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Exam 5: Accounting for Receivables and Inventory Cost Flow

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Question 41

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The best estimate for the amount of cash a company expects to collect from its accounts receivable is the face value of the receivables.

A) True
B) False

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Question 42

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One of the disadvantages of the specific identification inventory cost flow method is that it can allow managers of a business to manipulate the amount of income the business reports.

A) True
B) False

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Question 43

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For a business, the advantage of offering credit to customers is that it:

Warnock Company had $400,000 in credit sales for 2014, and it estimated that 2% of the credit sales would not be collected. The balance in Accounts Receivable at the end of the year was $79,000. Warnock had never used the allowance method to account for its receivables till 2014. The net realizable value of its accounts receivable at the end of the year was $71,000.

A company that has a note receivable outstanding at the end of the accounting period will have to make an adjusting entry related to that note. Describe the purpose of the adjusting entry.

Accepting credit cards rather than offering credit directly to customers can help a business reduce its costs.

In an inflationary environment:

The net effect of the entries to recognize the collection of a previously written-off account under the allowance method will

On December 31, 2014, the Landon Corporation estimated that 3% of its credit sales of $215,000 would be uncollectible. Landon used the allowance method of accounting for uncollectible accounts. On February 15, 2015, Landon wrote off the account of one of its customers, in the amount of $2,500. On April 7, 2015, the customer paid the account in full. Which of the following answers correctly states the effect of recording the collection of the reinstated receivable on April 7, 2015?

The accounting principle that requires a company to use the same accounting methods (such as inventory cost flow methods) over a period of time is

Mohr Manufacturing, Inc. had the following sales during 2014: $\begin{array} { l l } \text { Cash sales } & \$ 120,000 \\\text { Credit sales } & \$ 600,000 \\\text { Credit card sales } & \$ 2,000,000\end{array}$ Mohr also had the following beginning and ending balances in the receivables accounts: $\begin{array} { l c l } & \text { Beginning } & \text { Ending } \\\text { Credit sales } & \$ 120,000 & \$ 90,000 \\\text { Credit card sales } & \$ 400,000 & \$ 420,000\end{array}$ Mohr, which uses the allowance method of accounting for uncollectible accounts, estimated that 3% of the credit sales will go uncollected. The credit card company charges Mohr a 4% service charge. a) What was the amount of uncollectible accounts expense related to credit sales? b) What was the amount of the company's expense for credit card fees during the year? c) What was Mohr's cash flow from customers for the year?

When prices are falling:

The Repair Shop provided $618,000 of services to customers during 2014. All customers paid for the services with credit cards. The company submitted the credit card receipts to the credit card company immediately, and the credit card company paid cash in the amount of face value less a 4 percent service charge. Required: Record the credit card sales and collection of the receivables in the horizontal statements model, below. Show dollar amounts of increases and decreases. For cash flows, indicate whether the item is an operating activity (OA), investing activity (IA), or financing activity (FA). Use NA to indicate that an element is not affected by an event.

A company may choose to estimate its uncollectible accounts expense based on a percentage of sales or a percentage of accounts receivable.

If prices are rising, which inventory cost flow method will produce the lowest amount for Cost of Goods Sold?

What type of account is the Allowance for Doubtful Accounts?

What is an aging of accounts receivable, and how might an aging be useful in estimating uncollectible accounts?

Guerrero Company engaged in the following events during 2014: 1. Began operations by issuing common stock to investors for $40,000 cash 2. Provided services to customers on account, $95,000 3. Collected $72,000 cash from accounts receivable 4. Paid salaries of $55,000 for the year 5. Adjusted accounts to reflect estimate that 2 percent of service revenues on account would be uncollectible Required: Determine Guerrero's a. net income for 2014 b. net cash flow from operating activities c. balance in accounts receivable at the end of 2014 d. net realizable value of accounts receivable at the end of 2014 e. total assets as of December 31, 2014

Indicate whether each of the following statements is true or false for a company that uses the allowance method to account for uncollectible accounts. 1. The entry to recognize uncollectible accounts expense does not affect the net realizable value of accounts receivable 2. The write-off of an uncollectible account does not affect the net realizable value of accounts receivable 3. The net realizable value of receivables is the difference between the balance of Accounts Receivable and the balance in the Allowance for Doubtful Accounts 4. The write-off of an uncollectible account does not affect total equity 5. The Allowance for Doubtful Accounts is an expense account

In relation to inventory, differentiate between flow of cost and physical flow of goods.