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Questions and Answers

In the context of a petty cash fund, why is it important to periodically reimburse the fund to its original balance, rather than simply adding more cash as needed?

Reimbursing to the original amount allows for reconciliation and ensures internal control by matching receipts to expenditures.

When a petty cash fund is reimbursed, which account(s) are debited, and why are they debited?

Expense accounts (e.g., Office Supplies, Postage) are debited to recognize the expenses incurred.

Explain the purpose of the 'Allowance for Doubtful Debts' account and how it relates to the matching principle in accounting.

It estimates uncollectible accounts receivable, ensuring expenses are matched with revenues in the same period.

Describe how an aging of accounts receivable analysis helps a company better estimate its bad debt expense compared to using a simple percentage of total receivables.

Aging categorizes receivables by due date, applying higher uncollectible percentages to older balances, which gives a more accurate estimate. Signup and view all the answers

If a company's credit terms are '2/10, n/30', what does this signify, and how might these terms impact the company's cash flow and bad debt expense?

A 2% discount is offered if paid within 10 days, otherwise full payment is due in 30 days. Early payments improve cash flow and reduce risk of bad debt. Signup and view all the answers

Explain the accounting treatment for GST (Goods and Services Tax) when a bad debt is written off under the accruals basis. How does this affect the amount of GST remitted to the tax authorities?

The GST portion of the bad debt is also written off, reducing the amount of GST remitted. Signup and view all the answers

What are the implications if a company fails to adjust its Allowance for Doubtful Debts at the end of an accounting period? Discuss the potential impact on the balance sheet and income statement.

Overstated receivables and net income occur. Assets are overstated and expenses are understated. Signup and view all the answers

In the context of accounts receivable management, differentiate between the 'direct write-off method' and the 'allowance method' for accounting for bad debts, and explain which method is generally preferred under accrual accounting principles.

Direct write-off recognizes bad debt when it occurs. The allowance method estimates bad debt expense in advance. The allowance method is prefered. Signup and view all the answers

Calculate the total cash inflows for Caylie's bakery business, listing each revenue source.

Cash inflows are $68,500, derived from credit card sales of $46,000 and cash sales of $22,500. Signup and view all the answers

Determine the total cash outflows for Caylie's bakery business, listing each expense.

Cash outflows total $44,000, including operating expenses of $22,000, loan payments of $4,000, and payments to suppliers of $18,000. Signup and view all the answers

Calculate the total assets for Caylie's bakery business.

The total assets are $56,300, comprising food supplies of $18,500, accounts receivable of $7,200, GST receivable of $2,900, and cash at bank of $9,200, and credit card sales of $46,000 less accounts payable of $14,400 and rent payable of $4,800. Signup and view all the answers

Determine the total liabilities for Caylie's bakery business.

Total liabilities amount to $34,200, including accounts payable of $14,400, an outstanding bank loan of $15,000 and rent payable of $4,800. Signup and view all the answers

Based on your calculations, what can Samantha infer about investing in Caylie's bakery?

With cash inflows exceeding outflows, Caylie's bakery demonstrates positive cashflow. Total assets exceed total liabilities. This suggests Caylie's bakery is stable, but further investigation is needed to make a sound investment decision. Signup and view all the answers

Besides the information provided, what other business information should Samantha seek to make a more informed decision about investing in Caylie's business?

Samantha should seek information such as profit margins, the owner's business plan and previous financial statements. She should look for insights into long-term profitability and market conditions, and perform a SWOT analysis. Signup and view all the answers

Identify two internal control principles applied in Rabbit Ears Pet Food Ltd's new cash disbursement system and explain how they mitigate risk.

<ol> <li>Prenumbered cheques - provides a tracking mechanism for all payments and ensures that all cheques are accounted for, thus reducing the risk of unauthorized or fraudulent disbursements. 2. Segregation of duties - Cindy Morris (purchasing manager) and Ray Mills (receiving department supervisor) approves the invoice. This ensures no single individual has control over the entire disbursement process, reducing the risk of error or fraud.</li> </ol> Signup and view all the answers

Using the accounts receivable ageing schedule for Cain Ltd, calculate the adjusting entry to the Allowance for Doubtful Debts account at December 31, 2016.

Total estimated bad debts is $34,930, and the unadjusted balance of Allowance for Doubtful Debts is a credit of $10,000. The adjusting entry will need to debit Bad Debt Expense and credit Allowance for Doubtful Debts for $24,930 ($34,930 - $10,000). Signup and view all the answers

Eason Ltd. had total credit sales of $200,000 and accounts receivable of $46,000 at year-end. If Eason Ltd. uses the direct write-off method, what journal entry is required when a $2,900 bad debt is written off?

