Key Terms & Definitions:

Direct Write-off Method and Allowance Method. Which does GAAP require?
Cash Ratio. What does a higher number indicate?
Maturity Value of a Note is..
Acid Test Ratio
Days Sales in Receivables
A/R Turnover Ratio

SAMPLE PROBLEMS:
Chapter 7 Accounting Information Systems

Learning Objective 7-1

An accounting information system (AIS) collects, records, stores, and processes accounting data to
produce information that is useful for decision makers.
Answer: TRUE

An effective accounting information system with adequate internal controls can safeguard a business's
assets and reduce the likelihood of fraud and errors.
Answer: TRUE

An accounting information system has three basic components: source documents and input devices,
processing and storage, and outputs.
Answer: TRUE

Pre-numbered source documents provide necessary control in a system by automatically assigning a

sequential number to each new transaction.
Answer: TRUE

A source document provides the evidence and data for accounting transactions.
Answer: TRUE

Which of the following is true of data processing and storage in a computerized information system?
A) In a computerized accounting information system, processing includes manually journalizing
transactions and posting to the accounts.
B) In a computerized accounting information system, there will be a main centralized computer where
data is stored, which cannot be accessed from any other computers.
C) In both manual and computerized systems, all data are contained in paper documents and are often
stored in filing cabinets and off-site document warehouses.
D) In a computerized accounting information system, companies need to spend large amounts of cash to
ensure that their data and information are secure.
Answer: D
The main computer where data is stored, which can be accessed from many different computers is known
as a(n) ________.
A) internet protocol
B) RAM
C) server
D) router
Answer: C

Which of the following is an example of a storage device in an accounting information system?

A) monitor
B) network
C) printer
D) server
Answer: D

Which of the following is an input device in an accounting information system?

A) keyboard
B) internet protocol
C) printer
D) router
Answer: A

Which of the following is an output device in an accounting information system?

A) keyboard
B) internet protocol
C) printer
D) mouse
Answer: C

Which of the following is true of outputs in an accounting information system?

A) In a manual system, reports and financial statements must be created using Word documents, Excel
spreadsheets, or PowerPoint.
B) In a computerized system, the software can generate reports instantaneously that can never be
manipulated.
C) Examples of outputs in an accounting information system include purchase invoices, bank checks, and
sales invoices.
D) Since the output in an accounting information system are audited and error-free, it provides the
evidence and data for accounting transactions.
Answer: A

Which of the following is true of the comparison between a manual and a computerized accounting
information system?
A) In both manual and computerized systems, reports and financial statements must be created using
Word documents, Excel spreadsheets, or PowerPoint.
B) In a computerized system, the software can generate financial reports instantaneously that can never be
manipulated.
C) In a manual system, data are contained in paper documents that are often stored in filing cabinets and
off-site document warehouses; whereas in a computerized system, data are stored on a main computer
called a server.
D) In both manual and computerized systems, processing data includes manually journalizing
transactions and posting to the accounts.
Answer: C

Learning Objective 7-2

A subsidiary ledger is a record of accounts that provides supporting details on individual balances, the
total of which appears in a general ledger account.
Answer: TRUE

The accounts payable subsidiary ledger lists each vendor along with amounts paid to the vendors and the
remaining amounts owed to them.
Answer: TRUE

The Accounts Receivable balance in the general ledger may or may not equal the sum of the accounts in
the accounts receivable subsidiary ledger.
Answer: FALSE

After posting entries in a sales journal to the general ledger, the Accounts Receivable balance in the
general ledger should equal the sum of the individual customer balances in the accounts receivable
subsidiary ledger.
Answer: TRUE

A special journal is:

A) an accounting journal designed to record a specific type of transaction.
B) an accounting journal that holds individual accounts that support a specific general ledger account.
C) a record of accounts that provides supporting details on individual balances, the total of which
appears in a general ledger account.
D) a created list of the accounts used by a business entity to define each class of items for which cash is
spent or received.
Answer: A

Adjusting entries are recorded in the ________.

A) cash payments journal
B) purchases journal
C) cash receipts journal
D) general journal
Answer: D

A subsidiary ledger is:

A) an accounting journal designed to record a specific type of transaction.
B) a created list of the accounts used by a business entity to define each class of items for which cash is
spent or received.
C) a complete record of business transactions recorded in a ledger over the life of a company.
D) a record of accounts that provide supporting details on individual balances, the total of which appears
in a general ledger account.
Answer: D

Which of the following is true of an accounts payable subsidiary ledger?

A) It does not indicate the amount owed to each vendor.
B) It shows only a single total for the amount owed on account.
C) It lists vendors in alphabetical order, along with amounts paid to the vendors and the remaining
amounts owed to them.
D) Its format is entirely different from an accounts receivable subsidiary ledger.
Answer: C

Which of the following is true of a control account?

A) It is a valuation account from which balances are added to another account.
B) Its balance equals the sum of the balances in a group of related accounts in a subsidiary ledger.
C) It is equivalent to a contra account and represents the offsetting nature of debits and credits on a firm's
financial statements.
D) It holds individual accounts that support a general ledger account.
Answer: B

Which of the following is true of an accounts receivable subsidiary ledger?

A) It does not include a receivable account for each customer, but includes a cumulative account for all
customers.
B) It contains information about the amount each customer purchased on credit, but excludes the
customer name.
C) The total of the accounts in the accounts receivable subsidiary ledger must equal the accounts
receivable balance in the general ledger.
D) Companies keep an accounts payable subsidiary ledger that is entirely different than the accounts
receivable subsidiary ledger.
Answer: C

Assume that a company has only four customers: A, B, C, and D. The accounts receivable balance in the
general ledger is $7,983 and the accounts receivable subsidiary ledger of customers A, C, and D have
$1,246, $2,596 and $3,240 respectively. Calculate the amount in the accounts receivable subsidiary ledger
account of customer B.
A) $7,082
B) $2,147
C) $1,391
D) $901
Answer: D
Explanation: D) The accounts receivable balance of $7,983 in the general ledger equals the sum of the
accounts in the accounts receivable subsidiary ledger ($1,246 + $2,596 + ? + $3,240). Therefore, the amount
in the accounts receivable subsidiary ledger account of customer B = $7,983 - ($1,246 + $2,596 + $3,240) =
$901
A company has four vendors and the accounts payable subsidiary ledger shows the following balances.

Alpha $275,821
Beta 143,474
Gamma 78,943
Delta 34,187

Calculate the accounts payable balance in the general ledger.

A) $419,295
B) $532,425
C) $275,821
D) $256,604
Answer: B

Which of the following is true of a sales journal?

A) It is a special journal used to record all the cash sales.
B) It is used to record the sales of capital assets, such as buildings.
C) It is a special journal used to record credit sales.
D) It is a general journal that is used to record the adjustments in revenue account.
Answer: C

Tangent Corporation sold a product for $7,150 to Michael on credit. The cost of goods sold is
$5,650.Assuming that the firm is following a perpetual inventory system and using a sales journal, it will
record $5,650 in the:
A) Accounts Receivable DR, Sales Revenue CR column.
B) Cost of Goods Sold DR, Merchandise Inventory CR column.
C) Merchandise Inventory DR, Cost of Goods Sold CR column.
D) Sales Revenue DR, Accounts Receivable CR column.
Answer: B

Which of the following is true of a sales journal prepared under the perpetual inventory system?
A) It includes a Cost of Goods Sold DR, Merchandise Inventory CR column.
B) It records both cash and credit sales transactions.
C) All transactions recorded in a sales journal are also entered in the general journal.
D) It cannot be used with a perpetual inventory system.
Answer: A

If a business uses the periodic inventory system, the sales journal:

A) will record both the cash and credit sales.
B) will include a Purchase DR and Account Receivable CR column.
C) will exclude the Accounts Receivable DR and Sales Revenue CR column.
D) will not include the Cost of Goods Sold DR and Merchandise Inventory CR column.
Answer: D
Deal Corporation sells a product for $500 on account to Liza. This transaction will be recorded in the:
A) cash payments journal.
B) sales journal.
C) cash receipts journal.
D) purchase journal.
Answer: B

Tangent Corporation makes a $1,200 purchase of merchandise inventory on account. This transaction will
be recorded in the:
A) cash payments journal.
B) sales journal.
C) cash receipts journal.
D) purchases journal.
Answer: D

Deal Corporation sells a product for $500 cash to Liza. This transaction will be recorded in the:
A) cash payments journal.
B) sales journal.
C) cash receipts journal.
D) purchase journal.
Answer: C

Depreciation of fixed assets is recorded in a:

A) cash payments journal.
B) sales journal.
C) cash receipts journal.
D) general journal.
Answer: D

Learning Objective 7-3

The purchases journal is a special journal used to record all purchases of merchandise inventory, office
supplies, and other assets on account.
Answer: TRUE

When recording in a purchases journal with a periodic inventory system, the Merchandise Inventory DR
column would be replaced with a column titled Cost of Goods Sold DR.
Answer: FALSE

Credit purchases are recorded in the purchases journal.

