Q: What is the formula for Accounts Receivable Turnover?

$$\frac{\text{Net Sales}}{\text{Average Accounts Receivable}}$$

Question 1

Which of the following best describes the Allowance for Doubtful Accounts (AFDA)?

Accepted Answer

A contra-asset account that reduces the gross amount of accounts receivable to its net realizable value.

Question 2

A company has the following balances at year-end: Accounts Receivable (gross): $$50,000; Allowance for Doubtful Accounts: 2$$,000. What is the net amount reported on the balance sheet for Accounts Receivable?

Accepted Answer

$48,000

Question 3

Which journal entry correctly records the write-off of an uncollectible account under the allowance method?

Accepted Answer

Debit Allowance for Doubtful Accounts; Credit Accounts Receivable

Question 4

If a company underestimates its Allowance for Doubtful Accounts, what is the immediate effect on net income?

Accepted Answer

Net income is overstated.

Question 5

Using the income statement approach, if a company has $$200,000 in credit sales and estimates 2% will be uncollectible, what is the bad debt expense for the period?

$$	ext{Bad Debt Expense} = 2\% 	imes 200,000$

Accepted Answer

$4,000

Question 6

A company’s beginning AFDA is $$1,000. During the year, 300 of $$receivables are written off, and the ending AFDA should be $$1,500. What is the bad debt expense for the year?

$$	ext{Bad Debt Expense} = 	ext{Ending AFDA} - 	ext{Beginning AFDA} + 	ext{Write-offs}$$ 
= 1$$,500 - 1,000 + 300$

Accepted Answer

$800

Question 7

Which of the following is a signal that a company may be recognizing revenue too early?

Accepted Answer

An unusual increase in non-current accounts receivable as a percentage of revenue.

Question 8

What is the formula for Accounts Receivable Turnover?

Accepted Answer

$$\frac{	ext{Net Sales}}{	ext{Average Accounts Receivable}}$$

Question 9

If a company’s Accounts Receivable Turnover decreases over time, what does this most likely indicate?

Accepted Answer

The company is taking longer to collect receivables.

Question 10

A company’s average collection period (DSO) is calculated as:

$$	ext{DSO} = \frac{365}{	ext{Accounts Receivable Turnover}}.

If $$the turnover is 10, what is the DSO?

Accepted Answer

36.5 days

Question 11

Which of the following is NOT a motivation for managers to use earnings management, according to survey evidence?

Accepted Answer

To increase the company’s tax liability

Question 12

Which of the following best describes the difference between Real Earnings Management (REM) and Accrual Earnings Management (AEM)?

Accepted Answer

REM involves changing real business activities, while AEM involves manipulating accruals.

Question 13

If a company continuously overstates its net income by underestimating bad debt expense, what must eventually happen when the error is detected?

Accepted Answer

Net income will decrease in the period the error is detected.

Question 14

A company’s beginning accounts receivable is $$10,000, ending accounts receivable is 14$$,000, and net sales are $$60,000. What is the accounts receivable turnover?

$$	ext{Average A/R} = \frac{10,000 + 14,000}{2}$$ 
$$	ext{A/R Turnover} = \frac{60,000}{	ext{Average A/R}}$

Accepted Answer

4.62

Question 15

Which of the following is true regarding the write-off of a specific account under the allowance method?

Accepted Answer

It does not affect net income or total assets.

Question 16

If a company reinstates an account previously written off and then collects the cash, which sequence of entries is correct?

Accepted Answer

Debit Accounts Receivable, Credit Allowance for Doubtful Accounts; then Debit Cash, Credit Accounts Receivable

Question 17

Which method is more likely to use an aging schedule to estimate the Allowance for Doubtful Accounts?

Accepted Answer

Balance Sheet approach

Question 18

A company’s gross accounts receivable increased significantly while its sales remained flat. What is the most likely effect on the company’s DSO (Days Sales Outstanding)?

Accepted Answer

DSO will increase.

Question 19

Which of the following is a potential consequence of manipulating the Allowance for Doubtful Accounts to manage earnings?

Accepted Answer

It can shift income between periods, misleading stakeholders about the company’s true performance.

Accounts Receivable: Recognition, Measurement, and Earnings Management

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