Debit Bad Debts Expense $2,900; Credit Accounts Receivable $2,900. Signup and view all the answers

Eason Ltd. estimates bad debts based on 5% of accounts receivable. With accounts receivable at $46,000 and a $1,600 credit balance in Allowance for Doubtful Debts, what adjusting entry is needed for bad debts expense?

Debit Bad Debts Expense $700; Credit Allowance for Doubtful Debts $700. ($46,000 * 0.05) - $1,600 = $700. Signup and view all the answers

If Eason Ltd. has a $1,150 debit balance in Allowance for Doubtful Debts, instead of a credit balance and still estimates bad debts based on 5% of $46,000 accounts receivable, what is the bad debt expense?

Debit Bad Debts Expense $3,450; Credit Allowance for Doubtful Debts $3,450. ($46,000 * 0.05) + $1,150 = $3,450. Signup and view all the answers

What is a key weakness of the direct write-off method for reporting bad debts expense, especially compared to the allowance method?

It violates the matching principle because it recognizes bad debt expense in a period different from when the revenue was generated. Therefore, it is not compliant with accounting standards. Signup and view all the answers

Lexington Pty Ltd. has a $1,000 credit balance in Allowance for Doubtful Debts before adjustment. If an aging schedule indicates $11,750 in uncollectible accounts receivable, what adjusting journal entry is required?

Debit Bad Debts Expense $10,750; Credit Allowance for Doubtful Debts $10,750. Signup and view all the answers

Lexington Pty Ltd., using the allowance method, writes off a $5,000 account receivable. What journal entry is required?

Debit Allowance for Doubtful Debts $5,000; Credit Accounts Receivable $5,000. Signup and view all the answers

What type of account is the Allowance for Doubtful Debts, and how does it affect the presentation of accounts receivable on the statement of financial position?

It is a contra-asset account, and it reduces the gross amount of accounts receivable to the net realizable value on the statement of financial position. Signup and view all the answers

Diego Ltd. sold merchandise to George Pty Ltd on January 5th with terms n/15. What does "n/15" mean in this context, and how does it impact when Diego Ltd. expects payment?

"n/15" means the full amount is due in 15 days from the date of sale. Signup and view all the answers

On Feb. 18, Diego Ltd. accepted a note from Swaim Ltd. What journal entry would Diego Ltd. make to record this transaction, and what accounts would be affected?

Debit Notes Receivable and credit Accounts Receivable. This replaces the open account with a formal note. Signup and view all the answers

Avery Ltd.'s note was dishonoured on August 25th. What does it mean for a note to be 'dishonoured,' and what accounting steps does Diego Ltd. need to take?

Dishonoured means Avery Ltd. failed to pay the note at maturity. Diego Ltd. should reverse the note receivable and reinstate the accounts receivable from Avery Ltd. Signup and view all the answers

Why do companies, like Qantas and Air New Zealand, maintain an allowance for doubtful debts? What accounting principle does this practice adhere to?

To estimate and account for potential uncollectible accounts receivable. This follows the matching principle. Signup and view all the answers

If Qantas's receivables turnover ratio increased significantly from one year to the next, what might this indicate about their credit and collection policies, or their customer base?

It could indicate that Qantas is collecting its receivables more quickly, possibly due to stricter credit terms, more effective collection efforts, or a shift towards more creditworthy customers. Signup and view all the answers

How does the ratio of allowance for doubtful debts to gross accounts receivable help in assessing a company's credit risk and the quality of its accounts receivable?

It indicates the percentage of receivables that are expected to be uncollectible. A higher ratio suggests a greater credit risk. Signup and view all the answers

Samantha Perry is evaluating Caylie Lewis's bakery. Why might she want to review the bakery’s history of write-offs for uncollectible accounts as part of her investment decision?

To assess the bakery's credit policies, collection effectiveness, and the overall risk associated with its accounts receivable, which affects the bakery's financial health. Signup and view all the answers

If Caylie Lewis’s bakery primarily extends credit to local restaurants, what external factors could significantly impact the collectibility of its accounts receivable?

Economic downturns affecting the restaurant industry, increased competition among restaurants, or changes in consumer spending habits could impact restaurants' ability to pay their debts to the bakery. Signup and view all the answers

Benson Ltd. uses the direct write-off method. If total credit sales are $250,000, accounts receivable are $57,500, and bad debts written off are $3,625, what amount of bad debts expense will Benson Ltd. report?

$3,625 Signup and view all the answers

Benson Ltd. estimates bad debts at 5% of accounts receivable. With accounts receivable at $57,500 and an existing Allowance for Doubtful Debts credit balance of $2,000, what amount of bad debts expense will be recorded?

