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Chapter 006: Reporting and Interpreting Sales Revenue, Receivables, and Cash

True / False Questions


1. "F.O.B. destination" means that title to the shipped goods passes to the buyer on the
shipment date.
FALSE

AACSB Tag: Relative Thinking


Difficulty: Medium
L.O.: 1

2. Most companies record revenue when they ship goods to customers not when they are
delivered to customers.
TRUE

AACSB Tag: Relative Thinking


Difficulty: Easy
L.O.: 1

3. Credit terms "2/10, n/30" mean that if payment is made in two days, a 10% discount will be
given; if not paid within two days, the full invoice price will be due in thirty days.
FALSE

AACSB Tag: Relative Thinking


Difficulty: Easy
L.O.: 2

4. The sales returns and allowances account should be reported as a deduction from sales
revenue because it is a contra-revenue account.
TRUE

AACSB Tag: Communications


Difficulty: Medium
L.O.: 2

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Chapter 006: Reporting and Interpreting Sales Revenue, Receivables, and Cash

5. Sales returns and allowances should be included as a selling expense.


FALSE

AACSB Tag: Communications


Difficulty: Easy
L.O.: 2

6. Many merchants accept credit cards for the sale of goods because it can increase the
number of customers.
TRUE

AACSB Tag: Relative Thinking


Difficulty: Easy
L.O.: 2

7. A company is thinking of borrowing money at an 18% annual interest rate in order to pay a
$30,000 invoice within the discount period. The invoice terms are 2/10, n/30. They should
borrow the money because they will still have a net savings of 19.2%.
TRUE

AACSB Tag: Analytic


Difficulty: Medium
L.O.: 2

8. An entry to bad debts expense and the allowance for doubtful accounts is made to write off
a customer's account during the year when it is determined to be uncollectable.
FALSE

AACSB Tag: Relative Thinking


Difficulty: Medium
L.O.: 4

6-2
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Chapter 006: Reporting and Interpreting Sales Revenue, Receivables, and Cash

9. When a particular account receivable is determined to be uncollectible, the entry to write


off the account requires a debit to the allowance for doubtful accounts.
TRUE

AACSB Tag: Relative Thinking


Difficulty: Medium
L.O.: 4

10. The allowance for doubtful accounts normally has a debit balance after the year-end
adjustment.
FALSE

AACSB Tag: Relative Thinking


Difficulty: Easy
L.O.: 4

11. An entry to write off an uncollectible account does not change the net realizable value
(book value) of accounts receivable.
TRUE

AACSB Tag: Relative Thinking


Difficulty: Hard
L.O.: 4

12. Accounts Receivables turnover is computed as net credit sales divided by net trade
accounts receivable at the end of the accounting period.
FALSE

AACSB Tag: Relative Thinking


Difficulty: Medium
L.O.: 5

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Chapter 006: Reporting and Interpreting Sales Revenue, Receivables, and Cash

13. When a company reports a higher accounts receivable turnover ratio, then the number of
days it takes to collect the receivables has also increased.
FALSE

AACSB Tag: Relative Thinking


Difficulty: Medium
L.O.: 5

14. While preparing the statement of cash flows, the reason that we must adjust sales revenue
for the change in accounts receivables to convert the figure to cash collected from customers
is that accounts receivable represent sales revenue not collected from customers at the
beginning and end of the accounting year.
TRUE

AACSB Tag: Relative Thinking


Difficulty: Medium
L.O.: 5

15. Effective internal control of cash should include the separation of the duties for receiving
and disbursing cash.
TRUE

AACSB Tag: Ethics


Difficulty: Medium
L.O.: 6

16. If a check received from a customer that has been deposited by the seller is returned with
the bank statement marked not sufficient funds (NSF), it would appear on the seller's bank
reconciliation as a deduction from the ending bank statement balance.
FALSE

AACSB Tag: Relative Thinking


Difficulty: Medium
L.O.: 6

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Chapter 006: Reporting and Interpreting Sales Revenue, Receivables, and Cash

17. The primary purpose of preparing a bank reconciliation is to reconcile the bank balance at
the end of the period with the company's book balance at the end of the period.
TRUE

