deposited monthly in a bank.
C. there be approval of cash payments.
D. a reconciliation of the bank balance with the cash balance be prepared twice a year.

73. When preparing the monthly bank reconciliation, the accountant for Fareway Corporation discovered that a check correctly written to one of Fareway's suppliers for $159 had been incorrectly recorded in the books as $195. To correct the error, the accountant prepared an adjusting entry which required a debit to
A. Cash.
B. Bad debt expense.
C. Accounts receivable.
D. Purchases.

74. When preparing a bank reconciliation, which of the following would be deducted from the company's cash balance?
A. Interest paid by bank.
B. Deposits in transit.
C. Outstanding checks.
D. Bank service charges.

75. Merchandise was sold on credit for $10,000, terms 2/10, n/30. The entry to record the cash collection should include a
A. debit Cash, $10,000, and credit Accounts Receivable, $10,000, if collected within the discount period.
B. debit Cash, $10,000, and credit Accounts Receivable, $9,800, and Sales Discount, $200, if collected within the discount period.
C. debit Cash, $10,000, and credit Accounts Receivable, $9,800, and Sales Discount, $200, if collected after the discount period.
D. debit Cash, $10,000, and credit Accounts Receivable, $10,000, if collected after the discount period.

76. A customer purchased a $2,000 item at ApplianceWorld, paying with a credit card (VISA). The merchant is charged a 2% fee by the credit card company. When recording this sale, the merchant would:
A. debit accounts receivable for $2,000.
B. credit sales revenue for $2,000.
C. credit sales revenue for $1,800.
D. credit unearned sales revenue for $2,000.

77. Under the installment method, revenue is recognized when the customer
A. orders the merchandise.
B. receives the merchandise.
C. receives the bill.
D. makes a cash payment.

78. Under the percentage-of-completion method, revenue is recognized
A. when construction begins on the project.
B. when the project is complete.
C. throughout the project, based upon the amount of work completed each year.
D. throughout the project, based upon the amount of cash received from the customer.

79. If a company uses the completed-contract method rather than the percentage-of- completion method, the total net income the company recognizes from the beginning of the project throughout its completion
A. will be greater if the completed-contract method is used.
B. will be greater if the percentage-of-completion method is used.
C. will be the same for both methods.
D. will be greater for the completed-contract method only if the project takes longer than five years to complete.

Chapter 06 Reporting and Interpreting Sales Revenue, Receivables, and Cash Key

True / False Questions

1. "F.O.B. destination" means that title to the shipped goods passes to the buyer on the shipment date.
FALSE

AACSB Tag: Reflective Thinking
Difficulty: Medium
Learning Objective: 1

2. Most companies record revenue when they ship goods to customers not when they are delivered to customers.
TRUE

AACSB Tag: Reflective Thinking
Difficulty: Easy
Learning Objective: 1

3. Credit terms "2/10, n/30" mean that if payment is made in two days, a 10% discount will be given; if not paid within two days, the full invoice price will be due in thirty days.
FALSE

AACSB Tag: Reflective Thinking
Difficulty: Easy
Learning Objective: 2

4. The sales returns and allowances account should be reported as a deduction from sales revenue because it is a contra-revenue account.
TRUE

AACSB Tag: Communications
Difficulty: Medium
Learning Objective: 2

5. Sales returns and allowances should be included as a selling expense.
FALSE

AACSB Tag: Communications
Difficulty: Easy
Learning Objective: 2

6. Many merchants accept credit cards for the sale of goods because it can increase the number of customers.
TRUE

AACSB Tag: Reflective Thinking
Difficulty: Easy
Learning Objective: 2

7. A company is thinking of borrowing money at an 18% annual interest rate in order to pay a $30,000 invoice within the discount period. The invoice terms are 2/10, n/30. They should borrow the money because they will still have a net savings of 19.2%.
TRUE

AACSB Tag: Analytic
Difficulty: Medium
Learning Objective: 2

8. An entry to bad debts expense and the allowance for doubtful accounts is made to write off a customer's account during the year when it is determined to be uncollectable.
FALSE