Answer: TRUE

The Other Accounts DR columns of a purchases journal are used for recording merchandise inventory
and office supplies.
Answer: FALSE
Which of the following is a column of a purchases journal?
A) Cost of Goods Sold CR
B) Accounts Payable CR
C) Sales Revenue DR
D) Interest Revenue CR
Answer: B

The purchases journal of a business that uses periodic inventory system will include a column titled:
A) Cost of Goods Sold DR.
B) Purchases DR.
C) Accounts Payable DR.
D) Merchandise Inventory DR.
Answer: B

Cash purchases are generally recorded in the:

A) sales journal.
B) cash receipts journal.
C) cash payments journal.
D) purchases journal.
Answer: C

On July 4, a hardware manufacturing firm purchased inventory on account for $1,300. The company plans
to pay $700 in the next week and the remaining in the week after. Which of the following is the correct
entry to record this transaction in a purchases journal? Assume a perpetual inventory system is used.
A) $650 will be recorded in the Accounts Payable CR and Merchandise Inventory CR column.
B) $2,000 will be recorded in the Accounts Payable DR and Merchandise Inventory DR column.
C) $1,300 will be recorded in the Merchandise Inventory CR and Accounts Payable DR column.
D) $1,300 will be recorded in the Accounts Payable CR and Merchandise Inventory DR column.
Answer: D

On April 1, a hardware manufacturing firm purchases inventory on account for $700. Which of the
following correctly describes the effect of this transaction? Assume a perpetual inventory system is used.
A) Merchandise Inventory decreases by $700 and Accounts Receivable decreases by $700.
B) Merchandise Inventory decreases by $700 and Accounts Receivable increases by $700.
C) Merchandise Inventory increases by $700 and Accounts Payable decreases by $700.
D) Merchandise Inventory increases by $700 and Accounts Payable increases by $700.
Answer: D

Which of the following is true of posting entries from a purchases journal to the general ledger?
A) The posting references are not mentioned in the subsidiary ledger.
B) The Accounts Payable balance in the general ledger should be less than the sum of the individual
vendor balances in the subsidiary ledger.
C) The amounts in the Other Accounts DR column are posted individually to the specific accounts.
D) It is done on a daily basis for all the accounts.
Answer: C

On May 4, a retail firm pays a rent of $1,500 for the month of April. Which of the following is true when
this transaction is recorded in a cash payment journal?
A) Both assets and equity will increase by $1,500.
B) Both assets and liabilities will decrease by $1,500.
C) Both assets and equity will decrease by $1,500.
D) Both liabilities and equity will increase by $1,500.
Answer: C

Which of the following is true of posting entries from a cash payment journal to a general ledger?
A) Entries in the cash payments journal are posted monthly to the accounts payable subsidiary ledger and
daily to the general ledger.
B) The postings of accounts payable are credits and increase the balance in the individual accounts
payable account.
C) After posting, a check mark is entered in the cash payments journal and the posting reference is
printed in the subsidiary ledger.
D) At the end of the month, each column is totaled and the totals, including the Other Accounts DR
column, are posted to the specific general ledger accounts.
Answer: C

When using a manual accounting information system, which of the following will be recorded in the
general journal?
A) depreciation on equipment
B) payment of accounts payable
C) purchase of merchandise inventory on account
D) receipt of cash from a debtor
Answer: A
 If there is no cash involved in a particular business transaction then the transaction should be recorded
in:
A) either cash receipts journal or general journal.
B) either sales journal or purchases journal.
C) only general journal.
D) sales journal, purchases journal, or general journal.
Answer: D

If there is cash involved in a particular business transaction then the transaction should be recorded in
either:
A) cash payments journal or cash receipts journal.
B) cash payments journal or general journal.
C) cash payments journal or cash receipts journal and in general journal.
D) sales journal or purchases journal.
Answer: A

Learning Objective 7-4

Enterprise resource planning (ERP) systems are software systems that can integrate all of a company's
functions, departments, and data into a single system.
Answer: TRUE

In a computerized accounting information system, the business does not have to record the transaction in
debit and credit format.
Answer: TRUE

In a networked system, the server stores the program and the data.
Answer: TRUE

An enterprise resource planning (ERP) system is a:

A) hardware system that controls the access of employees to different levels of production in a firm.
B) software system used by small companies to record revenue and expenses.
C) hardware system of electronic linkages that allows different computers to share the same information.
D) software system that can integrate all of a company's functions, departments, and data into a single
system.
Answer: D

Which of the following is an advantage of an enterprise resource planning (ERP) system?

A) It is inexpensive to implement.
B) It does not provide financial benefits to both small and large corporations.
C) It replaces separate software systems, such as sales and payroll.
D) Its implementation requires a little commitment of time and people.
Answer: C
BM Corporation makes a sale for cash to Roger. In which of the following functions of QuickBooks will
this transaction be recorded?
A) Pay Bills
B) Enter Bills
C) Invoices
D) Receive Payments
Answer: D

BM Corporation makes a sale on account to Roger. In which of the following functions of QuickBooks will
this transaction be recorded?
A) Pay Bills
B) Enter Bills
C) Invoices
D) Receive Payments
Answer: C

Mercury Corporation receives a landscaping bill on January 15 and is required to pay it before February
15. In which of the following functions of QuickBooks will this transaction be recorded on the date of
receipt of the bill?
A) Pay Bills
B) Enter Bills
C) Invoices
D) Receive Payments
Answer: B

Mercury Corporation receives a landscaping bill on January 15 and is required to pay it before February
15. In which of the following functions of QuickBooks will this transaction be recorded on the date of
payment of the bill?
A) Receive Payments
B) Enter Bills
C) Invoices
D) Pay Bills
Answer: D

Chapter 8 Internal Control and Cash

Learning Objective 8-1

Sarbanes-Oxley Act requires all the private companies in the U.S. to maintain an internal control system.
Answer: FALSE

Under the Sarbanes-Oxley Act, accounting firms are allowed to audit a public company and provide
certain consulting services for the same client.
Answer: FALSE

Separation of duties is a part of the definition of internal control.

Answer: FALSE

Internal auditors monitor company controls to safeguard assets and ensure that employees are following
company policies.
Answer: TRUE

External auditors evaluate company controls to ensure the financial statements are presented fairly in
accordance with Generally Accepted Accounting Principles.
Answer: TRUE

The Sarbanes-Oxley Act was passed by the Public Company Accounting Oversight Board.
Answer: FALSE

Separating the custody of assets from accounting implies that the accountants must not handle cash, and
the cashier must not have access to the accounting records.
Answer: TRUE

Which of the following is true of internal control?

A) A company's outside auditor is responsible for the company's internal control system.
B) One of the major purposes of internal control is to ensure that the assets are safeguarded.
C) Internal control procedures tend to diminish the importance of operational efficiency.
D) Internal controls are mainly used to ensure timely payment of liabilities.
Answer: B

Which of the following is one of the purposes of internal control?

A) to encourage employees to follow company policy
B) to ensure timely payment of Accounts Payables
C) to ensure timely collection of Accounts Receivable
D) to guarantee that a business makes a profit
Answer: A

Which of the following is representative of safeguarding assets?

A) keeping office supplies under lock and key
B) reducing expense to increase operating profit
C) increasing operating profit to increase net income
D) ensuring maximum use of resources
Answer: A

Which of the following is one of the benefits provided by internal control?

A) ensures timely collection of Accounts Receivables
B) ensures that financial statements are produced timely
C) guarantees that a business makes profit
D) promotes operational efficiency
Answer: D

Which of the following is a key element of good internal control?

A) having latest version of information system installed
B) having audits at periodic intervals
C) having a good working environment for employees
D) allowing no vacations and job rotations
Answer: B

Which of the following describes "firewall"?

A) a malicious program that enters program code or destroys data without authorization
B) when two or more people cooperate together to defraud a company
C) a technique for protecting data
D) when a company defrauds its suppliers by making false claims
Answer: C

Which of the following describes the control environment?

A) Internal auditors monitor company controls to safeguard assets, and external auditors monitor the
controls to ensure that the accounting records are accurate.
B) The control environment is the "tone at the top" of the business.
C) The control environment is designed to ensure that the business earns profit.
D) A company must identify its risks.
Answer: B

Which of the following describes the internal control component "risk assessment?"
A) Internal auditors monitor company controls to safeguard assets, and external auditors monitor the
controls to ensure that the accounting records are accurate.
B) Risk assessment is the "tone at the top" of the business.
C) A company must identify its risks and take necessary steps to minimize it.
D) Risk assessment is designed to ensure that the business's goals are achieved.
Answer: C

In the following situation, which internal control procedure needs strengthening?