AACSB Tag: Relative Thinking


Difficulty: Easy
L.O.: 6

18. When completing a bank reconciliation, bank service charges should be deducted from the
company's cash balance.
TRUE

AACSB Tag: Relative Thinking


Difficulty: Easy
L.O.: 6

19. If a customer pays for merchandise using a credit card, the Sales Revenue recorded by the
retailer will be more than the amount of Cash recorded.
TRUE

AACSB Tag: Relative Thinking


Difficulty: Medium
L.O.: Sup A

20. Under the completed-contract method of accounting for long-term construction projects,
revenue is not recognized until the project is complete.
TRUE

AACSB Tag: Relative Thinking


Difficulty: Easy
L.O.: Sup B

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Chapter 006: Reporting and Interpreting Sales Revenue, Receivables, and Cash

Multiple Choice Questions


21. Which of the following statements is true?
A. revenue is usually recorded when goods are shipped
B. revenue is recorded when cash collection is made.
C. revenue is usually recorded upon delivery to the customer.
D. revenue is recorded either when the sale is made, collection occurs and/or delivery is
made. It is the company's decision.

AACSB Tag: Relative Thinking


Difficulty: Medium
L.O.: 1

22. A company that sells magazines and collects subscription fees prior to the publication and
distribution of the magazine. As the cash is received in advance from the customers, the
company should record a debit to Cash and a credit to
A. Sales revenue.
B. Prepaid expenses.
C. Unearned revenue.
D. Accounts payable.

AACSB Tag: Relative Thinking


Difficulty: Easy
L.O.: 1

23. Most companies usually recognize revenue as earned and record the revenue when
A. the customer's order is received
B. the order is shipped
C. the order is delivered
D. the return period is over.

AACSB Tag: Relative Thinking


Difficulty: Medium
L.O.: 1

6-6
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Chapter 006: Reporting and Interpreting Sales Revenue, Receivables, and Cash

24. When a company ships product to a customer with the terms FOB (free on board)
destination, which of the following is true?
A. The seller will pay the shipping charges and title will not be exchanged until goods are
received by the customer.
B. The buyer will pay the shipping charges and title is exchanged at point of shipment.
C. The seller will pay the shipping and title is exchanged at point of shipment.
D. The buyer will pay the shipping and title is exchanged when the goods are received by the
customer.

AACSB Tag: Relative Thinking


Difficulty: Hard
L.O.: 1

25. On the income statement, the amount of sales returns and allowances is normally
A. added into selling expenses.
B. subtracted from gross margin to determine net sales.
C. added in the calculation of cost of goods sold.
D. subtracted from gross sales to determine net sales.

AACSB Tag: Relative Thinking


Difficulty: Medium
L.O.: 2

26. Which of the following statements is false?


A. Sales returns and allowances is always treated as a contra-revenue.
B. Sales returns and allowances, sales discounts and credit card discounts are always treated
as selling expenses.
C. Credit card discounts and sales discounts can be treated as contra-revenue accounts or as
selling expenses.
D. Sales discounts are used to encourage early payment by customers.

AACSB Tag: Relative Thinking


Difficulty: Medium
L.O.: 2

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Chapter 006: Reporting and Interpreting Sales Revenue, Receivables, and Cash

27. Credit terms of 2/10, n/30 indicate that a


A. two percent discount for early payment is available if the invoice is paid before the tenth
day of the month following the month to of sale.
B. two percent discount for early payment is available within ten days of the date of sale.
C. ten percent discount for early payment is available if the invoice is paid within two days of
the date of the invoice.
D. two percent discount for early payment is available if the invoice is paid after the tenth
day, but before the thirtieth day of the invoice date.

AACSB Tag: Relative Thinking


Difficulty: Medium
L.O.: 2

28. Miranda Corp. received an order from a customer on October 1. The toys were shipped on
October 15. The customer sent a check for full payment on November 5. Miranda received the
check on November 10 and deposited it in the bank account. Miranda should record sales
revenue related to this series of transactions on
A. October 1.
B. October 15.
C. November 5.
D. November 10.

AACSB Tag: Relative Thinking


Difficulty: Easy
L.O.: 2

29. A customer purchased $5,000 of goods on credit from Discount Paper Supply on
September 1. The customer received the bill on September 13 and mailed a $5,000 check on
September 30. Discount Paper Supply received the check on October 4. In recording this
transaction, Discount Paper Supply should credit Sales Revenue for $5,000 on
A. September 1.
B. September 13.
C. September 30.
D. October 4.