AACSB Tag: Reflective Thinking
Difficulty: Medium
Learning Objective: 4

9. When a particular account receivable is determined to be uncollectible, the entry to write off the account requires a debit to the allowance for doubtful accounts.
TRUE

AACSB Tag: Reflective Thinking
Difficulty: Medium
Learning Objective: 4

10. The allowance for doubtful accounts normally has a debit balance after the year-end adjustment.
FALSE

AACSB Tag: Reflective Thinking
Difficulty: Easy
Learning Objective: 4

11. An entry to write off an uncollectible account does not change the net realizable value (book value) of accounts receivable.
TRUE

AACSB Tag: Reflective Thinking
Difficulty: Hard
Learning Objective: 4

12. Accounts Receivables turnover is computed as net credit sales divided by net trade accounts receivable at the end of the accounting period.
FALSE

AACSB Tag: Reflective Thinking
Difficulty: Medium
Learning Objective: 5

13. When a company reports a higher accounts receivable turnover ratio, then the number of days it takes to collect the receivables has also increased.
FALSE

AACSB Tag: Reflective Thinking
Difficulty: Medium
Learning Objective: 5

14. While preparing the statement of cash flows, the reason that we must adjust sales revenue for the change in accounts receivables to convert the figure to cash collected from customers is that accounts receivable represent sales revenue not collected from customers at the beginning and end of the accounting year.
TRUE

AACSB Tag: Reflective Thinking
Difficulty: Medium
Learning Objective: 5

15. Effective internal control of cash should include the separation of the duties for receiving and disbursing cash.
TRUE

AACSB Tag: Ethics
Difficulty: Medium
Learning Objective: 6

16. If a check received from a customer that has been deposited by the seller is returned with the bank statement marked not sufficient funds (NSF), it would appear on the seller's bank reconciliation as a deduction from the ending bank statement balance.
FALSE

AACSB Tag: Reflective Thinking
Difficulty: Medium
Learning Objective: 6

17. The primary purpose of preparing a bank reconciliation is to reconcile the bank balance at the end of the period with the company's book balance at the end of the period.
TRUE

AACSB Tag: Reflective Thinking
Difficulty: Easy
Learning Objective: 6

18. When completing a bank reconciliation, bank service charges should be deducted from the company's cash balance.
TRUE

AACSB Tag: Reflective Thinking
Difficulty: Easy
Learning Objective: 6

19. If a customer pays for merchandise using a credit card, the Sales Revenue recorded by the retailer will be more than the amount of Cash recorded.
TRUE

AACSB Tag: Reflective Thinking
Difficulty: Medium
Learning Objective: Sup A

20. Under the completed-contract method of accounting for long-term construction projects, revenue is not recognized until the project is complete.
TRUE

AACSB Tag: Reflective Thinking
Difficulty: Easy
Learning Objective: Sup B

AACSB Tag: Reflective Thinking
Difficulty: Medium
Learning Objective: 1

22. A company that sells magazines and collects subscription fees prior to the publication and distribution of the magazine. As the cash is received in advance from the customers, the company should record a debit to Cash and a credit to
A. Sales revenue.
B. Prepaid expenses.
C. Unearned revenue.
D. Accounts payable.

AACSB Tag: Reflective Thinking
Difficulty: Easy
Learning Objective: 1

23. Most companies usually recognize revenue as earned and record the revenue when
A. the customer's order is received
B. the order is shipped
C. the order is delivered
D. the return period is over.

AACSB Tag: Reflective Thinking
Difficulty: Medium
Learning Objective: 1

AACSB Tag: Reflective Thinking
Difficulty: Hard
Learning Objective: 1

25. On the income statement, the amount of sales returns and allowances is normally
A. added into selling expenses.
B. subtracted from gross margin to determine net sales.
C. added in the calculation of cost of goods sold.
D. subtracted from gross sales to determine net sales.

AACSB Tag: Reflective Thinking
Difficulty: Medium
Learning Objective: 2

26. Which of the following statements is false?
A. Sales returns and allowances is always treated as a contra-revenue.
B. Sales returns and allowances, sales discounts and credit card discounts are always treated as selling expenses.
C. Credit card discounts and sales discounts can be treated as contra-revenue accounts or as selling expenses.
D. Sales discounts are used to encourage early payment by customers.