At Syria Services, the junior accountant collects checks and cash from customers and records the
transactions into the journal. The controller approves the journal entries and bank reconciliations. The
treasurer signs checks and approves contracts.
A) assignment of responsibilities
B) competent, reliable, and ethical personnel
C) separation of duties
D) documents
Answer: C
 In the following situation, which internal control procedure needs strengthening?
Santhom Inc. does not have a separate accounting department. Its operating departments are also
responsible for recording transactions in the books of accounts of the company apart from their main
operations.
A) assignment of responsibilities
B) competent, reliable, and ethical personnel
C) separation of duties
D) documents
Answer: C

A pharmaceutical company testing drugs to determine possible side effects is a part of:
A) monitoring controls.
B) information systems.
C) control procedures.
D) risk assessment.
Answer: D

Which of the following is a problem that must be addressed in the internal controls for e-commerce?
A) encryption
B) firewall
C) phishing expeditions
D) separation of duties
Answer: C

A(n) ________ is a security procedure designed for e-commerce.

A) burglar alarm
B) firewall
C) fireproof vault
D) inventory storage
Answer: B

Two or more people working together to circumvent internal controls and defraud a company is known
as:
A) encryption.
B) firewalls.
C) collusion.
D) separation of duties.
Answer: C

Learning Objective 8-2

A point-of-sale terminal provides control over cash receipts over the counter.
Answer: TRUE

As a part of the internal control over cash receipts by mail, the mailroom sends both the customer checks
and the remittance advices to the accounting department.
Answer: FALSE

Regarding controls over cash receipts by mail, the bank deposit slip should be compared to the remittance
advices by the accounting department.
Answer: FALSE

For strong controls over cash receipts, the checks to be deposited should be sent to the treasurer, and the
remittance advices should be sent to the accounting department.
Answer: TRUE

As long as the same person deposits customer checks and records the deposits into the journal, there will
be good internal control over cash receipts.
Answer: FALSE

A basic principle of internal control over cash receipts is that the deposit of the cash and the recording of
the receipts into the journal should be separated.
Answer: TRUE

Which of the following is the last step in the daily control over cash receipts by mail?
A) A mailroom employee sends all customer checks to the treasurer who has the cashier make the bank
deposit.
B) The controller opens the mail and sends the remittance advices to the accounting department.
C) The controller compares the records of the day's bank deposit amount from the treasurer and the debit
to cash from the accounting department.
D) The accounting department prepares journal entries to cash and the customers' accounts.
Answer: C

Which of the following is described as a system where customers send their checks directly to a post office
box that belongs to a bank?
A) an encryption system
B) an imprest system
C) a lock-box system
D) a firewall system
Answer: C

In a large company, the person who is responsible for comparing cash and the bank balance is the:
A) CEO.
B) CFO.
C) controller.
D) treasurer.
Answer: C

Learning Objective 8-3

Before signing a check, the controller or the treasurer should examine the purchase order, the invoice,
and the receiving report to determine that the company received the goods and that the company is
paying only for the goods received.
Answer: TRUE

A receiving report should be matched with the supplier invoice before a payment to the supplier is
approved.
Answer: TRUE

For good controls over cash payments, the company officer approving a payment voucher should be the
same as the person who ordered the goods, to ensure that the correct amount of cash is paid.
Answer: FALSE

Which of the following is the first step in the purchasing and payment process?
A) The supplier ships the goods and sends an invoice to the purchaser.
B) The purchaser sends a check to the supplier.
C) The purchaser sends a purchase order to the supplier.
D) The purchase receives the inventory and prepares a receiving report.
Answer: C

Which of the following items must be examined by the controller or treasurer before signing a check?
A) the ledger
B) the purchase order
C) the confirmation report
D) the journal entry
Answer: B

Which of the following statements describes a purchase order?

A) It is an order to purchase goods from a supplier.
B) It is a statement from the supplier showing the goods purchased and the amount due.
C) It is a report showing that the goods have been received in good condition, as ordered.
D) It is a document authorizing a payment to a supplier.
Answer: A

Which of the following statements describes an invoice from a supplier?

A) It is an order to purchase goods from a supplier.
B) It is a statement from the supplier showing the goods purchased and the amount due.
C) It is a report showing that the goods have been received in good condition, as ordered.
D) It is a document authorizing a payment to a supplier.
Answer: B

Which of the following statements describes a receiving report?

A) It is an order to purchase goods from a supplier.
B) It is a statement from the supplier showing the goods purchased and the amount due.
C) It is a report showing that the goods have been received in good condition, as ordered.
D) It is a document authorizing a payment to a supplier.
Answer: C
 In a good internal control system, which of the following documents are required for proper approval of
a payment to a supplier?
A) a journal entry, a supplier invoice, and a description of the goods being purchased
B) a receiving report, an invoice, and a purchase order
C) a purchase order, a journal entry, and a price catalog
D) a supplier invoice, a bill of lading, and the supplier's financial statements
Answer: B

A document authorizing a cash payment is a(n):

A) check.
B) invoice.
C) voucher.
D) bill of lading.
Answer: C

Learning Objective 8-4

Cash in the bank is more liquid than a petty cash fund.
Answer: FALSE

Petty cash is a fund containing a small amount of cash that is used to pay for minor expenditures.
Answer: TRUE

The journal entry to replenish a petty cash fund includes a debit to the Petty Cash account and a credit to
the Expense account.
Answer: FALSE

The journal entry to open a new petty cash fund includes a debit to the Petty Cash account and a credit to
the Cash account.
Answer: TRUE

A key to strong control over petty cash is to ensure that several persons serve as custodian at one time.
Answer: FALSE
Diff: 1
LO: 8-4
AACSB: Concept
AICPA Functional: Measurement

An imprest system is a way to account for petty cash by maintaining a constant balance in the petty cash
account, supported by the fund, cash plus payment tickets, totaling the same amount.
Answer: TRUE

Which is the most liquid form of assets?

A) Cash
B) Accounts Receivable
C) Inventory
D) Supplies
Answer: A
A company has a petty cash fund amount of $300. When replenished, it has petty cash receipts of $30 for
gas expense, $32 for postage expense, $16 for supplies expense and $10 for miscellaneous expenses.
Assume the cash balance is not over or short. In the journal entry, Cash would be credited with:
A) $88
B) $72
C) $62
D) $78
Answer: A
Explanation: A) Amount of cash spent = $30 + $32 + $16 + $10 = $88

The petty cash fund had an initial imprest balance of $200. It currently has $17 in cash, $3 in
miscellaneous cash receipts and an additional $180 in specific cash receipts. The debit to Cash Short &
Over would be:
A) $0.
B) $17.
C) $180.
D) $183.
Answer: A
Explanation: A) Cash short & over = $200 - $17 - $3 - $180 = 0

Which of the following would be included in the entry to record the replenishment of a petty cash fund?
A) a credit to Petty cash
B) a debit to Accounts Receivable
C) a credit to Cash
D) a credit to various expenses and assets
Answer: C

A petty cash fund was established with a $350 balance. It currently has cash of $41 and petty cash tickets
totaling $309. Which of the following would be included in the entry to replenish the fund?
A) a credit to Petty Cash for $309
B) a debit to Petty Cash for $41
C) a credit to Cash for $41
D) debits to various expenses for $309
Answer: D
Explanation: D) Calculations: $350 - $41 = $309

A petty cash fund was established with a $350 balance. It currently has cash of $41 and petty cash tickets
totaling $309. Which of the following would be included in the entry to replenish the fund?
A) a credit to Petty Cash for $309
B) a debit to Petty Cash for $41
C) a credit to Cash for $41
D) a credit to Cash for $309
Answer: D
Explanation: D) Calculations: $350 - $41 = $309

Petty cash is accounted for by maintaining a constant balance in the petty cash account, supported by the
fund, cash plus payment tickets, totaling the same amount. Such a system is known as the:
A) control system.
B) voucher system.
C) balanced system.
D) imprest system.
Answer: D

A petty cash fund was established with a $500 balance. It currently has cash of $20 and petty cash tickets
as shown below.

Travel expense $130

Office supplies expense 300
Equipment rental expense 50

Which of the following would be the journal entry to replenish the Petty Cash account?
A) debit various expenses $480; credit Cash $480
B) debit various expenses $480; credit Petty Cash $480
C) debit Cash $20; credit various expenses $20
D) credit Petty Cash $480; debit Cash $480
Answer: A
Explanation: A) Calculations: $500 - $20 = $480

A petty cash fund was established with a $500 balance. It currently has cash of $19 and petty cash tickets
as shown below.

Travel expense $110

Office supplies $290
Equipment rental expense $80

Which of the following would be the journal entry to replenish the Petty Cash account?
A) debit to Cash Short & Over for $1
B) credit Cash Short & Over for $1
C) debit Petty Cash $1
D) credit Petty Cash $1
Answer: A
Explanation: A) Calculations: $500 - $110 - $290 - $80 - $19 = $1
A petty cash fund was established with a $600 balance. It currently has cash of $25 and petty cash tickets
as shown below.

