Quiz 4 Flashcards

Chapters 8 & 9

Click each card to reveal the answer. Try to answer it yourself before opening the card.

Chapter 8 - Receivables and Bad Debts

What does Accounts Receivable represent? Tap to reveal
Amounts customers owe the company from sales made on account.
Why does selling on account create bad-debt risk? Tap to reveal
Because the company recognizes the sale before it knows whether every customer will eventually pay.
What is the Allowance for Doubtful Accounts? Tap to reveal
A contra-asset that represents the estimated amount of Accounts Receivable the company does not expect to collect.
What is the normal balance of Allowance for Doubtful Accounts? Tap to reveal
Credit. It reduces the related asset, Accounts Receivable.
How do you calculate Net Accounts Receivable? Tap to reveal
Accounts Receivable − Allowance for Doubtful Accounts
What entry records the estimate of bad debts? Tap to reveal
Debit Bad Debt Expense
Credit Allowance for Doubtful Accounts
When does Bad Debt Expense get recognized under the allowance method? Tap to reveal
In the period in which the related credit sales create the expected collection risk, rather than waiting until a specific customer fails to pay.
What entry records the write-off of a specific customer's account? Tap to reveal
Debit Allowance for Doubtful Accounts
Credit Accounts Receivable
Does writing off a specific account create Bad Debt Expense? Tap to reveal
No. The expense was recognized earlier when the company estimated its bad debts.
What happens to Net Accounts Receivable when a specific account is written off? Tap to reveal
Nothing. Accounts Receivable and the Allowance both decrease by the same amount.
Does a write-off change total assets at the time of the write-off? Tap to reveal
No. Gross Accounts Receivable and its contra-asset both decrease equally.
How is the recovery of a previously written-off account recorded? Tap to reveal
It is a two-step process: first reinstate the receivable and the allowance, then record the cash collection.
Does recovering a previously written-off account create revenue? Tap to reveal
No. The original revenue was already recognized when the sale occurred.
What does the percentage-of-sales method estimate directly? Tap to reveal
Bad Debt Expense.
What does the percentage-of-receivables or aging method estimate directly? Tap to reveal
The desired ending balance in Allowance for Doubtful Accounts.
Under the aging method, why does the existing Allowance balance matter? Tap to reveal
Because the calculation gives the desired ending Allowance. The adjustment must move the account from its current balance to that desired ending balance.
What three pieces of information are needed to calculate interest on a note? Tap to reveal
Principal × Annual Interest Rate × Time
Why must time be considered when calculating note interest? Tap to reveal
Because the stated interest rate is an annual rate. A note outstanding for only part of a year earns only the corresponding fraction of annual interest.
How is receivables turnover calculated? Tap to reveal
Net Credit Sales ÷ Average Net Receivables
How do you calculate average net receivables? Tap to reveal
(Beginning Net Receivables + Ending Net Receivables) ÷ 2
How are days to collect calculated? Tap to reveal
365 ÷ Receivables Turnover
What does a higher receivables turnover generally indicate? Tap to reveal
Faster collection of receivables, although the result should be interpreted relative to prior periods, company policy, and industry expectations.

Chapter 9 - Long-Lived Tangible Assets

What is the basic test for deciding whether a cost should be capitalized or expensed? Tap to reveal
Ask whether the expenditure creates or improves future benefits or simply maintains the asset's current condition for the current period.
Which acquisition costs generally become part of a long-lived asset's recorded cost? Tap to reveal
Costs necessary to acquire the asset and prepare it for its intended use.
Is the cost of routine maintenance generally capitalized? Tap to reveal
No. Ordinary maintenance that simply keeps an asset in its current condition is generally expensed.
Is land depreciated? Tap to reveal
No. Land generally has an indefinite useful life.
What is depreciation? Tap to reveal
The allocation of a long-lived tangible asset's cost over the periods in which it is used.
Is depreciation an attempt to estimate an asset's current market value? Tap to reveal
No. Depreciation is a cost-allocation process, not a valuation process.
Does recording depreciation set aside cash to replace the asset? Tap to reveal
No. Recording depreciation does not create or reserve cash.
How is depreciable base calculated? Tap to reveal
Asset Cost − Residual Value
What is the straight-line depreciation formula? Tap to reveal
(Cost − Residual Value) ÷ Useful Life
What is the units-of-production depreciation formula? Tap to reveal
(Cost − Residual Value) ÷ Total Expected Units × Units Used This Period
What is the double-declining-balance depreciation calculation? Tap to reveal
Beginning Book Value × (2 ÷ Useful Life)
Why isn't residual value subtracted before calculating annual double-declining-balance depreciation? Tap to reveal
DDB applies its depreciation rate to beginning book value. Residual value acts as a floor so the asset is not depreciated below that amount.
How is book value calculated? Tap to reveal
Asset Cost − Accumulated Depreciation
Does the asset's original cost account decrease when depreciation is recorded? Tap to reveal
No. The asset remains recorded at historical cost. Accumulated Depreciation increases separately.
What should be done before calculating a gain or loss when an asset is sold between normal depreciation dates? Tap to reveal
Update depreciation through the date of disposal first.
What amount should cash proceeds be compared with when determining gain or loss on disposal? Tap to reveal
The asset's book value on the disposal date, not its original cost.
How is gain or loss on disposal determined? Tap to reveal
Compare Cash Proceeds with Book Value.

Proceeds > Book Value = Gain
Proceeds < Book Value = Loss
What two asset-related accounts must be removed when a depreciable asset is disposed of? Tap to reveal
The asset's original cost and its related Accumulated Depreciation.

Chapter 9 - Intangibles, Impairment & Analysis

What is an intangible asset? Tap to reveal
A long-lived asset representing a right or economic benefit without physical substance, such as a patent, trademark, copyright, franchise, or goodwill.
What happens to the cost of a finite-life intangible asset? Tap to reveal
It is amortized over its useful life.
For an intangible such as a patent, what life is generally used when the legal life and useful economic life differ? Tap to reveal
The shorter relevant useful/economic life or legal life when required by the problem.
Are indefinite-life intangible assets regularly amortized? Tap to reveal
No. They are instead evaluated for impairment.
Is goodwill regularly amortized? Tap to reveal
No. Goodwill is an indefinite-life intangible asset and is evaluated for impairment.
What happens when an asset is impaired? Tap to reveal
The asset is written down and an impairment loss is recognized, reducing assets, net income, and equity.
Does an impairment loss create a liability? Tap to reveal
No. It reduces the carrying amount of the asset and reduces income through a loss.
How is fixed asset turnover calculated? Tap to reveal
Net Sales Revenue ÷ Average Net Fixed Assets
What does fixed asset turnover help evaluate? Tap to reveal
How effectively a company uses its investment in fixed assets to generate sales.
What is the first number you should calculate in almost every asset-disposal problem? Tap to reveal
Book value on the disposal date.

Cost − Accumulated Depreciation = Book Value