ACCT Exam 3 (Chapters 7-8) Flashcards
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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?

  • Accounts Receivable Decreases (Credit)
  • Allowance for Doubtful Accounts Increases (Credit) (correct)
  • Accounts Receivable Increases (Debit) (correct)
  • Allowance for Doubtful Accounts Decreases (Debit)

    • When a company recognizes uncollectible accounts, how are particular asset accounts affected?

    <p>Allowance for Doubtful Accounts Increases (Credit)</p> Signup and view all the answers

    When calculating Accounts Receivable Turnover Ratio, do you use ending accounts receivable or average accounts receivable in the denominator?

    <p>Average Accounts Receivable</p> Signup and view all the answers

    What are the differences between Accounts Receivable and Notes Receivable?

    <p>All of the above</p> Signup and view all the answers

    How do you record an entry with regards to giving out a loan?

    <p>Debit Notes Receivable, Credit Cash</p> Signup and view all the answers

    How do you record an entry with regards to recognizing the accrual of interest?

    <p>Debit Interest Receivable, Credit Interest Revenue</p> Signup and view all the answers

    How do you record an entry with regards to collecting accrued interest?

    <p>Debit Cash, Credit Interest Receivable</p> Signup and view all the answers

    What does Allowance for Doubtful Accounts represent?

    <p>A company's estimate of the amount of uncollectible receivables</p> Signup and view all the answers

    Allowance for Doubtful Accounts is considered what kind of account?

    <p>Contra Asset</p> Signup and view all the answers

    What are the differences between the Allowance Method and the Direct Write-Off Method?

    <p>All of the above</p> Signup and view all the answers

    How do you calculate bad debt expenses using the allowance method?

    <p>% Uncollectible x Credit Sales</p> Signup and view all the answers

    What does the Bad Debt Expense account represent?

    <p>Expense associated with uncollectible amounts from accounts receivable</p> Signup and view all the answers

    What is the Accounts Receivable Turnover Ratio?

    <p>A ratio that determines how often a company collects accounts receivable</p> Signup and view all the answers

    How do you calculate the Accounts Receivable Turnover Ratio?

    <p>Sales / Accounts Receivable</p> Signup and view all the answers

    How do you calculate the Average Days to Collect Accounts Receivable?

    <p>365 / Accounts Receivable Turnover</p> Signup and view all the answers

    What is the Operating Cycle?

    <p>The average time it takes a business to convert inventory to accounts receivable and accounts receivable to cash</p> Signup and view all the answers

    How do you calculate the Operating Cycle?

    <p>Average Days to Sell Inventory + Average Days to Collect Receivables</p> Signup and view all the answers

    How do you calculate Average Days to Sell Inventory?

    <p>365 / Inventory Turnover</p> Signup and view all the answers

    What are long-term operational assets?

    <p>Assets used by a business over multiple accounting periods to generate revenue</p> Signup and view all the answers

    What are the two types of long-term operational assets?

    <p>Tangible and Intangible</p> Signup and view all the answers

    What are examples of long-term operational assets?

    <p>All of the above</p> Signup and view all the answers

    How does one determine the cost of a long-term asset?

    <p>Consider historical cost and any additional costs or discounts</p> Signup and view all the answers

    What is a basket purchase?

    <p>Acquiring several assets at once using a single purchase price</p> Signup and view all the answers

    How do you allocate costs to assets in a basket purchase?

    <p>% of total market value price that the asset is determined to be x Price for Basket Purchase</p> Signup and view all the answers

    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!

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