AACSB Tag: Reflective Thinking
Difficulty: Medium
Learning Objective: 2

AACSB Tag: Reflective Thinking
Difficulty: Medium
Learning Objective: 2

28. Miranda Corp. received an order from a customer on October 1. The toys were shipped on October 15. The customer sent a check for full payment on November 5. Miranda received the check on November 10 and deposited it in the bank account. Miranda should record sales revenue related to this series of transactions on
A. October 1.
B. October 15.
C. November 5.
D. November 10.

AACSB Tag: Reflective Thinking
Difficulty: Easy
Learning Objective: 2

29. A customer purchased $5,000 of goods on credit from Discount Paper Supply on September 1. The customer received the bill on September 13 and mailed a $5,000 check on September 30. Discount Paper Supply received the check on October 4. In recording this transaction, Discount Paper Supply should credit Sales Revenue for $5,000 on
A. September 1.
B. September 13.
C. September 30.
D. October 4.

AACSB Tag: Analytic
Difficulty: Easy
Learning Objective: 2

AACSB Tag: Analytic
Difficulty: Medium
Learning Objective: 2

31. When goods are sold to a customer with credit terms of 2/10, n/30, the customer will receive a
A. 10% discount if they pay within 2 days.
B. 2% discount if they pay 10% of the amount due within 30 days.
C. 10% discount if they pay within 30 days.
D. 2% discount if they pay within 10 days.

AACSB Tag: Reflective Thinking
Difficulty: Easy
Learning Objective: 2

32. A company had the following partial list of account balances at year-end:

The amount of Net Sales shown on the income statement would be
A. $91,900.
B. $90,700.
C. $89,900.
D. $88,600.

AACSB Tag: Analytic
Difficulty: Medium
Learning Objective: 2

AACSB Tag: Analytic
Difficulty: Hard
Learning Objective: 2

34. When credit terms for a sale are 2/15, n/40, the customer saves by paying the bill early. Approximately what percent would this savings amount to on an annual basis?
A. 18%.
B. 20%.
C. 30%.
D. 37%.

AACSB Tag: Analytic
Difficulty: Hard
Learning Objective: 2

35. What is the annual interest rate of a sales discount of 3/10, n/60?
A. 21.9%
B. 22.6%
C. 18.8%
D. 14.6%

AACSB Tag: Analytic
Difficulty: Medium
Learning Objective: 2

36. Which of the following accounts is not treated as a contra-revenue?
A. Sales discounts
B. Credit card discounts
C. Sales returns and allowances
D. Purchase discounts

AACSB Tag: Reflective Thinking
Difficulty: Medium
Learning Objective: 2

37. By treating sales returns and allowances, sales discounts, and credit card discounts as contra-revenues, we have the following impact
A. Gross margin is reduced by sales returns and allowances, sales discounts and credit card discounts
B. Gross margin is increased by sales returns and allowances, sales discounts and credit card discounts
C. Gross margin is unchanged by sales returns and allowances, sales discounts and credit card discounts
D. Net income is increased by sales returns and allowances, sales discounts and credit card discounts

AACSB Tag: Reflective Thinking
Difficulty: Hard
Learning Objective: 2

38. In 2006, Deckers gross profit percentage was 46.4% while their competitor, Timberland's percentage was 47.3%. Which was the most likely reason for Timberland's higher percentage?
A. Higher selling prices
B. Lower product cost as a percentage of sales
C. Ability to differentiate their product in consumers' eyes
D. Lower cost of goods sold

AACSB Tag: Reflective Thinking
Difficulty: Medium
Learning Objective: 3

AACSB Tag: Reflective Thinking
Difficulty: Medium
Learning Objective: 3

40. Which of the following is the most likely cause of an increase in gross profit percentage?
A. selling products for higher prices
B. selling products with lower margins
C. higher product costs
D. selling fewer products