AACSB Tag: Analytic


Difficulty: Easy
L.O.: 2

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Chapter 006: Reporting and Interpreting Sales Revenue, Receivables, and Cash

30. When a credit sale is made with terms of 2/10, net 30 on May 10 and the customer's check
is received on May 19, which of the following is true about the May 19 journal entry?
A. The debit to cash will equal the credit to accounts receivable because the discount was
recorded on May 10.
B. There will be a debit to sales discounts on May 10.
C. The debit to cash will be less than the credit to accounts receivable on May 19.
D. There will be a credit to sales discounts on May 19.

AACSB Tag: Analytic


Difficulty: Medium
L.O.: 2

31. When goods are sold to a customer with credit terms of 2/10, n/30, the customer will
receive a
A. 10% discount if they pay within 2 days.
B. 2% discount if they pay 10% of the amount due within 30 days.
C. 10% discount if they pay within 30 days.
D. 2% discount if they pay within 10 days.

AACSB Tag: Relative Thinking


Difficulty: Easy
L.O.: 2

32. A company had the following partial list of account balances at year-end:

The amount of Net Sales shown on the income statement would be


A. $91,900.
B. $90,700.
C. $89,900.
D. $88,600.

AACSB Tag: Analytic


Difficulty: Medium
L.O.: 2

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Chapter 006: Reporting and Interpreting Sales Revenue, Receivables, and Cash

33. A company purchased goods on credit with credit terms of 3/15, n/45. Although the
company does not have cash available to pay within the discount period, the manager of the
company is considering borrowing money to take advantage of the discount. In order to make
the appropriate decision, the manager computed the annual interest rate associated with the
sales discount. This annual rate is approximately
A. 56%.
B. 38%.
C. 25%.
D. 18%.

AACSB Tag: Analytic


Difficulty: Hard
L.O.: 2

34. When credit terms for a sale are 2/15, n/40, the customer saves by paying the bill early.
Approximately what percent would this savings amount to on an annual basis?
A. 18%.
B. 20%.
C. 30%.
D. 37%.

AACSB Tag: Analytic


Difficulty: Hard
L.O.: 2

35. What is the annual interest rate of a sales discount of 3/10, n/60?
A. 21.9%
B. 22.6%
C. 18.8%
D. 14.6%

AACSB Tag: Analytic


Difficulty: Medium
L.O.: 2

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Chapter 006: Reporting and Interpreting Sales Revenue, Receivables, and Cash

36. Which of the following accounts is not treated as a contra-revenue?


A. Sales discounts
B. Credit card discounts
C. Sales returns and allowances
D. Purchase discounts

AACSB Tag: Relative Thinking


Difficulty: Medium
L.O.: 2

37. By treating sales returns and allowances, sales discounts, and credit card discounts as
contra-revenues, we have the following impact
A. Gross margin is reduced by sales returns and allowances, sales discounts and credit card
discounts
B. Gross margin is increased by sales returns and allowances, sales discounts and credit card
discounts
C. Gross margin is unchanged by sales returns and allowances, sales discounts and credit card
discounts
D. Net income is increased by sales returns and allowances, sales discounts and credit card
discounts

AACSB Tag: Relative Thinking


Difficulty: Hard
L.O.: 2

38. In 2006, Deckers gross profit percentage was 46.4% while their competitor, Timberland's
percentage was 47.3%. Which was the most likely reason for Timberland's higher
percentage?
A. Higher selling prices
B. Lower product cost as a percentage of sales
C. Ability to differentiate their product in consumers' eyes
D. Lower cost of goods sold

AACSB Tag: Relative Thinking


Difficulty: Medium
L.O.: 3

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Chapter 006: Reporting and Interpreting Sales Revenue, Receivables, and Cash

39. Which of the following is the most likely cause of a decrease in a company's gross profit
percentage?
A. They discounted their prices.
B. They reduced product cost as a percentage of sales.
C. They reduced their operating costs.
D. They sold fewer products.

