Philippine School of Business Administration: Cpa Review
Philippine School of Business Administration: Cpa Review
Philippine School of Business Administration: Cpa Review
CPA REVIEW
Receivables: Claims held against customers and others for money, goods, or
services. Classified as either trade or nontrade. Trade receivables (accounts
receivable and notes receivable) are the most significant receivables an
enterprise possesses
1. Accounts receivable are oral promises of the purchaser to pay for goods
and services sold.
1. Trade Discounts. These reductions from the list price are not recognized in
the accounting records, customers are billed net of trade discounts.
b. Net Method. Sales and receivables are recorded at the net amount.
Sales discounts not taken by customers are credited to the Sales
Discounts Forfeited account, which is reported in the other income line
item of the profit or loss statement.
(2) does not result in receivables being stated at net realizable value in
the balance sheet.
NOTE
Net accounts receivable is the balance in accounts receivable less the
allowance for bad debts. Also remember that net receivables do not change
when a specific account is written off since both accounts receivable and the
allowance account are reduced by the same amount.
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MULTIPLE CHOICE:
2. When the direct write-off method of recognizing bad debt expense is used,
the entry to write off a specific customer account would
a. increase net income.
b. have no effect on net income.
c. increase the accounts receivable balance and increase net income.
d. decrease the accounts receivable balance and decrease net income.
D
3. When comparing the allowance method of accounting for bad debts with the
direct write-off method, which of the following is true?
a. The direct write-off method is exact and also better illustrates the matching
principle.
b. The allowance method is less exact but it better illustrates the matching
principle.
c. The direct write-off method is theoretically superior.
d. The direct write-off method requires two separate entries to write off an
uncollectible account.
B
4. When the allowance method of recognizing bad debt expense is used, the
entries at the time of collection of an account previously written off would
a. Decrease the allowance for doubtful accounts
b. Increase net income
c. Have no effect on the allowance for doubtful accounts
d. Have no effect on net income
D
5. When a specific customer’s account receivable is written off as uncollectible,
what will be the effect on net income under each of the following methods of
recognizing bad debt expense?
Allowance Direct writeoff
a. None Decrease
b. Decrease None
c. Decrease Decrease
d. None None
A
6. When the allowance method of recognizing bad debt expense is used, the
entry to record the write-off of a specific uncollectible account would decrease
a. allowance for doubtful accounts.
b. net income.
c. net realizable value of accounts receivable.
d. working capital.
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a. None None
b. Decrease Decrease
c. Increase Increase
d. Decrease None
A
8. When the allowance method of recognizing bad debt expense is used, the
entries at the time of collection of a small account previously written off would
a. increase net income.
b. increase the allowance for doubtful accounts.
c. decrease net income.
d. decrease the allowance for doubtful accounts.
B
9. A method of estimating bad debts that focuses on the balance sheet rather
than the income statement is the allowance method based on
a. direct write-off.
b. aging the trade receivable accounts.
c. credit sales.
d. specific accounts determined to be uncollectible.
B
10. The entry
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20. In the case of long-term installments receivable (real estate installment sales)
where a major portion of the receivables will be collected beyond the normal
operating cycle
a. The entire receivables are classified as current without disclosure of the
amount not currently due
b. The entire receivables are classified as noncurrent
c. Only the portion currently due is classified as current and the balance as
noncurrent
d. The entire receivables are classified as current with disclosure of the amount
not currently due
C
21. Receivables from subsidiaries and affiliates, if significant should be classified
as
a. Current assets
b. Noncurrent assets
c. Either as noncurrent or current depending on the expectation of realizing
them within one year or over one year
d. Intangible assets
C
22. Receivables from officers, directors and employees for goods sold or services
rendered in the ordinary course of business
a. Are considered current if proper control is exercised in granting credit and the
accounts are currently collectible
b. Are not included in trade accounts receivable
c. Are included in current assets even if the receivables are actually loans and
advances and the collection is unlikely within a year
d. Are always classified as noncurrent
A
23. If a company employs the gross method of recording accounts receivable
from customers, then sales discounts taken should be
a. reported as a deduction from sales in the income statement.
b. reported as an item of "other expense" in the income statement.
c. reported as a deduction from accounts receivable in determining the net
realizable value of accounts receivable.
d. reported as sales discounts forfeited in the cost of goods sold section of
the income statement.
A
24. Assuming that the ideal measure of short-term receivables in the balance
sheet is the discounted value of the cash to be received in the future, failure
to follow this practice usually does not make the balance sheet misleading
because
a. most short-term receivables are not interest-bearing.
b. the allowance for uncollectible accounts includes a discount element.
c. the amount of the discount is not material.
d. most receivables can be sold to a bank or factor.
C
25. Installments receivable arising from sales of household appliances should be
classified as
a. Current assets
b. Noncurrent assets
c. Current assets; however, the amount not realizable within one year should be
disclosed, if material
d. None of these
C
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