Travel expense $130

Office supplies $305
Equipment rental expense $85

Which of the following would be the journal entry to replenish the Petty Cash account?
A) Debit to Cash Short & Over for $55
B) Credit Cash Short & Over for $55
C) Debit Petty Cash $55
D) Credit Petty Cash $55
Answer: A
Explanation: A) Cash short & over = $600 - $130 - $305 - $85 - $25 = $55

A petty cash fund was established with a $250 balance. It currently has cash of $38 and petty cash tickets
totaling $212 for travel expense. Provide the journal entry to record the replenishment of the fund.
Answer:
Travel expense 212
Cash 212

A petty cash fund was established with a $299 balance. It currently has cash of $76 and petty cash tickets
totaling $222 for travel expense. Provide the journal entry to record the replenishment of the fund.
Answer:
Travel Expense 222
Cash Short & Over 1
Cash 223

Learning Objective 8-5

The cash balance in a company's general ledger and the bank's balance on the bank statement will always
be the same.
Answer: FALSE

All items on the book side of the bank reconciliation require journal entries.
Answer: TRUE
Bank errors are posting errors made by the bank that either incorrectly increase or decrease the bank
balance.
Answer: TRUE

On a bank reconciliation, deposits in transit are added on the bank side of the reconciliation.
Answer: TRUE

If the bank reconciliation includes a bank service charge, a journal entry is required, which debits Bank
Expense and credits Cash.
Answer: TRUE

If the bank reconciliation includes a deposit in transit, a journal entry is required which includes a debit
to cash.
Answer: FALSE

Journal entries are required if the bank reconciliation includes a book error.
Answer: TRUE

Journal entries that are necessitated by reconciling items on the book side of the reconciliation include
either a debit to Cash or a credit to Cash.
Answer: TRUE

Which of the following is true of the bank reconciliation?

A) It should not be prepared by an employee who handles cash transactions.
B) It is prepared in place of the cash ledger.
C) It is a financial statement.
D) It guarantees that no errors have been made.
Answer: A

A check for which a maker's bank account has inadequate money to pay the check is known as:
A) a nonsufficient funds check.
B) an outstanding check.
C) a restrictive check.
D) a canceled check.
Answer: A
The following information is available for Jack's Unlimited Company for the current month.

Book balance end of the month $6,875

Outstanding checks 655
Deposits in transit 3,500
Service charges 85
Interest revenue 35

What is the adjusted book balance on the bank reconciliation?

A) $9,600
B) $7,480
C) $6,755
D) $6,825
Answer: D
Explanation: D) Book balance = $6,875 - $85 + $35 = $6,825

A company received a bank statement showing a balance of $75,100. Reconciling items included
outstanding checks of $2,250, and a deposit in transit of $9,500. What is the company's adjusted bank
balance?
A) $63,350
B) $67,850
C) $82,350
D) $65,600
Answer: C
Explanation: C) Adjusted bank balance = $75,100 + $9,500 - $2,250 = $82,350

A company received a bank statement with a balance of $6,350. Reconciling items included a bookkeeper
error of $300a $300 check recorded as $600two outstanding checks totaling $820, a service charge of
$25, a deposit in transit of $280, and interest revenue of $21. What is the adjusted bank balance?
A) $5,636
B) $5,610
C) $5,016
D) $5,810
Answer: D
Explanation: D) Adjusted bank balance = $6,350 - $820 + $280 = $5,810

A company's cash ledger shows an ending balance of $4,000. Reconciling items included a bookkeeper
error of $100 (a $500 check recorded as $600), two outstanding checks totaling $820, a service charge of
$25, a deposit in transit of $280, and interest revenue of $31. What is the adjusted book balance?
A) $3,894
B) $3,460
C) $4,106
D) $4,540
Answer: C
Explanation: C) Adjusted book balance = $4,000 + $100 - $25 + $31 = $4,106
 Which of the following items would require an adjusting entry after preparation of the bank
reconciliation?
A) errors made by the bank revealed by the bank reconciliation
B) all items on the bank's side
C) errors made on the books revealed by the bank reconciliation
D) outstanding checks
Answer: C

In reconciling a bank statement, the bank balance is $1,500 and the checkbook balance is $2,105. Which of
the following is the most probable reason for the checkbook balance being larger than the bank balance?
A) The bank has not cleared certain outstanding checks.
B) The bank has added interest revenue to the account balance.
C) A deposit in transit was made at the end of the month.
D) The bank received an EFT from a customer.
Answer: C

In reconciling a bank statement, the bank balance is $2,100 and the checkbook balance is $2,001. Which of
the following is the most probable reason for the bank balance being larger than the book balance?
A) There are outstanding checks.
B) The bank has deducted certain amounts for bank service charges.
C) A deposit in transit was made at the end of the month.
D) The company erroneously recorded a check for an amount less than actual.
Answer: A

A check was written by a business for $549, but was recorded erroneously in the cash ledger as $459. How
would this error be included on the bank reconciliation?
A) an addition on the book side
B) a deduction on the bank side
C) a deduction on the book side
D) an addition on the bank side
Answer: C

The following information is available for Jade Company for the month ending June 30, 2014.
Balance as per the bank statement is $11,240.
Balance as per books is $10,200.
Check #506 for $1,200 and check #510 for $900 were not shown on the June 30, bank statement.
A deposit in transit of $3,110 had not been received by the bank when the bank statement was
generated.
A bank debit memo indicated an NSF check for $85 written by Jane Smith to Jade Company on June 13.
A bank credit memo indicated a note collected by the bank of $2,100 and interest revenue of $55 on
June 20.
The bank statement indicated service charges of $20.
What is the adjusted book balance?
A) $12,740
B) $12,250
C) $8,150
D) $8,200
Answer: B
Explanation: B) Adjusted book balance = $10,200 + $2,100 + $55. - $85 - $20 = $12,250

Journal entries are required for the reconciling items on the book side because:
A) those transactions have not yet been recorded by the bank.
B) the adjusted balances on both sides are the same amounts.
C) the amounts are immaterial.
D) those transactions have not yet been recorded on the company books.
Answer: D

The bookkeeper of Fire Steel Inc. recorded a $1,524.00 check as $15,240 in payment of the current month's
rent. Which of the following journal entries is needed to adjust for this error in the books of the company?
A)
Cash 13,716
Sales Revenue 13,716

B)
Rent Expense 15,240
Cash 15,240

C)
Cash 13,716
Rent Expense 13,716

D)
Booking Error 1,524
Cash 1,524

Answer: C
A customer's check for $1,280 was returned for nonsufficient funds. Which of the following journal entries
is needed to adjust for the NSF check?
A)
Accounts receivable 1,280
Cash 1,280

B)
Cash 1,280
Sales revenue 1,280

C)
NSF check 1,280
Cash 1,280

D)
Accounts payable 1,280
Cash 1,280

Answer: A

The following information is needed to reconcile the cash balance for Fire Steel Inc.
A deposit of $5,800 is in transit.
Outstanding checks total $1,500.
The book balance is $6,800 at February 28, 2013.
The bookkeeper recorded a $1,740 check as $17,400 in payment of the current month's rent.
The bank balance at February 28, 2013 was $18,000.
A deposit of $400 was credited by the bank for $4,000.
A customer's check for $3,700 was returned for nonsufficient funds.
The bank service charge is $60.
What was the adjusted book balance?
A) $18,720
B) $18,060
C) $18,700
D) $18,820
Answer: C
Explanation: C) Adjusted book balance = $6,800 + $15,660 - $3,700 - $60 = $18,700
The following information is needed to reconcile the cash balance for Fire Steel Inc.
A deposit of $5,800 is in transit.
Outstanding checks total $1,500.
The book balance is $6,800 at February 28, 2013.
The bookkeeper recorded a $1,740 check as $17,400 in payment of the current month's rent.
The bank balance at February 28, 2013 was $18,000.
A deposit of $400 was credited by the bank for $4,000.
A customer's check for $3,700 was returned for nonsufficient funds.
The bank service charge is $60.
What was the adjusted bank balance?
A) $18,720
B) $18,700
C) $18,820
D) $18,060
Answer: B
Explanation: B) Adjusted book balance = $18,000 + $5,800 - $1,500 - $3,600 = $18,700

Which of the following items are reconciling items on the bank side of the reconciliation?
A) outstanding checks and correction of book error
B) deposit in transit and NSF check
C) deposit in transit and outstanding checks
D) bank service charge and correction of book error
Answer: C

