REVENUE AND COLLECTION CYCLE

Chapter Activity

Instructions: Highlight with yellow the correct answer in each item. For computations, show your
solution.

Concepts

1. An auditor’s purpose in reviewing credit ratings of customers with delinquent accounts

receivable most likely is to obtain evidence concerning management’s assertions about
a. Valuation or allocation
b. Presentation and disclosure
c. Existence or occurrence
d. Rights and obligations

2. Which of the following internal controls most likely would reduce the risk of diversion of
customer receipts by an entity’s employees?
a. A bank lockbox system
b. Prenumbered remittance advices
c. Monthly bank reconciliations
d. Daily deposit of cash receipts

3. Which of the following characteristics most likely would be indicative of check kiting?
a. High turnover of employees who have access to cash
b. Many large checks that are recorded in Mondays
c. Low average balance compared to high level of deposits
d. Frequent ATM checking account withdrawals

4. Proper authorization of write-offs of uncollectible accounts should be approved in which

department?
a. Accounts receivable
b. Accounts payable
c. Credit
d. Treasurer

5. An auditor tests an entity’s control of obtaining credit approval before shipping goods to
customers in support of management’s financial statement assertion of
a. Valuation or allocation
b. Completeness
c. Existence or occurrence
d. Rights and obligations

6. Shipping documents should be traced to and compared with sales records or invoices to
a. Determine whether payments are properly applied to customer accounts
b. Ensure that shipments are billed to customers
c. Determine whether unit prices billed are in accordance with sales contracts
d. Ascertain whether all sales are supported by shipping documents
7 to 10

Benjie, CPA, has just accepted an engagement to audit the financial statements of Agile Corporation, Inc.
for the year ending December 31, 2020. After obtaining an understanding of the client’s design of the
accounting and internal control systems and their operation, he then proceeded in performing test of
controls related to revenue and collection activities.

7. For effective internal control, employees maintaining the accounts receivable subsidiary ledger
should not also approve
a. Employee overtime wages
b. Write-offs of customer accounts
c. Credit granted to customers
d. Cash disbursement

8. To achieve a good internal control, which department should perform the activities of matching
shipping documents with sales orders and preparing daily sales summaries?
a. Billing
b. Shipping
c. Credit
d. Sales order

9. For the most effective internal control, monthly bank statements should be received directly
from the banks and reviewed by the
a. Controller
b. Cash receipts accountant
c. Cash disbursement accountant
d. Internal auditor

10. If in the audit of the accounts receivable function, you found the accounts receivable turnover
rate had fallen from 7.3 to 4.3 over the last three years. What is the most likely cause of the
decrease?
a. An increase in the discount offered for early payment
b. A more liberal credit policy
c. A change from net 30 to net 25
d. Greater cash sales
Application

Your audit disclosed that on December 31, 2023, the accounts receivable control account of Mechado
Company had a balance of P2,865,000. An analysis of the accounts receivable account showed the
following:

Accounts known to be worthless P37,500

Advance payment to creditors on purchase
orders 150,000
Advances to affiliated companies 375,000
Customer’s accounts reporting credit balances
arising from sales return (225,000)
Interest receivable on bonds 150,000
Other trade accounts receivable- unassigned 750,000
Subscription receivable due in 30 days 825,000
Trade accounts receivable- assigned (Mechado
Company’s equity in assigned accounts is
P150,000) 375,000
Trade installment receivable due 1-18 months,
including unearned finance charges of P30,000 330,000
Trade receivables from officers due currently 22,500
Trade accounts on which post-dated checks are
held (no entries were made on receipts of
checks) 75,000
P2,865,000

Based on the above and the result of your audit, determine the adjusted balance of the following:

1. Trade accounts receivable as of December 31, 2023 is

a. P1,147,500 c. P1,485,000
b. P1,522,500 d. P1,447,500

2. The net current trade and other receivable as of December 31, 2023 is
a. P2,647,500 c. P2,272,500
b. P2,610,000 d. 1,822,500

3. How much of the foregoing will be presented under noncurrent assets as of December 31,
2023?
a. P1,200,000 c. P525,000
b. 375,000 d. P0
Your audit of Caldereta Corporation for the year ended December 31, 2023 revealed that the Accounts
Receivable account consist of the following:

Trade accounts receivable (current) P3,440,000

Past due current accounts 640,000
Uncollectible accounts 128,000
Credit balances in customers’ accounts (80,000)
Notes receivable dishonored 240,000
Consignment shipments- at cost
The consignee sold goods costing P96,000 for
P160,000. A 10% commission was charged by the
consignee and remitted the balance to Calderata.
The cash was received on January 2024. 320,000
P4,688,000

The balance of the allowance for doubtful accounts before audit adjustment is a credit of P80,000. It is
estimated that an allowance should be maintained equal to 5% of trade receivables, net of amount due
from the consignee who is bonded. The company has not provided yet for the 2023 bad debt expense.

4. Adjusted balance of Trade Accounts Receivable

a. P4,080,000 c. P4,464,000
b. P3,440,000 d. P3,584,000

5. Adjusted balance of Allowance for Doubtful Accounts

a. P204,000 c. P172,000
b. P216,000 d. P227,200

6. Adjusted Doubtful accounts expense

a. P264,000 c. P252,000
b. P220,000 d. P227,200

The adjusted trial balance of Kare-Kare Company as of December 30, 2022 shows the following:

Debit Credit
Accounts receivable P1,000,000
Allowance for bad debts P40,000

Additional information:
 Cash sales of the company represents 10% of gross sales
 90% of the credit sales customers do not take advantage of the 2/10, n/30 terms
 It is expected that cash discount of P6,000 will be taken on accounts receivable outstanding at
December 31, 2023.
 Sales return in 2023 amounted to P400,000. All returns were from charge sales.
 During 2023, accounts totaling to P44,000 were written off as uncollectible; bad debt recoveries
during the year amount to P3,000.
 The allowance for bad debts is adjusted so that it represents certain percentage of the
outstanding accounts receivable at year end. The required percentage at December 31, 2023 is
150% of the rate used on December 31, 2022.

7. The Accounts Receivable as of December 31, 2023 is

a. P3,000,000 c. P333,333
b. P300,000 d. P2,444,000

8. The Allowance for doubtful accounts as of December 31, 2023 is

a. P20,000 c. P180,000
b. P120,000 d. P146,640

9. The Net Realizable Value of Accounts Receivable as of December 31, 2023 is

a. P307,340 c. P2,874,000
b. P2.814,000 d. P2,291,360

10. The doubtful account expense for the year 2023 is

c. P181,000 c. P21,000
d. P121,000 d. P147,640