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Receivables Overview and Accounting Practices
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Receivables Overview and Accounting Practices

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Questions and Answers

What are receivables?

  • Accounts payable
  • All money claims against other entities (correct)
  • Cash sales
  • Inventory
  • What is accounts receivable?

    A claim against the customer created by selling merchandise or services on credit.

    What does accounts receivable turnover measure?

    How frequently during the year the accounts receivable are being converted to cash.

    What is aging the receivables?

    <p>Analyzing and classifying accounts receivable by age groupings.</p> Signup and view all the answers

    What is the allowance for doubtful accounts?

    <p>The contra asset account for accounts receivable.</p> Signup and view all the answers

    What is the allowance method?

    <p>Accounting for uncollectible accounts by providing an expense in advance.</p> Signup and view all the answers

    What is bad debt expense?

    <p>Operating expenses incurred due to failure to collect receivables.</p> Signup and view all the answers

    What is the direct write-off method?

    <p>Accounting for uncollectible accounts by recognizing the expense when deemed worthless.</p> Signup and view all the answers

    What is a dishonored note receivable?

    <p>A note the maker fails to pay on the due date.</p> Signup and view all the answers

    What is maturity value?

    <p>The amount due at the maturity or due date of a note.</p> Signup and view all the answers

    What is net realizable value?

    <p>Estimated selling price less direct costs of disposal.</p> Signup and view all the answers

    What are notes receivable?

    <p>A customer's written promise to pay an amount and possibly interest.</p> Signup and view all the answers

    What is the number of days' sales in receivables?

    <p>The relationship between net accounts receivable and average daily sales.</p> Signup and view all the answers

    What is classified as a current asset on the balance sheet?

    <p>Accounts receivable.</p> Signup and view all the answers

    Notes are often used for credit periods of more than 60 days.

    <p>True</p> Signup and view all the answers

    What are trade receivables?

    <p>Notes and accounts receivable resulting from sales transactions.</p> Signup and view all the answers

    What are other receivables?

    <p>Interest, taxes, receivables from officers or employees.</p> Signup and view all the answers

    Where are other receivables reported on the balance sheet?

    <p>Current assets if collected within one year, otherwise as non-current assets.</p> Signup and view all the answers

    What is selling the receivables called?

    <p>Factoring the receivables.</p> Signup and view all the answers

    What is the buyer of a receivable called?

    <p>A factor.</p> Signup and view all the answers

    What are signs an account is uncollectible?

    <ol> <li>The receivable is past due. 2. The customer does not respond to collection attempts. 3. The customer files for bankruptcy. 4. The customer closes its business. 5. The company can't locate the customer.</li> </ol> Signup and view all the answers

    What are the two methods of accounting for uncollectible receivables?

    <p>Direct write-off and allowance.</p> Signup and view all the answers

    The direct write-off method is often used by small companies with few receivables.

    <p>True</p> Signup and view all the answers

    The allowance method is used by large companies per GAAP.

    <p>True</p> Signup and view all the answers

    When a customer's account is identified as uncollectible, it is written off against the allowance account.

    <p>True</p> Signup and view all the answers

    The allowance account will have a credit balance at the end of the period if the write-offs during the period are less than the beginning balance.

    <p>True</p> Signup and view all the answers

    It will have a debit balance if the write-offs exceed the beginning balance.

    <p>True</p> Signup and view all the answers

    What are the two methods used to estimate uncollectible accounts?

    <ol> <li>Percent of sales method. 2. Analysis of receivables method.</li> </ol> Signup and view all the answers

    Study Notes

    Receivables Overview

    • Receivables refer to all monetary claims against various entities, such as individuals and businesses.

    Accounts Receivable

    • Accounts Receivable is generated from sales made on credit, representing a company's claim to payment from customers.

    Accounts Receivable Turnover

    • This metric indicates how often accounts receivable are converted to cash during a year, calculated as net sales divided by average net accounts receivable.

    Aging Receivables

    • Aging involves classifying accounts receivable into different age brackets based on their due dates, facilitating the analysis of collectibility.

    Allowance for Doubtful Accounts

    • A contra asset account that offsets accounts receivable, reflecting the estimated uncollectible amounts.

    Allowance Method

    • An accounting approach that anticipates uncollectible accounts by recognizing related expenses before actual write-offs occur.

    Bad Debt Expense

    • Represents operating expenses incurred from uncollectible receivables.

    Direct Write-Off Method

    • This method recognizes bad debt expense only when an account is deemed worthless.

    Dishonored Note Receivable

    • A note that is not paid by the maker by its due date.

    Maturity Value

    • The total amount due when a note reaches its maturity date.

    Net Realizable Value

    • The expected selling price of inventory after deducting direct disposal costs, like sales commissions.

    Notes Receivable

    • A formal written promise by a customer to pay a specified amount of money, potentially including interest.

    Number of Days' Sales in Receivables

    • A ratio calculated by dividing net accounts receivable by average daily sales, indicating the average time it takes to collect receivables.

    Current Asset Classification

    • Accounts receivable is classified as a current asset on the balance sheet.

    Notes for Credit

    • Notes are typically used in credit transactions that exceed 60 days.

    Trade Receivables

    • Consist of notes and accounts receivable arising from sales transactions.

    Other Receivables

    • Include receivables like interest or taxes and those owed by officers or employees.

    Reporting of Other Receivables

    • Receivables due within a year are classified as current assets; those due beyond a year are recorded as non-current assets labeled "investments."

    Factoring Receivables

    • The process of selling receivables to another party for cash.

    Buyer of Receivables

    • Known as a factor, this entity purchases receivables from sellers.

    Indicators of Uncollectible Accounts

    • Accounts showing signs of uncollectibility include:
      • Past due status
      • Customer non-responsiveness
      • Bankruptcy filings
      • Closure of business operations
      • Inability to locate the customer

    Uncollectible Receivables Accounting Methods

    • Two primary methods: direct write-off and allowance method.

    Small vs. Large Companies

    • The direct write-off method is commonly used by small companies, while larger firms typically adhere to the allowance method under GAAP.

    Account Write-Offs

    • When a customer's account is recognized as uncollectible, it is written off using the allowance account.

    Allowance Account Balances

    • The allowance account maintains a credit balance if write-offs are less than the beginning balance, while excessive write-offs over the beginning balance would result in a debit balance.

    Estimating Uncollectible Accounts

    • Regular estimates of uncollectible accounts are made using two methods:
      • Percent of sales method
      • Analysis of receivables method

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    Description

    This quiz covers key concepts related to receivables, including accounts receivable, turnover metrics, aging methods, and the allowance for doubtful accounts. Test your understanding of how businesses manage their monetary claims and assess collectibility. Ideal for accounting students looking to master these essential topics.

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