Which of the following items are reconciling items on the book side of the reconciliation?
A) outstanding checks and correction of book error
B) deposit in transit and NSF check
C) bank service charge and outstanding checks
D) bank service charge and correction of book error
Answer: D
The following information is needed to reconcile the cash balance for Fire Steel Inc.
A deposit of $5,800 is in transit.
Outstanding checks total $1,500.
The book balance is $6,800 at February 28, 2013.
The bookkeeper recorded a $1,740 check as $17,400 in payment of the current month's rent.
The bank balance at February 28, 2013 was $18,000.
A deposit of $400 was credited by the bank for $4,000.
A customer's check for $3,700 was returned for nonsufficient funds.
The bank service charge is $60.
Based on this information, prepare a bank reconciliation for Fire Steel Inc. as of February 28, 2013.
Answer:
Bank Book
Balance, February 28, 2013 $18,000 Balance, February 28,2013 $6,800
Add: Add:
Deposit in transit 5,800 Correction of book error 15,660
Less: Less:
Outstanding checks 1,500 NSF check 3,700
Correction of bank error 3,600 Bank service charge 60

Adjusted balance Feb. 28, 2013 $18,700 Adjusted balance Feb. 28, 2013 $18,700
Diff: 3
The following information is available for Jade Company for the month ending June 30, 2014.
Balance as per the bank statement is $11,240.
Balance as per books is $10,200.
Check #506 for $1,200 and check #510 for $900 were not shown on the June 30, bank statement.
A deposit in transit of $3,110 had not been received by the bank when the bank statement was
generated.
A bank debit memo indicated an NSF check for $85 written by Jane Smith to Jade Company on June
13.
A bank credit memo indicated a note collected by the bank of $2,100 and interest revenue of $55 on
June 20.
The bank statement indicated service charges of $20.
Prepare bank reconciliation for Jade Company for June 30, 2014.
Answer:
Bank Book
Balance, June 30, 2014 $11,240 Balance, June 30, 2014 $10,200
Add: Add:
Deposit in transit 3,110 Note collected by bank 2,100
Interest revenue 55
Less: Less:
Outstanding checks #506 1,200 NSF check 85
Outstanding checks #510 900 Bank service charge 20
______ _______
Adjusted balance, June 30, 2014 $12,250 Adjusted balance, June 30, 2014 $12,250
Refer to the following bank reconciliation:

Bank Book
Balance, June 30, 2014 $11,240.00 Balance, June 30, 2014 $10,200.00
Add: Add:
Deposit in transit 3,110.00 Note collected by bank 2,100.00
Interest revenue 55.00
Less: Less:
Outstanding checks #506 1,200.00 NSF check 85.00
Outstanding checks #510 900.00 Bank service charge 20.00
_________ ________
Adjusted balance, June 30, 2014 $12,250.00 Adjusted balance, June 30, 2014 $12,250.00

Journalize the adjusting entry for the second reconciling item: interest revenue.
Answer:
Cash 55
Interest Revenue 55
Refer to the following bank reconciliation:

Bank Book
Balance, June 30, 2014 $11,240.00 Balance, June 30, 2014 $10,200.00
Add: Add:
Deposit in transit 3,110.00 Note collected by bank 2,100.00
Interest revenue 55.00
Less: Less:
Outstanding checks #506 1,200.00 NSF check 85.00
Outstanding checks #510 900.00 Bank service charge 20.00
_________ _________
Adjusted balance, June 30, 2014 $12,250.00 Adjusted balance, June 30, 2014 $12,250.00

Journalize the adjusting entry for the third reconciling item: NSF check.
Answer:
Accounts Receivable 85
Cash 85

Refer to the following bank reconciliation:

Bank Book
Balance, June 30, 2014 $11,240.00 Balance, June 30, 2014 $10,200.00
Add: Add:
Deposit in transit 3,110.00 Note collected by bank 2,100.00
Interest revenue 55.00
Less: Less:
Outstanding checks #506 1,200.00 NSF check 85.00
Outstanding checks #510 900.00 Bank service charge 20.00
_________ _________
Adjusted balance, June 30, 2014 $12,250.00 Adjusted balance, June 30, 2014 $12,250.00

Journalize the adjusting entry for the fourth reconciling item: bank service charge.
Answer:
Bank Expense 20
Cash 20
Learning Objective 8-6

Having a cash ratio below 1 is a good thing.

Answer: TRUE

Cash is a highly liquid asset, but cash equivalents are not highly liquid assets.
Answer: FALSE

Cash and cash equivalents are divided by ________ to determine the cash ratio.
A) total current liabilities
B) fixed assets
C) equity
D) total long-term liabilities
Answer: A

The ________ helps to determine a company's ability to meet its short-term obligations from cash and
cash equivalents.
A) accounts receivable turnover
B) cash ratio
C) gross profit
D) debt equity ratio
Answer: B

The Fingertips Company had the following financial data for the year ended December 31, 2015:

Cash $45,000
Cash equivalents 80,000
Long term investments 60,000
Total current liabilities 150,000

What is the cash ratio as of December 31, 2015, for Fingertips Company?
A) 0.30
B) 0.40
C) 0.53
D) 0.83
Answer: D
Explanation: D) Cash Ratio = (Cash + Cash Equivalents) / Total Current Liabilities
Cash Ratio = ($45,000 + $80,000) / $150,000
Cash Ratio = 0.83
The cash ratios of four companies are listed below.

COMPANY CASH RATIO

Juan Corp. 0.26
Rose Inc. 0.15
Freelance Inc. 0.18
Pioneer Corp. 0.27

Which company has the maximum ability to repay its short-term debts?
A) Juan Corp.
B) Rose Inc.
C) Freelance Inc.
D) Pioneer Corp.
Answer: D

A company has the cash ratio of 2.3. What does this imply?
A) The company has an unnecessarily large amount of cash supply.
B) The company does not have enough cash supply.
C) The company is not in a position to pay off its long term liabilities.
D) The company is not in a position to pay off its current liabilities.
Answer: A

The data of Franklin Brothers Corp. for two years are given below:

2014 2015
Cash and cash equivalents $5,400 $12,500
Total current liabilities 24,000 30,000

Based on the above information, which of the following statements is true?

A) Cash ratio has increased from 0.02 in 2014 to 0.03 in 2015.
B) Cash ratio has increased from 0.05 in 2014 to 0.08 in 2015.
C) Cash ratio has increased from 0.417 in 2014 to 0.225 in 2015.
D) Cash ratio has increased from 0.225 in 2014 to 0.417 in 2015.
Answer: D
Explanation: D) Calculation of cash ratios:
Cash Ratio = (Cash + Cash Equivalent) / Total Current Liabilities
2015: Cash Ratio = $12,500 / $30,000 = 0.417
2014: Cash Ratio = $5,400 / $24,000 = 0.225
A higher cash ratio is usually considered favorable as the company is said to be in a better position to pay
off its current liabilities.
Chapter 9 Receivables
Learning Objective 9-1

The receivables of an organization can be categorized into accounts receivable, notes receivable, and
other receivables.
Answer: TRUE

A company will have receivables whenever it sells goods or services on credit.

Answer: TRUE

Factoring is one of the options available to a business to reduce the risk of uncollectible accounts
receivable.
Answer: TRUE

Which of the following is included in the category of other receivables?

A) interest receivable
B) accounts receivable
C) notes receivable
D) investments
Answer: A

Which of the following statements is true?

A) Accounts receivable are more liquid than cash.
B) Notes receivable are always due in 30 days.
C) Notes receivable are longer in term than accounts receivable.
D) Accounts receivable are liabilities.
Answer: C

Which of the following is an example of exercise of internal control over receivables?

A) separate cash collection and credit allowance duties
B) extend credit only to customers who are most likely to pay
C) pursue collection from customers to maximize cash flow
D) ensure quick recovery of accounts receivable
Answer: A

Tom's Fit Inc. a readymade garment seller accepts payment through credit cards. During the month of
August, the card sales amounted to $12,000. The processor charges a 3% fee. Assume that the processor
nets the deposits. Provide the journal entry for card sales revenue.
Answer:
Cash 11,640
Credit Card Expense 360
Sales Revenue 12,000
Tom's Fit Inc. a readymade garment seller accepts payment through credit cards. During the month of
August, the card sales amounted to $12,000. The processor charges a 3% fee. Assuming that the credit
card processor uses the gross method, provide the journal entries for the receipt of funds and the
collection of fees at the end of the period.
Answer:
Cash 12,000
Sales Revenue 12,000

Credit Card Expense 360

Cash 360

Learning Objective 9-2

The direct write-off method of accounting for uncollectible receivables is primarily used by small, non-
public companies.
Answer: TRUE

The expense associated with the cost of uncollectible accounts receivable is known as bad debts expense.
Answer: TRUE

Companies that follow GAAP are required to use the direct write-off method for uncollectible accounts
receivable.
Answer: FALSE

The direct write-off method is only acceptable for companies that have very few uncollectible receivables.
Answer: TRUE

The direct write-off method for uncollectible accounts violates the matching principle.
Answer: TRUE

The following information is from the records of Armadillo Camera Shop:

Accounts receivable, December 31, 2014 $80,000 (debit)

Net credit sales for 2014 165,000
Accounts written off as uncollectible during 2014 15,000
Cash sales during 2014 40,000

