Accounting IICh. 7 Reading Guide
ACCOUNTING II
Chapter 7Reading Guide
Answer the following questions as you read Chapter 7, pages 198-214.
List two reasons businesses may offer to sell merchandise on account?Why should a business investigate a customer’s credit history before selling to them on account?
7-1 DIRECT WRITE-OFF METHOD
What are uncollectible accounts?What is it called when you cancel the balance of a customer’s account because you don’t expect them to pay you?
Using the direct write-off method, when does a business record uncollectible accounts expense?
When using the direct write-off method, what accounts are affected and how when an account is written off (include debits & credits)?
What are uncollectible accounts also referred to as? (See “Remember” box)
There is the possibility that after you write-off an account, the customer will turn around and pay you. When this happens, two entries must be journalized. What is the purpose of the two entries?
What accounts are affected and how when reopening an account, using the direct write-off method (include debits & credits)?
How is the account “Collection of Uncollectible Accounts” classified (see Chart of Accounts on page 197)? Is it a temporary or permanent account?
7-2 ALLOWANCE METHOD
Why might a business choose to use the Allowance Method of recording uncollectible accounts expense, rather than the direct write-off method?What are the two allowance methods of recording uncollectible accounts expense?
What accounts are affected and how when journalizing an estimate to write-off uncollectible accounts (include debits & credits)?
What is the formula to determine net sales (see Chapter 4, statement on page 111)?
Why is the amount estimated to NOT be collectible NOT recorded in the Account Receivable account (to decrease it)?
If the balance in the Allowance for Uncollectible Accounts Expense increases from year to year, what might this indicate?
What are you doing when you are “aging accounts receivable?” Why are the percentages different for each time period?
When using the Aging of Accounts Receivable Method, the total estimated uncollectible amount is NOT the amount used when recording the adjusting entry. What is the formula to calculate the amount to be journalized?
What accounts are affected and how when writing off an uncollectible account using the allowance method (include debits and credits)?
What accounts are affected and how when reopening an account previously written off (include debits & credits)?
Why do businesses have to be careful when establishing credit terms with customers? (See FYI box, page 208)
Which account is NOT changed when a business writes off an account using the allowance method?
Sometimes, a customer you have written off pays you back. What are the two transactions that must be journalized when the customer pays you back?
7-3 ACCOUNTS RECEIVABLE TURNOVER RATIO
Why should businesses analyze how fast their customers are paying them?What is the Accounts Receivable Turnover Ratio?
How often may business calculate the Accounts Receivable Turnover Ratio?
How is the Book Value of Accounts Receivable calculated? What does this amount represent?
If the A/R turnover ratio is 7.1, and the business offers terms of n/30, is this collection rate acceptable? Explain.
What is the formula to calculate the Actual Average Number of Days for Payment?
If a business has terms of n/60 and A/R turnover ratio of 4.2, how is the business doing in collecting accounts receivable? Explain.
List the four steps employers may take to create a more favorable Accounts Receivable Turnover Ratio.
If businesses demand quicker payment, a loss of business may result. Why?
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