AACSB Tag: Relative Thinking


Difficulty: Medium
L.O.: 3

40. Which of the following is the most likely cause of an increase in gross profit percentage?
A. selling products for higher prices
B. selling products with lower margins
C. higher product costs
D. selling fewer products

AACSB Tag: Relative Thinking


Difficulty: Medium
L.O.: 3

41. In 2009, Worldwide Waffles reported net operating revenues of $18.2 billion and cost of
goods sold for $10.8 billion. Their gross profit percentage for 2009 was
A. 29.9%
B. 40.7%
C. 69.6%
D. None of these

AACSB Tag: Analytic


Difficulty: Easy
L.O.: 3

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Chapter 006: Reporting and Interpreting Sales Revenue, Receivables, and Cash

42. Dillon Company uses the allowance method to account for bad debts. The entry to writeoff a bad account (one that will never be collected) should be:

A.
B.
C.
D.

AACSB Tag: Relative Thinking


Difficulty: Easy
L.O.: 4

43. When using the allowance method for accounting for bad debts, accounts receivable is
reported on the balance sheet at the expected net realizable value. When a particular
receivable from a customer ultimately is determined to be uncollectible and is written off, the
recording of this event will
A. decrease the net realizable value of the accounts receivable.
B. have an effect that is not determinable from the information given.
C. increase the net realizable value of the accounts receivable.
D. have no effect on the net realizable value of the accounts receivable.

AACSB Tag: Relative Thinking


Difficulty: Medium
L.O.: 4

44. Assuming the allowance method for bad debts is used, when a customer's uncollectible
account is written off, a credit should be made to
A. Bad debt expense.
B. Allowance for doubtful accounts.
C. Sales revenue.
D. Accounts receivable.

AACSB Tag: Relative Thinking


Difficulty: Easy
L.O.: 4

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Chapter 006: Reporting and Interpreting Sales Revenue, Receivables, and Cash

45. On January 31, 2009, Klein Company wrote off an uncollectible account of $5,000. The
allowance method is used. The write-off would cause bad debt expense to
A. decrease by $5,000.
B. increase by $5,000.
C. increase by $10,000.
D. not change.

AACSB Tag: Analytic


Difficulty: Medium
L.O.: 4

46. Accrual accounting requires that the loss resulting from the failure of credit customers to
pay their bills should
A. not be recorded until cash is collected from the customer in settlement of the account
because that is the only sure event.
B. be estimated in the period in which sales are made but should not be recorded until the
customer defaults because of the matching principle.
C. be estimated and recorded in the period in which sales are made so that expenses are
matched with revenues.
D. be recognized in the period in which the account receivable proves to be uncollectible
because that is the only date when the loss will really be known.

AACSB Tag: Relative Thinking


Difficulty: Easy
L.O.: 4

47. Which generally accepted accounting principle best supports the establishment of the
account, allowance for doubtful accounts?
A. Matching principle.
B. Continuity principle.
C. Exception principle.
D. Revenue principle.

AACSB Tag: Relative Thinking


Difficulty: Easy
L.O.: 4

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Chapter 006: Reporting and Interpreting Sales Revenue, Receivables, and Cash

48. When the allowance method is used, the entry which is appropriate when a particular
account is written off as uncollectible should include a
A. debit to accounts receivable.
B. debit to bad debt expense.
C. debit to allowance for doubtful accounts.
D. debit to sales revenue.

AACSB Tag: Relative Thinking


Difficulty: Medium
L.O.: 4

49. Oakwood Company had accounts receivable of $750,000 and an allowance for doubtful
accounts of the $21,500 just prior to writing off as worthless an account receivable for Hyland
Company of $5,000. The net realizable value of accounts receivable as shown by the
accounting record before and after the write-off was as follows:

A.
B.
C.
D.

AACSB Tag: Analytic


Difficulty: Medium
L.O.: 4

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Chapter 006: Reporting and Interpreting Sales Revenue, Receivables, and Cash

50. Woodland Company uses the allowance method to account for bad debts. During 2009, a
customer became bankrupt and a receivable of $10,000 was deemed uncollectible. The entry
to record the uncollectible amount is:
A.

B.

C.

D.