The company uses the direct write-off method for bad debts. What is the amount of bad debts expense?
A) $80,000
B) $40,000
C) $16,800
D) $15,000
Answer: D
Charles and Charms, a merchandiser, has an account receivable for $125 which they now decided to be
uncollectible. The merchandiser uses the direct write-off method. Which of the following entries is
required to record the write-off?
A)
Bad Debts Expense 125
Accounts Receivable 125

B)
Cash 125
Accounts Receivable 125

C)
Allowance for Bad Debts 125
Accounts Receivable 125

D)
Accounts Receivable 125
Bad Debts Expense 125

Answer: A

On January 1, Davidson Services has the following balances:

Davidson has the following transactions during January: Credit sales of $100,000, collections of credit
sales of $85,000, and write-offs of $15,000. Davidson uses the direct write-off method. At the end of
January, the balance in Accounts Receivable is:
A) $16,000.
B) $24,000.
C) $68,000.
D) $28,000.
Answer: B
Explanation: B)
On January 1, Davidson Services has the following balances:

Davidson has the following transactions during January: Credit sales of $100,000, collections of credit
sales of $85,000, and write-offs of $15,000. Davidson uses the direct write-off method. At the end of
January, the balance in Bad Debts Expense is:
A) $16,000.
B) $17,000.
C) $12,000.
D) $15,000.
Answer: D
Explanation: D)

Which of the following statements is true of the direct write-off method?

A) GAAP requires public companies to follow the direct write-off method.
B) It provides better matching of revenues with expenses.
C) It results in more accurate net income than any other method.
D) It is only suitable for small companies that have very few uncollectible receivables.
Answer: D

A company with significant amounts of accounts receivable, experiences uncollectible accounts from
time to time. If the company uses the direct write-off method, the effect of writing off of an uncollectible
receivable will be a(n):
A) reduction in net income.
B) nil on net income.
C) increase in total assets.
D) generation of positive cash flow.
Answer: A
Give the journal entry to record an uncollectible account receivable using the direct write-off method.
Answer:
Bad Debts Expense XX
Accounts Receivable XX

Sun Inc. had completely written off the account of one of its old customers, Brad, in 2014 for $500. On
January 21, 2015, Brad unexpectedly repaid his debt in full. The company uses the direct write-off method
to account for uncollectible receivables. Journalize the entries required for Sun Inc. on January 21, 2015.
Answer:
Accounts Receivable-Brad 500
Bad Debts Expense 500

Cash 500
Accounts Receivable 500

Learning Objective 9-3

A method of accounting for uncollectible receivables in which the company estimates bad debts expense
instead of waiting to see which customers the company will not collect from is known as the allowance
method.
Answer: TRUE

The Allowance for Bad Debts can be calculated as a specific percentage of credit sales and is a contra
account to Accounts Receivable.
Answer: TRUE

The net realizable value of Accounts Receivable is calculated by subtracting Bad Debts Expense from
Accounts Receivable.
Answer: FALSE

The percent-of-sales method computes bad debts expense as a percentage of net cash sales.
Answer: FALSE

The percent-of-receivables method computes bad debts expense as a percentage of accounts receivable.
Answer: FALSE

The aging-of-receivables method is a balance sheet approach of estimating uncollectible accounts.

Answer: TRUE

Which of the following are the two methods of accounting for uncollectible receivables?
A) direct write-off method and liability method
B) asset method and sales method
C) allowance method and liability method
D) allowance method and direct write-off method
Answer: D

Which of the following are two methods of estimating uncollectible receivables?

A) allowance method and amortization method
B) aging-of-accounts-receivable method and percent-of-sales method
C) gross-up method and direct write-off method
D) direct write-off method and percent-of-completion method
Answer: B

The entry to write off an account receivable under the allowance method will:
A) reduce net income.
B) have no effect on net income.
C) increase total assets.
D) increase net income.
Answer: B

The following information is from the records of Armadillo Camera Shop:

Accounts receivable, December 31, 2015 $20,000 (debit)

Allowance for Bad Debts, December 31, 2015
prior to adjustment 600 (debit)
Net credit sales for 2015 95,000
Accounts written off as uncollectible during 2015 350

Bad debts expense is estimated by the aging-of-accounts-receivables method. Management estimates that
$2,850 of accounts receivable will be uncollectible. Calculate the amount of net accounts receivable after
the adjustment for bad debts.
A) $17,750
B) $17,150
C) $16,550
D) $13,000
Answer: B
Explanation: B) $20,000 - $2,850 = $17,150

GAAP requires most companies to use the:

A) direct write-off method to evaluate bad debts.
B) allowance method to evaluate bad debts.
C) amortization method to evaluate bad debts.
D) 360-day method to evaluate bad debts.
Answer: B
 The Allowance for Bad Debts account has a credit balance of $2,000. The company's management
estimates that 2% of net credit sales will be uncollectible for the year 2015. Net credit sales for the year
amounted to $250,000. What will be the amount of Bad Debts Expense reported on the income statement
for 2015?
A) $5,000
B) $3,075
C) $2,875
D) $2,675
Answer: A
Explanation: A)

$250,000 0.02 = $5,000

The Allowance for Bad Debts account has a credit balance of $2,000 before the adjusting entry for bad
debt expense. The company's management estimates that 2% of net credit sales will be uncollectible for
the year 2015. Net credit sales for the year amounted to $250,000. What will be the balance of the
Allowance for Bad Debts reported on the balance sheet at December 31, 2015?
A) $7,275
B) $3,075
C) $7,000
D) $5,285
Answer: C
Explanation: C)
The Allowance for Bad Debts has a credit balance of $9,000 before the adjusting entry for bad debt
expense. After analyzing the accounts in the accounts receivable subsidiary ledger using the aging
method, the company's management estimates that uncollectible accounts will be $15,000. What will be
the amount of bad debts expense reported on the income statement?
A) $24,000
B) $6,000
C) $15,000
D) $9,000
Answer: B
Explanation: B)

*$15,000 - $9000 = $6,000

The Allowance for Bad Debts account has a credit balance of $9,000 before the adjusting entry for bad
debt expense. After analyzing the accounts in the accounts receivable subsidiary ledger using the aging
method, the company's management estimates that uncollectible accounts will be $15,000. What will be
the balance of the Allowance for Bad Debts reported on the balance sheet?
A) $15,000
B) $14,900
C) $15,900
D) $14,100
Answer: A
Explanation: A)
The following information is from the 2015 records of Armand Camera Shop:

Accounts Receivable, December 31, 2015 $40,000 (debit)

Allowance for Bad Debts, December 31, 2015
prior to adjustment 1,500 (debit)
Net credit sales for 2015 175,000
Accounts written off as uncollectible during 2015 15,000
Cash sales during 2015 27,000

Bad debts expense is estimated by the aging-of-receivables method. Management estimates that $5,000 of
accounts receivable will be uncollectible. Calculate the amount of bad debts expense for 2015.
A) $7,000
B) $6,500
C) $6,450
D) $5,250
Answer: B
Explanation: B)

The following information is from the 2015 records of Armand Camera Shop:

Accounts Receivable, December 31, 2015 $40,000 (debit)

Allowance for Bad Debts, December 31, 2015
prior to adjustment 1,500 (debit)
Net credit sales for 2015 175,000
Accounts written off as uncollectible during 2015 15,000
Cash sales during 2015 27,000

Bad debts expense is estimated by the percent-of-sales method. Management estimates that 3% of net
credit sales will be uncollectible. The balance of the Allowance for Bad Debts after adjustment will be:
A) $7,000.
B) $3,450.
C) $2,850.
D) $3,750.
Answer: D
Explanation: D)
The following information is from the 2015 records of Armand Camera Shop:

Accounts Receivable, December 31, 2015 $40,000 (debit)

Allowance for Bad Debts, December 31, 2015
prior to adjustment 1,500 (debit)
Net credit sales for 2015 175,000
Accounts written off as uncollectible during 2015 15,000
Cash sales during 2015 27,000

Bad debts expense is estimated by the aging-of-receivables method. Management estimates that $5,000 of
accounts receivable will be uncollectible. Calculate the Allowance for Bad Debts after the adjustment for
bad debt expense at December 31, 2015.
A) $5,250
B) $6,500
C) $7,000
D) $5,000
Answer: D
Explanation: D)

Smart Art is a new establishment. During the first year, there were credit sales of $40,000 and collections
of credit sales of $36,000. One account for $650 was written off. The company decided to use the percent-
of-sales method to account for bad debts expense, and decided to use a factor of 2% for their year-end
adjustment of bad debts expense. At the end of the year, what is the ending balance in Accounts
Receivable?
A) $4,000
B) $3,600
C) $3,350
D) $3,200
Answer: C
Explanation: C) Accounts Receivable = $40,000 - $36,000 - $650 = $3,350
 Smart Art is a new establishment. During the first year, there were credit sales of $40,000 and collections
of credit sales of $36,000. One account for $650 was written off. The company decided to use the percent-
of-sales method to account for bad debts expense, and decided to use a factor of 2% for their year-end
adjustment of bad debts expense. The ending balance in Allowance for Bad Debts account would be:
A) $150.
B) $800.
C) $250.
D) $1,450.
Answer: A
Explanation: A)