AACSB Tag: Reflective Thinking
Difficulty: Medium
Learning Objective: 3

41. In 2009, Worldwide Waffles reported net operating revenues of $18.2 billion and cost of goods sold for $10.8 billion. Their gross profit percentage for 2009 was
A. 29.9%
B. 40.7%
C. 69.6%
D. None of these

AACSB Tag: Analytic
Difficulty: Easy
Learning Objective: 3

42. Dillon Company uses the allowance method to account for bad debts. The entry to write-off a bad account (one that will never be collected) should be:

A.
B.
C.
D.

AACSB Tag: Reflective Thinking
Difficulty: Easy
Learning Objective: 4

43. When using the allowance method for accounting for bad debts, accounts receivable is reported on the balance sheet at the expected net realizable value. When a particular receivable from a customer ultimately is determined to be uncollectible and is written off, the recording of this event will
A. decrease the net realizable value of the accounts receivable.
B. have an effect that is not determinable from the information given.
C. increase the net realizable value of the accounts receivable.
D. have no effect on the net realizable value of the accounts receivable.

AACSB Tag: Reflective Thinking
Difficulty: Medium
Learning Objective: 4

44. Assuming the allowance method for bad debts is used, when a customer's uncollectible account is written off, a credit should be made to
A. Bad debt expense.
B. Allowance for doubtful accounts.
C. Sales revenue.
D. Accounts receivable.

AACSB Tag: Reflective Thinking
Difficulty: Easy
Learning Objective: 4

AACSB Tag: Analytic
Difficulty: Medium
Learning Objective: 4

46. Accrual accounting requires that the loss resulting from the failure of credit customers to pay their bills should
A. not be recorded until cash is collected from the customer in settlement of the account because that is the only sure event.
B. be estimated in the period in which sales are made but should not be recorded until the customer defaults because of the matching principle.
C. be estimated and recorded in the period in which sales are made so that expenses are matched with revenues.
D. be recognized in the period in which the account receivable proves to be uncollectible because that is the only date when the loss will really be known.

AACSB Tag: Reflective Thinking
Difficulty: Easy
Learning Objective: 4

47. Which generally accepted accounting principle best supports the establishment of the account, allowance for doubtful accounts?
A. Matching principle.
B. Continuity principle.
C. Exception principle.
D. Revenue principle.

AACSB Tag: Reflective Thinking
Difficulty: Easy
Learning Objective: 4

AACSB Tag: Reflective Thinking
Difficulty: Medium
Learning Objective: 4

49. Oakwood Company had accounts receivable of $750,000 and an allowance for doubtful accounts of the $21,500 just prior to writing off as worthless an account receivable for Hyland Company of $5,000. The net realizable value of accounts receivable as shown by the accounting record before and after the write-off was as follows:

A.
B.
C.
D.

AACSB Tag: Analytic
Difficulty: Medium
Learning Objective: 4

AACSB Tag: Analytic
Difficulty: Medium
Learning Objective: 4

51. At year end, Chief Company has a balance of $10,000 in accounts receivable of which $1,000 is more than 30 days overdue. Chief has a credit balance of $100 in the allowance for doubtful accounts before any year-end adjustments. Chief estimates its bad debts losses at 1% of current accounts and 10% of accounts over thirty days. What adjustment should Chief make to the allowance for doubtful accounts?
A. $120 (credit).
B. $100 (credit).
C. $90 (credit).
D. No adjustment as the current balance is correct.

AACSB Tag: Analytic
Difficulty: Hard
Learning Objective: 4

52. Which of the following is not an accurate description of allowance for doubtful accounts?
A. contra-account.
B. balance sheet account.
C. offset account.
D. income statement account.

AACSB Tag: Reflective Thinking
Difficulty: Easy
Learning Objective: 4

AACSB Tag: Reflective Thinking
Difficulty: Medium
Learning Objective: 4

54. If a customer pays her bill after her account has already been written off, the company receiving the payment should record the account reinstatement with
A. a credit to bad debt expense.
B. a credit to allowance for doubtful accounts.
C. a credit to cash.
D. a debit to bad debt expense.