$875 Signup and view all the answers

Benson Ltd. estimates bad debts at 5% of accounts receivable. With accounts receivable at $57,500 and an existing Allowance for Doubtful Debts debit balance of $1,438, what amount of bad debts expense will be recorded?

$4,313 Signup and view all the answers

What is the primary weakness of the direct write-off method of accounting for bad debts?

It violates the matching principle because the bad debt expense is not recognized in the same period as the revenue it generated. Signup and view all the answers

Shine Ltd.'s trial balance at June 30, 2016, shows Accounts Receivable of $350,000, Allowance for Doubtful Debts of $1,500 (credit), and Sales of $875,000. Which method of accounting for bad debts is Shine Ltd. using, and how can you tell?

Shine Ltd. is using the allowance method because it has an Allowance for Doubtful Debts account. Signup and view all the answers

Shine Ltd. has an existing credit balance of $1,500 in its Allowance for Doubtful Debts, and an aging schedule indicates that $16,750 of accounts receivable will be uncollectible. What adjusting entry is required?

Debit Bad Debts Expense $15,250 and credit Allowance for Doubtful Debts $15,250. Signup and view all the answers

Shine Ltd. uses the direct write-off method. In July 2016, a $4,500 account receivable is written off as uncollectible. What journal entry is required?

Debit Bad Debts Expense $4,500 and credit Accounts Receivable $4,500. Signup and view all the answers

Explain how the allowance for doubtful debts affects the reported value of accounts receivable on the statement of financial position.

The allowance for doubtful debts reduces the gross accounts receivable to its net realizable value, which is the amount expected to be collected. This provides a more accurate representation of the asset's worth. Signup and view all the answers

Using the Elam Ltd data, what is the impact on the accounting equation when Elam Ltd. accepts a $6,000, 4-month promissory note from Brooks Pty Ltd for balance due, assuming the initial sale was recorded properly?

Accepting the note receivable has no immediate impact on the accounting equation. Accounts Receivable decreases by $6,000 and Notes Receivable increases by $6,000, resulting in a shift between asset accounts but no net change in total assets, liabilities, or equity. Signup and view all the answers

Explain the accounting treatment when a note receivable is discounted at the bank, as demonstrated by Tritt Pty Ltd's note. What is the key consideration in determining the accounting impact?

Discounting a note receivable involves selling it to a bank for cash. The difference between the note's face value less the discount and the cash received represents the discount expense. The business must consider if the discounting is 'with recourse' or 'without recourse' to determine if contingent liability exists. Signup and view all the answers

Using the CSR Ltd data, if credit sales were $3754.9 million and the average accounts receivable balance was $527 million, calculate the receivables turnover ratio. Provide the formula used.

The receivables turnover ratio is calculated as Credit Sales / Average Accounts Receivable. Using the provided data, the receivables turnover ratio is $3754.9 / $527 = approximately 7.12. Signup and view all the answers

Using the CSR Ltd data, calculate the average collection period in days. Assume a 365-day year.

The accounts receivable average collection period is calculated as 365 / Receivables Turnover Ratio. Given a receivables turnover ratio of 7.12, the average collection period is approximately 51.26 days. Signup and view all the answers

Using the Coca-Cola Amatil Ltd (CCA) data, calculate the credit risk ratio (Allowance for Doubtful Debts to gross Accounts Receivable) at the end of the year. Show the formula.

The credit risk ratio is (Allowance for Doubtful Debts / Gross Accounts Receivable). For CCA at year-end, this is ($9.0 / $777.6) = approximately 1.16%. Signup and view all the answers

Companies A and B have similar sales volume, but Company A has a significantly lower receivables turnover ratio than Company B. What might this indicate about Company A's credit policies or collection practices compared to Company B?

A lower receivables turnover ratio for Company A suggests that it has less efficient credit policies and/or collection practices compared to Company B. This could mean Company A has more lenient credit terms, slower collection efforts, or a higher proportion of slow-paying customers. Signup and view all the answers

A company's allowance for doubtful debts as a percentage of gross accounts receivable has increased significantly from the beginning to the end of the year. What are two potential reasons for this increase?

Two potential reasons for this increase are: 1) A change in the company's credit policy, resulting in extending credit to riskier customers, or 2) a deterioration in the economic environment, leading to customers having difficulty paying their debts. Signup and view all the answers

Flashcards

Petty Cash Fund

A small fund used for minor expenses where writing a check is impractical.

Establishing Petty Cash

The journal entry to establish a petty cash fund involves debiting Petty Cash and crediting Cash.