Smart Art is a new establishment. During the first year, there were credit sales of $40,000 and collections
of credit sales of $36,000. One account for $650 was written off. The company decided to use the percent-
of-sales method to account for bad debts expense, and decided to use a factor of 2% for their year-end
adjustment of bad debts expense. At the end of the year, the balance of bad debts expense would be:
A) $150.
B) $800.
C) $250.
D) $1,450.
Answer: B
Explanation: B) Bad debts expense = ($40,000 .02) = $800

Smart Art is a new establishment. During the first year, there were credit sales of $40,000 and collections
of credit sales of $36,000. One account for $650 was written off. The company decided to use the aging-of-
receivables method to account for bad debts expense, and estimated $500 as uncollectible at year end.
Therefore, the ending balance in the Allowance for Bad Debts would be:
A) $150.
B) $800.
C) $200.
D) $500.
Answer: D

A newly created design business called Smart Art is just finishing up its first year of operations. During
the year, there were credit sales of $40,000 and collections of credit sales of $36,000. One account for $650
was written off. Smart Art uses the aging method to account for uncollectible account expense. It has
estimated $200 as uncollectible at year-end. At the end of the year, what is the ending balance in the Bad
Debts Expense account?
A) $1,150
B) $800
C) $200
D) $850
Answer: D
Explanation: D) Bad Debts Expense = $200 + $650 = $850

At the beginning of 2015, Peter Dots has the following ledger balances:

During the year, credit sales amounted to $800,000. Cash collected on credit sales amounted to $760,000,
and $18,000 has been written off. At the end of the year, the company adjusted for bad debts expense
using the percent-of-sales method and applied a rate, based on past history, of 2.5%. The ending balance
of Accounts Receivable would be:
A) $40,000.
B) $62,000.
C) $80,000.
D) $18,000.
Answer: B
Explanation: B)
At the beginning of 2015, Peter Dots has the following ledger balances:

During the year, credit sales amounted to $800,000. Cash collected on credit sales amounted to $760,000
and $18,000 has been written off. At the end of the year, company adjusted for bad debts expense using
the percent-of-sales method and applied a rate, based on past history, of 2.5%. The ending balance in the
Allowance for Bad Debts would be:
A) $5,000.
B) $6,500.
C) $6,400.
D) $7,000.
Answer: D
Explanation: D)
At the beginning of 2015, Peter Dots has the following ledger balances:

During the year, credit sales amounted to $800,000. Cash collected on credit sales amounted to $760,000
and $18,000 has been written off. At the end of the year, company adjusted for bad debts expense using
the percent-of-sales method and applied a rate, based on past history, of 2.5%. The ending balance in Bad
Debts Expense would be:
A) $20,000.
B) $40,000.
C) $28,000.
D) $27,000.
Answer: A
Explanation: A)

Accounts receivable has a balance of $30,000 and the Allowance for Bad Debts has a credit balance of
$3,000. The allowance method is used. What is the net realizable value before and after a $2,000 Account
Receivable is written off?
A) $27,000; $27,000
B) $14,300; $14,300
C) $16,000; $15,940
D) $16,000; $16,000
Answer: A
Explanation: A) Before After
write-off write-off
Accounts Receivable $30,000 $28,000
Less: Allowance for Bad Debts -3,000 -1,000
Net Realizable Value $27,000 $27,000
Accounts receivable has a balance of $5,000 and the Allowance for Bad Debts has a credit balance of $440.
The allowance method is used. What is the net realizable value after a $160 account receivable is written
off?
A) $4,400
B) $4,720
C) $4,560
D) $5,000
Answer: C
Explanation: C) After
write-off
Accounts Receivable $4,840
Less: Allowance for Bad Debts 280
Net Realizable Value $4,560

On January 1st, 2015, Everlight Corp. has the following balances:

During the year, Everlight has $150,000 of credit sales, collections of credit sales of $140,000, and write-offs
of $3,000. It records bad debts expense at the end of the year using the aging-of-receivables method. At
the end of the year, aging analysis produces a figure of $1,900, being the estimate of uncollectible
accounts. Before the year-end entry to adjust the bad debts expense is made, the balance in the Allowance
for Bad Debts expense would be:
A) debit of $1,800.
B) credit of $4,200.
C) zero balance.
D) debit of $3,000.
Answer: A
Explanation: A)

$3,000 - $1,200 = $1,800

A company reports net accounts receivable of $150,000 on its December 31, 2015 balance sheet. The
Allowance for Bad Debts has a credit balance of $15,000. What is the balance in Accounts Receivable?
A) $155,000
B) $150,000
C) $165,000
D) $135,000
Answer: C
Explanation: C) $150,000 + $15,000 = $165,000
On January 16, Whole Circle sold goods worth $5,000 to Smith on account. It could not collect cash from
the customer, and finally decided to write off the account. Give journal entry to record the write-off
assuming that the company uses the allowance method.
Answer:
Allowance for Bad Debts 5,000
Accounts ReceivableSmith 5,000

On January 16, 2015, Whole Circle had sold goods worth $5,000 to Smith on account. It could not collect
cash from the customer, and finally decided to write off the account on December 31, 2015.
However, in November 4, 2016, Smith approached the company to make payment, and made payment.
Journalize the transactions on December 31, 2015 and November 4, 2016. (Whole Circle uses the allowance
method.)
Answer: December 31, 2015:
Allowance for Bad Debts 5,000
Accounts ReceivableSmith 5,000

November 4, 2016:
Accounts ReceivableSmith 5,000
Allowance for Bad Debts 5,000

Cash 5,000
Accounts ReceivableSmith 5,000

Smart Art is a new establishment. During the first year, there were credit sales of $40,000 and collections
of credit sales of $36,000. One account for $650 was written off. The company decided to use the percent-
of-sales method to account for bad debts expense, and use a factor of 2% for their year-end adjustment of
bad debts expense. Prepare the entry to record the bad debt expense.
Answer:
Bad Debts Expense 800
Allowance for Bad Debts 800

Smart Art is a new establishment. During the first year, there were credit sales of $40,000 and collections
of credit sales of $36,000. One account for $650 was written off. The company decided to use the aging
method to account for bad debts expense. It has calculated an amount of $200 as their estimate of
uncollectible amounts at year-end. Prepare the journal entry required to record Bad debts expense at the
end of the year.
Answer:
Bad Debts Expense 850
Allowance for Bad Debts 850

Explanation: Calculations: $200 + $650 = $850

 The Allowance for Bad Debts account has a credit balance of $2,000 before the adjusting entry for bad
debt expense. The company's management estimates that 2% of net credit sales will be uncollectible for
the year 2015. Net credit sales for the year amounted to $250,000. Give journal entry to record the bad
debts expense at December 31, 2015.
Answer:
Bad Debts Expense 5,000
Allowance for Bad Debts 5,000

Learning Objective 9-4

The interest period extends from the original date of the note to the maturity date.
Answer: TRUE

The entity that signs the promissory note and promises to pay the required amount is the:
A) maker of the note.
B) banker of the note.
C) holder of the note.
D) payee of the note.
Answer: A

What is the maturity value of a 3-month, 10% note for $40,000?

A) $42,000
B) $44,000
C) $41,000
D) $40,000
Answer: C
Explanation: C) ($40,000 10%) 3/12 = $1,000
$40,000+ $1,000 = $41,000

A company issues a 60-day, 12% note for $15,000. What is the principal amount of the note?
A) $16,800
B) $15,000
C) $14,700
D) $15,300
Answer: B

Calculate the interest on a 90-day, 9% note for $36,000. (Use a 360-day year to compute interest.)
A) $720
B) $810
C) $880
D) $460
Answer: B
Explanation: B) ($36,000 9%) 90/360 = $810
AICPA Functional: Measurement

The maturity value of a note is the:

A) principal amount minus interest due.
B) principal amount plus interest due.
C) face amount of the note.
D) principal amount times the interest rate.
Answer: B

On October 1, 2015, Ealys Jewellers accepted a 4-month, 12% note for $6,000 in settlement of an overdue
account receivable. The company closes its accounts at the year end. Calculate and record the accrued
interest on the note at December 31, 2015.
A) $180
B) $160
C) $240
D) $140
Answer: A
Explanation: A) ($6,000 12%) 3/12 = $180

On January 1, Ajax Corp accepted a one-year note for $50,000 at 5% from one of its customers. When the
note matured on December 31, the customer was unable to pay, and the company recorded the dishonor.
The amount of the debit in the dishonor entry would be:
A) $47,500.
B) $2,500.
C) $50,000.
D) $52,500.
Answer: D
Explanation: D) $50,000 5% = $2,500
Total amount = $50,000 + $2,500 = $52,500

