$$\text{Accounts Receivable} \quad XXX$$ $$\text{Service (or Sales) Revenue} \quad XXX$$

Question 1

Which of the following best describes the core principle of revenue recognition under GAAP?

Accepted Answer

Revenue should be recognized when goods or services are delivered and the entity expects to receive payment.

Question 2

Which is the correct order of the five-step model for recognizing revenue from a contract?

Accepted Answer

Identify contract, identify performance obligations, determine transaction price, allocate transaction price, recognize revenue.

Question 3

A trade discount is best described as:

Accepted Answer

A reduction in the price of a product or service as an incentive to a business customer to buy it.

Question 4

When goods are shipped FOB shipping point, when does the seller recognize revenue?

Accepted Answer

When the goods leave the seller's shipping dock.

Question 5

Which of the following is a way for retailers to speed up cash collections?

Accepted Answer

Accepting credit card and debit card sales.

Question 6

What is a credit memo?

Accepted Answer

A document authorizing a credit to the customer's account receivable on the seller's books.

Question 7

A sales discount stated as 2/10, n/30 means:

Accepted Answer

The buyer receives a 2% discount if payment is made within 10 days; otherwise, the net amount is due in 30 days.

Question 8

Which of the following best describes 'receivables'?

Accepted Answer

Monetary claims against others.

Question 9

What is the journal entry to record the receivable for performing a service on account?

Accepted Answer

$$	ext{Accounts Receivable} \quad XXX$$ 
$$	ext{Service (or Sales) Revenue} \quad XXX$$

Question 10

What is the biggest risk to a company that accepts credit sales?

Accepted Answer

The risk of not collecting some receivables.

Question 11

Which method is best for measuring uncollectible accounts expense (bad debts)?

Accepted Answer

The allowance method.

Question 12

Under the allowance method, a write-off of uncollectibles has what effect on total assets, current asset, net accounts receivable, or net income?

Accepted Answer

No effect.

Question 13

Which of the following is NOT a reason why the direct write-off method is not in compliance with US GAAP?

Accepted Answer

It recognizes revenue before goods are delivered.

Question 14

How is interest on a note receivable calculated?

Accepted Answer

$$	ext{Principal} 	imes 	ext{Interest Rate} 	imes 	ext{Time} = 	ext{Amount of Interest}$$

Question 15

What is the formula to calculate the quick (acid-test) ratio?

Accepted Answer

$$\frac{	ext{Cash} + 	ext{Cash Equivalents} + 	ext{Short-Term Investments} + 	ext{Net Current Receivables}}{	ext{Total Current Liabilities}}$$

Question 16

What does the accounts receivable turnover ratio show?

Accepted Answer

The number of times per year a company completely collects its average accounts receivable.

Question 17

How is the days' sales outstanding (DSO) ratio computed?

Accepted Answer

By dividing 365 by the accounts receivable turnover ratio.

Question 18

In the aging-of-receivables method, individual receivables from specific customers are analyzed based on:

Accepted Answer

How long they have been outstanding.

Question 19

Which two methods are often used together for estimating uncollectible accounts?

Accepted Answer

Percent-of-sales method and aging method.

Chapter 5 – Receivables and Revenue: Comprehensive Study Notes

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