AACSB Tag: Analytic


Difficulty: Medium
L.O.: 4

51. At year end, Chief Company has a balance of $10,000 in accounts receivable of which
$1,000 is more than 30 days overdue. Chief has a credit balance of $100 in the allowance for
doubtful accounts before any year-end adjustments. Chief estimates its bad debts losses at 1%
of current accounts and 10% of accounts over thirty days. What adjustment should Chief
make to the allowance for doubtful accounts?
A. $120 (credit).
B. $100 (credit).
C. $90 (credit).
D. No adjustment as the current balance is correct.

AACSB Tag: Analytic


Difficulty: Hard
L.O.: 4

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Chapter 006: Reporting and Interpreting Sales Revenue, Receivables, and Cash

52. Which of the following is not an accurate description of allowance for doubtful accounts?
A. contra-account.
B. balance sheet account.
C. offset account.
D. income statement account.

AACSB Tag: Relative Thinking


Difficulty: Easy
L.O.: 4

53. LRP Company uses the allowance method to record its bad debt expense. When the
account of a particular customer is deemed to be uncollectible and is written off, LRP will
prepare a journal entry with a
A. debit to bad debt expense.
B. credit to bad debt expense.
C. debit to accounts receivable.
D. debit to allowance for doubtful accounts.

AACSB Tag: Relative Thinking


Difficulty: Medium
L.O.: 4

54. If a customer pays her bill after her account has already been written off, the company
receiving the payment should record the account reinstatement with
A. a credit to bad debt expense.
B. a credit to allowance for doubtful accounts.
C. a credit to cash.
D. a debit to bad debt expense.

AACSB Tag: Relative Thinking


Difficulty: Medium
L.O.: 4

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Chapter 006: Reporting and Interpreting Sales Revenue, Receivables, and Cash

55. When using the allowance method of accounting for bad debts, bad debt expense should
be recorded
A. as an adjusting entry at the end of the accounting period.
B. when a particular account is written off.
C. whenever the allowance for doubtful accounts has a debit balance.
D. whenever the allowance for doubtful accounts has a zero balance.

Difficulty: Medium
L.O.: 4

56. Bad debt expense should


A. appear on the balance sheet as a contra-asset.
B. appear on the income statement as part of selling expenses.
C. appear on the income statement as a contra-revenue.
D. not appear in the financial statements.

AACSB Tag: Communications


Difficulty: Easy
L.O.: 4

57. Upon completing an aging analysis of accounts receivable, the accountant for Rosco
Works estimated that $5,000 of the current $98,000 of accounts receivable would be
uncollectible. The allowance for doubtful accounts had a $400 debit balance at year-end prior
to adjustment. The amount of bad debt expense that should appear in Rosco's income
statement for the year is
A. $5,000.
B. $5,400.
C. $4,600.
D. $0.

AACSB Tag: Analytic


Difficulty: Medium
L.O.: 4

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Chapter 006: Reporting and Interpreting Sales Revenue, Receivables, and Cash

58. Which of the following entries will affect both the balance sheet and the income
statement?
A. A debit to bad debts expense and a credit to the allowance for doubtful accounts
B. A debit to the allowance for doubtful accounts and a credit to accounts receivable
C. A debit to accounts receivable and a credit to the allowance for doubtful accounts
D. None of the entries affects the balance sheet and income statement

AACSB Tag: Relative Thinking


Difficulty: Medium
L.O.: 4

59. In 2009, Deckers reported an accounts receivables turnover ratio of 6.8 and their
competitor, Timberland's, reported a ratio of 8.4. Which of the following is false?
A. Deckers needs to increase their ratio in order to improve collection time.
B. Deckers needs to focus on improving their credit and collection process.
C. Deckers has done a better job of collecting their accounts receivables than Timberland's.
D. Deckers requires more time to collect accounts receivables than Timberland's.

AACSB Tag: Relative Thinking


Difficulty: Medium
L.O.: 5

60. An increase in the accounts receivable turnover ratio will have what type of effect on
cash?
A. Cause an increase in cash flow from operations
B. Cause a decrease in cash flow from operations
C. Cause no change in cash flow from operations
D. The effect on cash flow cannot be determined with the above information.

AACSB Tag: Relative Thinking


Difficulty: Hard
L.O.: 5

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Chapter 006: Reporting and Interpreting Sales Revenue, Receivables, and Cash

61. If Worldwide Waffles accounts receivable balance was $1,973 million in 2009 and $1,814
million in 2008, the impact on the statement of cash flows would be
A. An increase in cash flow from investing activities.
B. A decrease in cash flow from operating activities.
C. An increase in cash flow from operating activities.
D. A decrease in cash flow from investing activities.