On October 1, 2015, Android Inc. made a loan to one of its customers. The customer signed a 4-month
note for $100,000 at 15%. How much interest revenue did the company record in the year 2015?
A) $1,500
B) $1,250
C) $5,000
D) $3,750
Answer: D
Explanation: D) ($100,000 15%) 3/12 = $3,750

On October 1, 2015, Android Inc. made a loan to one of its customers. The customer signed a 4-month
note for $100,000 at 15%. How much interest revenue did the company record in the year 2016 for this
note?
A) $2,150
B) $3,750
C) $1,250
D) $5,000
Answer: C
Explanation: C) ($100,000 15%) 1/12 = $1,250

On October 1, 2015, Android Inc. made a loan to one of its customers. The customer signed a 4-month
note for $100,000 at 15%. Calculate the total interest earned on the note.
A) $5,000
B) $3,750
C) $1,250
D) $15,000
Answer: A
Explanation: A) ($100,000 15%) 4/12 = $5,000

On December 1, 2015, Parsons Inc. sold machinery to a customer for $20,000. The customer could not pay
at the time of sale, but agreed to pay 9 months later, and signed a 9-month note at 9% interest. How much
interest revenue was earned during the year 2015?
A) $180
B) $150
C) $200
D) $900
Answer: B
Explanation: B) ($20,000 9%) 1/12 =$150

On December 1, 2015, Parsons Inc. sold machinery to a customer for $20,000. The customer could not pay
at the time of sale, but agreed to pay 9 months later, and signed a 9-month note at 9% interest. How much
interest revenue was earned during the year 2016?
A) $900
B) $1,800
C) $1,600
D) $1,200
Answer: D
Explanation: D) ($20,000 9%) 8/12 = $1,200

On December 1, 2015, Parsons Inc. sold machinery to a customer for $20,000. The customer could not pay
at the time of sale, but agreed to pay 9 months later, and signed a 9-month note at 9% interest. How much
interest revenue was earned for the entire term of the note?
A) $1,350
B) $1,200
C) $150
D) $1,800
Answer: A
Explanation: A) ($20,000 9%) 9/12 = $1,350

On December 1, 2015, Parsons Inc. sold machinery to a customer for $20,000. The customer could not pay
at the time of sale, but agreed to pay 9 months later, and signed a 9-month note at 9% interest. What was
the total amount of cash collected by Parsons on the maturity of the note?
A) $21,800
B) $21,350
C) $18,650
D) $21,200
Answer: B
Explanation: B) $20,000 + [(20,000 9%) 9/12] = $21,350
A six-month note receivable for $4,000 at 12%, dated September 1, 2015, has accrued interest revenue of
________ on December 31, 2015.
A) $480
B) $240
C) $160
D) $80
Answer: C
Explanation: C) ($4,000 12%) 4/12 = $160

On November 1, 2015, Ealys Jewellers accepted a 3-month, 15% note for $6,000 in settlement of an overdue
account receivable. Give the journal entry to record the accrued interest at the year end.
Answer:
Interest Receivable 150
Interest Revenue 150

Explanation: Calculations: ($6,000 15%) 2/12 = $150

On October 1, 2015, Allen Jewelry Company accepted a 4-month, 10% note for $2,400 in settlement of an
overdue account receivable. Interest revenue was accrued through December 31, 2015. Allen receives the
maturity value of the note on the due date. Give journal entry to record the collection of funds.
Answer:
Cash 2,480
Note Receivable 2,400
Interest Receivable 60
Interest Revenue 20

Explanation:
($2,400 10%) 3/12 = $60
($2,400 10%) 1/12 = $20

On January 1, Ajax Corp accepted a one-year note for $5,000 at 4% from one of its customers. When the
note matured on December 31, the customer was unable to pay, and the company treated it as a
dishonored note. Provide the journal entry for the dishonor of the note in the books of the company.
Answer:
Accounts Receivable 5,200
Notes Receivable 5,000
Interest Revenue 200

Explanation:
Calculations: $5,000 4% = $200
On December 1, 2015, Parsons Inc. sold machinery to a customer for $2,000. Parsons regularly sells
machinery. The customer could not pay at the time of sale, but agreed to pay 9 months later, and signed a
9-month note at 12% interest. Give journal entry to record the revenue at the time of sale. Ignore the entry
for cost of goods sold.
Answer:
Notes Receivable 2,000
Sales Revenue 2,000

On July 1, 2015, Ealys Jewellers accepted a 3-month, 15% note for $6,000 in settlement of an overdue
account receivable. Provide the journal entry to record the acceptance of the note.
Answer:
Notes Receivable 6,000
Accounts Receivable 6,000

Give journal entry to record the dishonor of a note receivable at the maturity date.
Answer:
Accounts Receivable
Notes Receivable
Interest Revenue

Learning Objective 9-5

The acid-test ratio is also known as the quick ratio.

Answer: TRUE

The higher the quick ratio, the lower the business's ability to pay its current liabilities.
Answer: FALSE

The acid-test ratio is a more stringent measure of liquidity than the cash ratio.
Answer: FALSE

Days' sales in receivables is also known as the collection period.

Answer: TRUE

An acid-test ratio of 1.0 is considered safer than a ratio of 0.50.

Answer: TRUE

The days' sales in receivables ratio indicates the number of days it takes to collect the average level of
accounts receivable.
Answer: TRUE
 The accounts receivable turnover ratio indicates whether a company could pay all its current liabilities if
they were become due immediately.
Answer: FALSE

Barker Sales has a days' sales in receivables figure of 35 and Xanadu Company has a days' sales in
receivables of 25. This would suggest that Xanadu is having greater difficulty collecting their accounts
receivable than Barker.
Answer: FALSE

The accounts receivable turnover ratio of a merchandiser is 9.8 times. Calculate the days' sales in
receivables for the merchandiser. (Round to the nearest day.)
A) 33 days
B) 37 days
C) 28 days
D) 40 days
Answer: B
Explanation: B) Days' sales in receivables = 365/9.8 = 37 days (rounded)

Which of the following is true of the proper balance sheet treatment of the Allowance for Bad Debts with
a credit balance?
A) It is reported as a current liability.
B) It is reported as an operating expense.
C) It is reported as a separate, independent line item under current assets.
D) It is shown as a contra account related to accounts receivable.
Answer: D

A company has net credit sales of $95,000, beginning net accounts receivable of $20,000 and ending net
accounts receivable of $18,000. Calculate the days' sales in receivables.
A) 60 days
B) 48 days
C) 58 days
D) 73 days
Answer: D
Explanation: D) Accounts Receivable Turnover Ratio = [$95,000/(($20,000 + $18,000)/2)] = 5
Days' sales in receivables = 365/5 = 73 days

Which of the following is included in the numerator of the acid-test ratio?

A) Cash including cash equivalents, inventory, short-term investments, net current receivables
B) Accounts receivable and inventory
C) Cash including cash equivalents, short-term investments, net current receivables
D) Total current assets
Answer: C
Which of the following is included in the denominator of the acid-test ratio?
A) Current liabilities less accounts payable
B) Total liabilities
C) Total current liabilities
D) Total current assets
Answer: C

From the following details, calculate the acid-test ratio. (Round to two decimal places.)

Cash $120,000
Short-term investments 150,000
Net current receivables 280,000
Inventory 290,000
Total current liabilities 790,000

A) 0.91
B) 0.94
C) 1.06
D) 0.70
Answer: D
Explanation: D) Acid-test ratio = ($120,000 + $150,000 + $280,000)/$790,000 = 0.7 (rounded)

What is the acid-test ratio for a merchandiser having the following balances? (Round to two decimal
places.)

Cash $20,000
Short-term investments 40,000
Net current receivables 50,000
Merchandise Inventory 90,000
Total current liabilities 275,000

A) 0.93
B) 0.40
C) 0.64
D) 1.76
Answer: B
Explanation: B) Acid-test ratio = ($20,000 + $40,000 + $50,000)/$275,000 = 0.40
A company has net credit sales of $1,012,500, beginning net accounts receivable of $250,000 and ending
net accounts receivable of $200,000. What is the days' sales in accounts receivable? (Round to nearest
whole day.)
A) 81 days
B) 99 days
C) 93 days
D) 90 days
Answer: A
Explanation: A) Accounts receivable turnover ratio = [$1,012,500/(($250,000 + $200,000)/2)] = 4.5
Days' sales in receivables = 365/4.5 = 81.11 = 81 days (rounded)

Martin Sales provides the following information:

Net credit sales: $750,000
Beginning net accounts receivable: $40,000
Ending net accounts receivable: $20,000
Calculate the accounts receivable turnover ratio. (Round to the nearest whole number.)
A) 24 times
B) 25 times
C) 27 times
D) 22 times
Answer: B
Explanation: B) Accounts receivable turnover ratio = [$750,000/(($40,000 + $20,000)/2)] = 25 times