Questions and Answers
How do you calculate net realizable value (NRV) for accounts receivable?
Accounts Receivable - Allowance for Doubtful Accounts = NRV
Where is net realizable value (NRV) reported?
On the balance sheet
When a company reinstates an account receivable that has previously been written off, how are particular asset accounts affected?
When a company recognizes uncollectible accounts, how are particular asset accounts affected?
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When calculating Accounts Receivable Turnover Ratio, do you use ending accounts receivable or average accounts receivable in the denominator?
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What are the differences between Accounts Receivable and Notes Receivable?
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How do you record an entry with regards to giving out a loan?
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How do you record an entry with regards to recognizing the accrual of interest?
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How do you record an entry with regards to collecting accrued interest?
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What does Allowance for Doubtful Accounts represent?
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Allowance for Doubtful Accounts is considered what kind of account?
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What are the differences between the Allowance Method and the Direct Write-Off Method?
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How do you calculate bad debt expenses using the allowance method?
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What does the Bad Debt Expense account represent?
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What is the Accounts Receivable Turnover Ratio?
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How do you calculate the Accounts Receivable Turnover Ratio?
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How do you calculate the Average Days to Collect Accounts Receivable?
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What is the Operating Cycle?
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How do you calculate the Operating Cycle?
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How do you calculate Average Days to Sell Inventory?
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What are long-term operational assets?
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What are the two types of long-term operational assets?
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What are examples of long-term operational assets?
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How does one determine the cost of a long-term asset?
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What is a basket purchase?
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How do you allocate costs to assets in a basket purchase?
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Study Notes
Accounts Receivable
- Net realizable value (NRV) calculated as: Accounts Receivable - Allowance for Doubtful Accounts
- NRV is reported on the balance sheet.
Reinstating Accounts Receivable
- Increases Accounts Receivable with a debit entry.
- Increases Allowance for Doubtful Accounts with a credit entry.
Uncollectible Accounts
- Increases Uncollectible Accounts Expense with a debit entry.
- Increases Allowance for Doubtful Accounts with a credit entry.
Accounts Receivable Turnover Ratio
- Average Accounts Receivable is used in the denominator for calculations.
Differences Between Accounts Receivable and Notes Receivable
- Accounts Receivable: Smaller amounts, short payment terms, no interest, linked to operating activities.
- Notes Receivable: Larger amounts, extended payment terms, involves interest and maturity dates, linked to investing activities.
Recording Loan Entries
- Debit Notes Receivable to recognize the loan made.
- Credit Cash to reflect cash outflow for the loan.
Accrual of Interest Recognition
- Debit Interest Receivable to acknowledge earned interest.
- Credit Interest Revenue to recognize income from interest.
Collecting Accrued Interest
- Debit Cash to reflect cash received.
- Credit Interest Receivable to reduce outstanding interest owed.
Allowance for Doubtful Accounts
- Represents the company's estimate of expected uncollectible receivables.
- Classified as a contra asset account, increased by credit and decreased by debit.
Methods for Recording Bad Debt Expenses
- Allowance Method:
- Estimates bad debt using a percentage of sales.
- Fulfills matching principle and uses Allowance for Doubtful Accounts.
- Direct Write-Off Method:
- No contra-assets, directly registers bad debt.
- Only permissible for small Accounts Receivable.
- Does not satisfy matching principle, often overstates assets.
Calculating Bad Debt Expenses
- Formula: Percentage uncollectible x Credit Sales.
Bad Debt Expense Account
- Represents costs related to uncollectible accounts receivable.
Accounts Receivable Turnover Ratio Definition
- Measures the frequency of collecting accounts receivable.
Calculating Accounts Receivable Turnover Ratio
- Formula: Sales / Accounts Receivable.
Average Days to Collect Accounts Receivable
- Calculated as: 365 / Accounts Receivable Turnover.
Operating Cycle
- Defined as the average duration to convert inventory to Accounts Receivable and subsequently to cash.
Calculating Operating Cycle
- Formula: Average Days to Sell Inventory + Average Days to Collect Receivables.
Average Days to Sell Inventory Calculation
- Formula: 365 / Inventory Turnover.
- Inventory Turnover= Cost of Goods Sold / Average Inventory.
- Average Inventory = Total Inventory Price / Total Inventory Units.
Long-term Operational Assets
- Define as assets utilized over multiple accounting periods to generate revenue.
Types of Long-term Operational Assets
- Tangible assets (physical items) and intangible assets (non-physical rights).
Examples of Long-term Operational Assets
- Tangible: Property, plants, equipment.
- Intangible: Copyrights, patents.
Determining Cost of Long-term Assets
- Assess historical cost (price at acquisition).
- Include additional costs such as discounts, delivery, or remodeling.
Basket Purchase Definition
- Acquiring several assets simultaneously for a single purchase price.
Allocating Costs in Basket Purchases
- Allocation based on the percentage of total market value that each asset represents relative to the total purchase price.
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Description
Test your knowledge on key accounting concepts from Chapters 7 and 8. This quiz covers important topics like net realizable value of accounts receivable and reinstatement of written-off accounts. Perfect for preparing for your upcoming exam!