AACSB Tag: Relative Thinking


Difficulty: Medium
L.O.: 5

62. Net income for Trex Outdoors in 2009 was $9,154 (in thousands). There was an addition
to net income on the statement of cash flows for $2,106 (in thousands) for the change in
accounts receivable. The accounts receivable balance on December 31, 2008 was $20,851 (in
thousands). How much was the accounts receivable balance on December 31, 2009?
A. $11,260 (in thousands)
B. $18,745 (in thousands)
C. $22,957 (in thousands)
D. $20,851 (in thousands)

AACSB Tag: Analytic


Difficulty: Hard
L.O.: 5

63. The Mickey Company reported revenue of $30,752 million for 2009. Their accounts
receivable balance was $5,330 million in 2009 and $4,912 million in 2008. Cash collected
from customers equals
A. $25,013 million
B. $28,926 million
C. $30,334 million
D. None of the answers is correct

AACSB Tag: Analytic


Difficulty: Medium
L.O.: 5

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Chapter 006: Reporting and Interpreting Sales Revenue, Receivables, and Cash

64. For accounting purposes, cash includes


A. notes receivable from employees.
B. supplies.
C. balances on deposit in banks.
D. a note received from a customer in settlement of an overdue account receivable.

AACSB Tag: Relative Thinking


Difficulty: Easy
L.O.: 6

65. When a depositor receives a bank statement indicating a "NSF check", he should
A. credit the cash account for the amount of the check.
B. record the amount as an expense of the current period.
C. credit a special receivable for the amount of the check.
D. debit sales revenue.

AACSB Tag: Relative Thinking


Difficulty: Medium
L.O.: 6

66. A deposit in transit on a bank reconciliation should be


A. added to the depositor's book cash balance.
B. subtracted from the depositor's book cash balance.
C. added to the bank statement balance.
D. subtracted from the bank statement balance.

AACSB Tag: Relative Thinking


Difficulty: Medium
L.O.: 6

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Chapter 006: Reporting and Interpreting Sales Revenue, Receivables, and Cash

67. Linetech Company's bank statement showed an ending balance of $8,000. Items appearing
in the bank reconciliation included: outstanding checks, $500; deposits in transit, $1,000;
bank service charges, $50; and Driver Company's check erroneously deducted from Linetech's
bank account by the bank, $250. The correct cash balance at the end of the month should be
reported as
A. $10,600
B. $8,750
C. $8,500
D. $8,250

AACSB Tag: Analytic


Difficulty: Hard
L.O.: 6

68. Which of the following demonstrates a poor internal control procedure?


A. The bookkeeper makes cash deposits and records journal entries related to cash, while the
treasurer prepares the bank reconciliation.
B. The president, who does no bookkeeping, prepares the bank reconciliation each month.
C. The treasurer signs all checks after the bookkeeper prepares the supporting documents.
D. One bookkeeper prepares cash deposits and the other bookkeeper enters the collections in
the journal and ledger.

AACSB Tag: AACSB Ethics


Difficulty: Medium
L.O.: 6

69. The cash records and the bank statement of Frankel Company showed the following at the
end of February 2009: Outstanding checks at the end of January 2009, $8,000; checks written
by Frankel Company during February 2009, $50,000; and checks cleared by the bank during
February 2009, $54,000. Therefore, the outstanding checks at the end of February 2009,
amounted to
A. $2,000.
B. $4,000.
C. $6,000.
D. $8,000.

AACSB Tag: Analytic


Difficulty: Hard
L.O.: 6

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Chapter 006: Reporting and Interpreting Sales Revenue, Receivables, and Cash

70. The cash account and the December bank statement of Gomez Company showed the
following: Deposits made by Gomez Company during December 2009, $90,000; deposits
reflected on the December 2009 bank statement, $88,000; and deposits in transit on
November 30, 2009, $5,000. Therefore, the deposits in transit at the end of December 2009
amounted to
A. $10,000.
B. $ 7,000.
C. $ 5,000.
D. $ 2,000.

