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What is the primary purpose of the Allowance for Doubtful Accounts?
What is the primary purpose of the Allowance for Doubtful Accounts?
How is the Allowance for Doubtful Accounts classified in financial statements?
How is the Allowance for Doubtful Accounts classified in financial statements?
Which journal entry is made at the end of each period to record uncollectible accounts?
Which journal entry is made at the end of each period to record uncollectible accounts?
What type of balance does the Allowance for Doubtful Accounts maintain?
What type of balance does the Allowance for Doubtful Accounts maintain?
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How does the Allowance for Doubtful Accounts affect the overall financial position of a company?
How does the Allowance for Doubtful Accounts affect the overall financial position of a company?
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Which financial statement reflects the impact of the Allowance for Doubtful Accounts?
Which financial statement reflects the impact of the Allowance for Doubtful Accounts?
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What accounting principle necessitates estimating uncollectible accounts?
What accounting principle necessitates estimating uncollectible accounts?
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What does the recording of uncollectible accounts as an expense imply for the company?
What does the recording of uncollectible accounts as an expense imply for the company?
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What does the net realizable value represent?
What does the net realizable value represent?
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Which entry is made when an account is determined to be uncollectible?
Which entry is made when an account is determined to be uncollectible?
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Which account is credited when writing off an uncollectible account?
Which account is credited when writing off an uncollectible account?
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What happens to an account when it is determined to be uncollectible?
What happens to an account when it is determined to be uncollectible?
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How much was owed by Jason Clark that K-Max determined to be uncollectible?
How much was owed by Jason Clark that K-Max determined to be uncollectible?
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What is the purpose of the Allowance for Doubtful Accounts?
What is the purpose of the Allowance for Doubtful Accounts?
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What must occur before cash collections for an account previously written off can be recorded?
What must occur before cash collections for an account previously written off can be recorded?
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At the end of each month, what action should management take regarding uncollectible accounts?
At the end of each month, what action should management take regarding uncollectible accounts?
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Which of the following statements is TRUE regarding accounts receivable?
Which of the following statements is TRUE regarding accounts receivable?
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What journal entries are involved when cash is collected for an account receivable that was previously written off?
What journal entries are involved when cash is collected for an account receivable that was previously written off?
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Which transaction reflects the correct accounting action when K-Max writes off Jason Clark's account?
Which transaction reflects the correct accounting action when K-Max writes off Jason Clark's account?
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Which accounts are affected when reversing a write-off entry for collections?
Which accounts are affected when reversing a write-off entry for collections?
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What is the purpose of adjusting the Allowance for Doubtful Accounts?
What is the purpose of adjusting the Allowance for Doubtful Accounts?
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Which step is necessary after estimating uncollectible accounts at the end of the month?
Which step is necessary after estimating uncollectible accounts at the end of the month?
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In what situation would the Allowance for Doubtful Accounts be credited?
In what situation would the Allowance for Doubtful Accounts be credited?
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What effect does a cash collection have on an account previously written off?
What effect does a cash collection have on an account previously written off?
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What is the total Uncollectible Accounts Expense recorded on December 31?
What is the total Uncollectible Accounts Expense recorded on December 31?
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Which account is credited when recognizing the Uncollectible Accounts Expense?
Which account is credited when recognizing the Uncollectible Accounts Expense?
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In the Balance Sheet Approach for estimating uncollectible accounts, what is the first step?
In the Balance Sheet Approach for estimating uncollectible accounts, what is the first step?
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What percentage is applied to the accounts receivable in the calculation example?
What percentage is applied to the accounts receivable in the calculation example?
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Why is it important to compute a separate allowance for each age grouping?
Why is it important to compute a separate allowance for each age grouping?
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Which component is NOT involved in the journal entry for recording uncollectible accounts?
Which component is NOT involved in the journal entry for recording uncollectible accounts?
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How is the allowance for doubtful accounts adjusted?
How is the allowance for doubtful accounts adjusted?
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If the total Accounts Receivable is $50,000 and the calculated percentage for uncollectible accounts is 5.00%, what is the uncollectible amount?
If the total Accounts Receivable is $50,000 and the calculated percentage for uncollectible accounts is 5.00%, what is the uncollectible amount?
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What is the total estimated uncollectible amount for accounts that are 1 - 30 days past due?