AACSB Tag: Reflective Thinking
Difficulty: Medium
Learning Objective: 4

55. When using the allowance method of accounting for bad debts, bad debt expense should be recorded
A. as an adjusting entry at the end of the accounting period.
B. when a particular account is written off.
C. whenever the allowance for doubtful accounts has a debit balance.
D. whenever the allowance for doubtful accounts has a zero balance.

Difficulty: Medium
Learning Objective: 4

AACSB Tag: Communications
Difficulty: Easy
Learning Objective: 4

57. Upon completing an aging analysis of accounts receivable, the accountant for Rosco Works estimated that $5,000 of the current $98,000 of accounts receivable would be uncollectible. The allowance for doubtful accounts had a $400 debit balance at year-end prior to adjustment. The amount of bad debt expense that should appear in Rosco's income statement for the year is
A. $5,000.
B. $5,400.
C. $4,600.
D. $0.

AACSB Tag: Analytic
Difficulty: Medium
Learning Objective: 4

58. Which of the following entries will affect both the balance sheet and the income statement?
A. A debit to bad debts expense and a credit to the allowance for doubtful accounts
B. A debit to the allowance for doubtful accounts and a credit to accounts receivable
C. A debit to accounts receivable and a credit to the allowance for doubtful accounts
D. None of the entries affects the balance sheet and income statement

AACSB Tag: Reflective Thinking
Difficulty: Medium
Learning Objective: 4

AACSB Tag: Reflective Thinking
Difficulty: Medium
Learning Objective: 5

60. An increase in the accounts receivable turnover ratio will have what type of effect on cash?
A. Cause an increase in cash flow from operations
B. Cause a decrease in cash flow from operations
C. Cause no change in cash flow from operations
D. The effect on cash flow cannot be determined with the above information.

AACSB Tag: Reflective Thinking
Difficulty: Hard
Learning Objective: 5

61. If Worldwide Waffles accounts receivable balance was $1,973 million in 2009 and $1,814 million in 2008, the impact on the statement of cash flows would be
A. An increase in cash flow from investing activities.
B. A decrease in cash flow from operating activities.
C. An increase in cash flow from operating activities.
D. A decrease in cash flow from investing activities.

AACSB Tag: Reflective Thinking
Difficulty: Medium
Learning Objective: 5

AACSB Tag: Analytic
Difficulty: Hard
Learning Objective: 5

63. The Mickey Company reported revenue of $30,752 million for 2009. Their accounts receivable balance was $5,330 million in 2009 and $4,912 million in 2008. Cash collected from customers equals
A. $25,013 million
B. $28,926 million
C. $30,334 million
D. None of the answers is correct

AACSB Tag: Analytic
Difficulty: Medium
Learning Objective: 5

64. For accounting purposes, cash includes
A. notes receivable from employees.
B. supplies.
C. balances on deposit in banks.
D. a note received from a customer in settlement of an overdue account receivable.

AACSB Tag: Reflective Thinking
Difficulty: Easy
Learning Objective: 6

AACSB Tag: Reflective Thinking
Difficulty: Medium
Learning Objective: 6

66. A deposit in transit on a bank reconciliation should be
A. added to the depositor's book cash balance.
B. subtracted from the depositor's book cash balance.
C. added to the bank statement balance.
D. subtracted from the bank statement balance.

AACSB Tag: Reflective Thinking
Difficulty: Medium
Learning Objective: 6

67. Linetech Company's bank statement showed an ending balance of $8,000. Items appearing in the bank reconciliation included: outstanding checks, $500; deposits in transit, $1,000; bank service charges, $50; and Driver Company's check erroneously deducted from Linetech's bank account by the bank, $250. The correct cash balance at the end of the month should be reported as
A. $10,600
B. $8,750
C. $8,500
D. $8,250

AACSB Tag: Analytic
Difficulty: Hard
Learning Objective: 6

AACSB Tag: AACSB Ethics
Difficulty: Medium
Learning Objective: 6

69. The cash records and the bank statement of Frankel Company showed the following at the end of February 2009: Outstanding checks at the end of January 2009, $8,000; checks written by Frankel Company during February 2009, $50,000; and checks cleared by the bank during February 2009, $54,000. Therefore, the outstanding checks at the end of February 2009, amounted to
A. $2,000.
B. $4,000.
C. $6,000.
D. $8,000.

