Multiple Choice Questions
1. If a company uses the direct write-off method of accounting for bad debts,
a. It is applying the matching principle.
b. It will reduce the accounts receivable account at the end of the accounting period for estimated uncollectible accounts.
c. It will report accounts receivable in the balance sheet at their net realizable value.
d. It will record bad debt expense only when an account is determined to be uncollectible.
2. Which of the following best describes the objective of estimating bad debt expense with the percentage of credit sales method?
a. To estimate bad debt expense based on a percentage of credit sales made during the period
b. To estimate the amount of bad debt expense based on an aging of accounts receivable
c. To determine the amount of uncollectible accounts during a given period
d. To facilitate the use of the direct write-off method
3. Which of the following best describes the concept of the aging method of receivables?
a. Accounts receivable should be directly written off when the due date arrives and the customers have not paid the bill.
b. An accurate estimate of bad debt expense may be arrived at by multiplying historical bad debt rates by the amount of credit sales made during a period.
c. Estimating the appropriate balance for the allowance for doubtful accounts results in the appropriate value for net accounts receivable on the balance sheet.
d. The precise amount of bad debt expense may be arrived at by multiplying historical bad debt rates by the amount of credit sales made during a period.
4. The aging method is closely related to the:
a. Balance sheet
b. Statement of retained earnings
c. Statement of cash flows
d. Income statement
5. The percentage of credit sales approach is closely related to the:
a. Balance sheet
b. Statement of retained earnings
c. Statement of cash flows
d. Income statement
6. The process by which firms package factored receivables as financial instruments or securities and sell them to investors is known as:
a. Credit extension
b. Aging of accounts receivable
c. Bundling
d. Securitization
7. Which one of the following statements is true if a company’s collection period for accounts receivable is unacceptably long?
a. The company should expand operations with its excess cash.
b. The company may need to borrow to acquire operating cash.
c. The company may offer trade discounts to lengthen the collection period.
d. Cash flows from operations may be higher than expected for the company’s sales.
8. Zenephia Corp. accepted a nine-month note receivable from a customer on October 1, 2011. If Zenephia has an accounting period which ends on December 31, 2011, when would it most likely recognize interest income from the note?
a. On October 1, 2011
b. On December 31, 2011, only
c. On December 31, 2011, and July 1, 2012
d. On July 1, 2012, only
9. The ‘‘principal’’ of a note receivable refers to:
a. The present value of the note
b. The amount of cash borrowed
c. The financing company that is lending the money
d. The amount of interest due
10 Net profit margin percentage is calculated by:
a. Dividing net income by (net) sales
b. Dividing operating income by (net) sales
c. Subtracting operating income from (net) sales
d. Subtracting net income from (net) sales