What is the total estimated uncollectible amount for accounts that are 1 - 30 days past due?
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How much total accounts receivable does EastCo, Inc. have categorized as overdue?
How much total accounts receivable does EastCo, Inc. have categorized as overdue?
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What percentage of the total accounts receivable balance is estimated to be uncollectible based on the provided aging schedule?
What percentage of the total accounts receivable balance is estimated to be uncollectible based on the provided aging schedule?
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What is the total estimated uncollectible amount for accounts that are over 60 days past due?
What is the total estimated uncollectible amount for accounts that are over 60 days past due?
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If EastCo’s unadjusted balance in the allowance account is $500, which of the following best describes the adjustment needed considering total estimated uncollectible amounts?
If EastCo’s unadjusted balance in the allowance account is $500, which of the following best describes the adjustment needed considering total estimated uncollectible amounts?
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What is the estimated bad debt percentage for accounts that are between 31 - 60 days past due?
What is the estimated bad debt percentage for accounts that are between 31 - 60 days past due?
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Which of the following total balances represents the accounts receivable classified as current?
Which of the following total balances represents the accounts receivable classified as current?
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What total amount of estimated uncollectible receivable accounts is accounted for when digging into the aging schedule?
What total amount of estimated uncollectible receivable accounts is accounted for when digging into the aging schedule?
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What does the Accounts Receivable Turnover Ratio assess?
What does the Accounts Receivable Turnover Ratio assess?
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Which formula is used to calculate the Accounts Receivable Turnover Ratio?
Which formula is used to calculate the Accounts Receivable Turnover Ratio?
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Which of the following is NOT a method to minimize amounts in Accounts Receivable?
Which of the following is NOT a method to minimize amounts in Accounts Receivable?
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What is a potential outcome of poor management of Accounts Receivable?
What is a potential outcome of poor management of Accounts Receivable?
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Why is it important to evaluate the quality of Accounts Receivable?
Why is it important to evaluate the quality of Accounts Receivable?
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Which statement is true about credit card sales in relation to Accounts Receivable?
Which statement is true about credit card sales in relation to Accounts Receivable?
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What is one way to improve the Accounts Receivable Turnover Ratio?
What is one way to improve the Accounts Receivable Turnover Ratio?
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How does offering discounts for early payment affect Accounts Receivable?
How does offering discounts for early payment affect Accounts Receivable?
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Study Notes
Financial Assets
- Financial assets include cash and assets easily converted to cash
- Businesses need enough cash to pay bills
- Well-managed companies promptly deposit daily cash receipts
- Accounts receivable are a primary source of daily receipts
- Excess cash can be invested in short-term, liquid securities
- These investments generate interest and dividends
- The current value of cash is its face amount
- Marketable securities' values change daily
- Receivables are shown at the estimated collectible amount (net realizable value)
Cash
- Cash is defined as any deposit banks will accept
- This includes coins, paper money, checks, money orders, and travelers' checks
- Bank credit card sales are also considered cash
- Cash equivalents are short-term investments that are as liquid as cash
- Examples include money market funds, U.S. Treasury bills, and high-grade commercial papers
Reporting Cash in the Balance Sheet
- Cash and cash equivalents are combined on the balance sheet
- Investments that mature within 90 days of their purchase are considered cash equivalents
- Restricted cash is not available for paying current liabilities
- Lines of credit are disclosed in notes
- Companies need to accurately account for cash, prevent theft and fraud, and assure adequate cash availability
- Unnecessarily large amounts of idle cash should be avoided.