AACSB Tag: Analytic
Difficulty: Hard
Learning Objective: 6

70. The cash account and the December bank statement of Gomez Company showed the following: Deposits made by Gomez Company during December 2009, $90,000; deposits reflected on the December 2009 bank statement, $88,000; and deposits in transit on November 30, 2009, $5,000. Therefore, the deposits in transit at the end of December 2009 amounted to
A. $10,000.
B. $ 7,000.
C. $ 5,000.
D. $ 2,000.

AACSB Tag: Analytic
Difficulty: Hard
Learning Objective: 6

71. To aid internal control, the individual authorized to sign checks should be the
A. supervisor of receiving.
B. accounts payable bookkeeper.
C. treasurer.
D. purchasing agent.

AACSB Tag: Ethics
Difficulty: Easy
Learning Objective: 6

72. Effective control of cash requires that
A. one person handle the receipts and disbursements of cash.
B. cash be deposited monthly in a bank.
C. there be approval of cash payments.
D. a reconciliation of the bank balance with the cash balance be prepared twice a year.

AACSB Tag: Ethics
Difficulty: Medium
Learning Objective: 6

73. When preparing the monthly bank reconciliation, the accountant for Fareway Corporation discovered that a check correctly written to one of Fareway's suppliers for $159 had been incorrectly recorded in the books as $195. To correct the error, the accountant prepared an adjusting entry which required a debit to
A. Cash.
B. Bad debt expense.
C. Accounts receivable.
D. Purchases.

AACSB Tag: Reflective Thinking
Difficulty: Medium
Learning Objective: 6

AACSB Tag: Reflective Thinking
Difficulty: Easy
Learning Objective: 6

75. Merchandise was sold on credit for $10,000, terms 2/10, n/30. The entry to record the cash collection should include a
A. debit Cash, $10,000, and credit Accounts Receivable, $10,000, if collected within the discount period.
B. debit Cash, $10,000, and credit Accounts Receivable, $9,800, and Sales Discount, $200, if collected within the discount period.
C. debit Cash, $10,000, and credit Accounts Receivable, $9,800, and Sales Discount, $200, if collected after the discount period.
D. debit Cash, $10,000, and credit Accounts Receivable, $10,000, if collected after the discount period.

AACSB Tag: Analytic
Difficulty: Hard
Learning Objective: Sup A

76. A customer purchased a $2,000 item at ApplianceWorld, paying with a credit card (VISA). The merchant is charged a 2% fee by the credit card company. When recording this sale, the merchant would:
A. debit accounts receivable for $2,000.
B. credit sales revenue for $2,000.
C. credit sales revenue for $1,800.
D. credit unearned sales revenue for $2,000.

AACSB Tag: Analytic
Difficulty: Medium
Learning Objective: Sup A

77. Under the installment method, revenue is recognized when the customer
A. orders the merchandise.
B. receives the merchandise.
C. receives the bill.
D. makes a cash payment.

AACSB Tag: Reflective Thinking
Difficulty: Easy
Learning Objective: Sup B

78. Under the percentage-of-completion method, revenue is recognized
A. when construction begins on the project.
B. when the project is complete.
C. throughout the project, based upon the amount of work completed each year.
D. throughout the project, based upon the amount of cash received from the customer.

AACSB Tag: Reflective Thinking
Difficulty: Easy
Learning Objective: Sup B

79. If a company uses the completed-contract method rather than the percentage-of- completion method, the total net income the company recognizes from the beginning of the project throughout its completion
A. will be greater if the completed-contract method is used.
B. will be greater if the percentage-of-completion method is used.
C. will be the same for both methods.
D. will be greater for the completed-contract method only if the project takes longer than five years to complete.

AACSB Tag: Reflective Thinking
Difficulty: Medium
Learning Objective: Sup B

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Reporting Interpreting Sales Revenue Receivables Cash

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