Internal Control Over Cash
- Separate handling cash duties from accounting and record keeping duties
- Prepare cash budgets of cash receipts, cash payments, and cash balances
- Deposit all cash receipts daily in the bank
- Make all cash payments by check
- Verify all expenditures before a payment check is issued
- Separate the functions of approving expenses from signing checks
- Reconcile bank statements with accounting records
Bank Statements
- Bank statements show beginning and ending balance, deposits, checks paid, and other debits and credits
- These are essential in reconciling the bank balance with the company's cash records
Reconciling Bank Statements
- Adjust bank statements and company records for any unrecorded transactions or errors
- Reconciling the bank statement helps create a company's adjusted balance
- Differences between bank records and accounting records are normal (outstanding checks, deposits in transit, service charges, NSF checks, bank errors, and book errors)
- Reconciling entries are needed for any adjustment items
Reconciling Bank Statement Example
- Outstanding checks totalled $2,417
- A $500 check mailed to the bank was not recorded yet
- Customer's NSF check for $225
- Bank statement showed $30 interest earned
- Check 781 was erroneously recorded in the books as $240
- Acme Company deposit of $486 was credit erroneously to the account
Short-Term Investments
- Marketable securities include bond investments, capital stock investments, and readily marketable investments
- Short-term investments are almost as liquid as cash
Mark-to-Market
- Short-term investments in marketable securities are shown on the balance sheet at current market value
- This is called fair value accounting
- Investments are frequently listed immediately after cash on the balance sheet
- Unrealized holding gain or loss on investments account is created to show adjustments
- The account appears as a stockholders' equity item
Accounting for Marketable Securities
- There are four basic events relating to investments in marketable securities: purchasing, receiving interest and dividends, and selling
- Investments recorded at cost, including brokerage commissions
- The example shows The Coca-Cola Company stock received dividend on December 15 and record this in journal entry
Recognition of Investment Revenue
- Entries to recognize interest and dividend revenue typically involve a debit to Cash and a credit to revenue accounts
- The example shows receipt of dividends from Coca-Cola Company
Sale of Investments
- Gains or losses on investment sales appear in the Other Income/Expense section
- The example shows the sale of 500 and 2,500 shares of Coca-Cola Company stock.
Adjusting Marketable Securities to Market Value
- Marketable securities are presented on the balance sheet at their current market value
- Unrealized holding gain or loss on investments account is adjusted
- Example shows Foster Corporation's adjustment on December 31
Presentation of Marketable Securities in the Balance Sheet Example
- Shows Foster Corporation's Balance Sheet Example
Accounts Receivable
- Companies often sell goods and services on credit
- Accounts receivable are the largest asset for many companies
- Some accounts will not be collected
Uncollectible Accounts
- Uncollectible accounts result from credit sales
- This is recorded as an estimate in the financial statements
- The Allowance for Doubtful Accounts is a contra-asset account
The Allowance for Doubtful Accounts
- This account is a contra-asset account or a valuation account
- The balance offsets Accounts Receivable to form a more helpful measure of a company's liquidity
Writing Off an Uncollectible Account
- When an account is uncollectible, it is no longer considered an asset
- Example illustrates how to write off an uncollectible account, and the effect on Accounts Receivable and the Allowance for Doubtful Accounts
Recovery of an Account Receivable
- Subsequent collection of a previously written-off account needs a reversal entry
Monthly Estimates of Credit Losses
- At the end of each month, management estimates and adjusts the probable amount of uncollectible accounts estimate of the Allowance for Doubtful Accounts
Monthly Estimates of Credit Losses Example
- Example of MusicLand's accounting records at December 31, 2003
Estimating Credit Losses — The "Balance Sheet" Approach
- Year-end receivables are broken down by age
- Different age groupings have different likelihoods of being uncollectible
- A separate allowance is computed for each age grouping
- Example shows EastCo, Inc. receivables at December 31, 2003
An Alternative Approach to Estimating Credit Losses
- The percentage of uncollectible accounts is based on the actual uncollectible accounts from previous years' credit sales
- The example shows EastCo credit sales of $60,000 in 2003, and 1% historically uncollectible
Direct Write-Off Method
- This method makes no attempt to match revenue with the expense of uncollectible accounts
- Company records the expenses when accounts are determined to be uncollectible
Income Tax Regulations and Financial Reporting
- Direct write-off methods are not permitted by GAAP
- Allowance methods better match expenses with revenues
Internal Controls for Receivable
- Separate the maintenance of the account receivable subsidiary ledger from the custody of cash receipts and the authorization of write-offs
Management of Accounts Receivable
- Extending credit encourages customers to buy from a company
- However, it ties up resources in accounts receivables
Ways to Minimize Amounts in Accounts Receivable
- Selling accounts receivables and credit card sales minimize amounts in accounts receivables
Evaluating the Quality of Accounts Receivable
- Accounts Receivable Turnover Ratio
- Average Number of Days to Collect A/R
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Description
This quiz covers the essentials of financial assets, including cash, receivables, and marketable securities. Understand the importance of liquidity in business operations and how cash equivalents are reported on balance sheets. Test your knowledge on the management and reporting of these financial components.