AACSB Tag: Analytic


Difficulty: Hard
L.O.: 6

71. To aid internal control, the individual authorized to sign checks should be the
A. supervisor of receiving.
B. accounts payable bookkeeper.
C. treasurer.
D. purchasing agent.

AACSB Tag: Ethics


Difficulty: Easy
L.O.: 6

72. Effective control of cash requires that


A. one person handle the receipts and disbursements of cash.
B. cash be deposited monthly in a bank.
C. there be approval of cash payments.
D. a reconciliation of the bank balance with the cash balance be prepared twice a year.

AACSB Tag: Ethics


Difficulty: Medium
L.O.: 6

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Chapter 006: Reporting and Interpreting Sales Revenue, Receivables, and Cash

73. When preparing the monthly bank reconciliation, the accountant for Fareway Corporation
discovered that a check correctly written to one of Fareway's suppliers for $159 had been
incorrectly recorded in the books as $195. To correct the error, the accountant prepared an
adjusting entry which required a debit to
A. Cash.
B. Bad debt expense.
C. Accounts receivable.
D. Purchases.

AACSB Tag: Relative Thinking


Difficulty: Medium
L.O.: 6

74. When preparing a bank reconciliation, which of the following would be deducted from the
company's cash balance?
A. Interest paid by bank.
B. Deposits in transit.
C. Outstanding checks.
D. Bank service charges.

AACSB Tag: Relative Thinking


Difficulty: Easy
L.O.: 6

75. Merchandise was sold on credit for $10,000, terms 2/10, n/30. The entry to record the cash
collection should include a
A. debit Cash, $10,000, and credit Accounts Receivable, $10,000, if collected within the
discount period.
B. debit Cash, $10,000, and credit Accounts Receivable, $9,800, and Sales Discount, $200, if
collected within the discount period.
C. debit Cash, $10,000, and credit Accounts Receivable, $9,800, and Sales Discount, $200, if
collected after the discount period.
D. debit Cash, $10,000, and credit Accounts Receivable, $10,000, if collected after the
discount period.

AACSB Tag: Analytic


Difficulty: Hard
L.O.: Sup A

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Chapter 006: Reporting and Interpreting Sales Revenue, Receivables, and Cash

76. A customer purchased a $2,000 item at ApplianceWorld, paying with a credit card
(VISA). The merchant is charged a 2% fee by the credit card company. When recording this
sale, the merchant would:
A. debit accounts receivable for $2,000.
B. credit sales revenue for $2,000.
C. credit sales revenue for $1,800.
D. credit unearned sales revenue for $2,000.

AACSB Tag: Analytic


Difficulty: Medium
L.O.: Sup A

77. Under the installment method, revenue is recognized when the customer
A. orders the merchandise.
B. receives the merchandise.
C. receives the bill.
D. makes a cash payment.

AACSB Tag: Relative Thinking


Difficulty: Easy
L.O.: Sup B

78. Under the percentage-of-completion method, revenue is recognized


A. when construction begins on the project.
B. when the project is complete.
C. throughout the project, based upon the amount of work completed each year.
D. throughout the project, based upon the amount of cash received from the customer.

AACSB Tag: Relative Thinking


Difficulty: Easy
L.O.: Sup B

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Chapter 006: Reporting and Interpreting Sales Revenue, Receivables, and Cash

79. If a company uses the completed-contract method rather than the percentage-ofcompletion method, the total net income the company recognizes from the beginning of the
project throughout its completion
A. will be greater if the completed-contract method is used.
B. will be greater if the percentage-of-completion method is used.
C. will be the same for both methods.
D. will be greater for the completed-contract method only if the project takes longer than five
years to complete.

AACSB Tag: Relative Thinking


Difficulty: Medium
L.O.: Sup B

Essay Questions
80. The following data were taken from the records of Cerro Gordo, Incorporated, at
December 31, 2009:

Requirements:
A. Prepare a complete single-step income statement for the company (including pretax
income and earnings per share).
B. Prepare a complete multiple-step income statement for the company (including gross
margin, pretax income, and earnings per share).

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Chapter 006: Reporting and Interpreting Sales Revenue, Receivables, and Cash

AACSB Tag: Analytic


Difficulty: Hard
L.O.: 2

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Chapter 006: Reporting and Interpreting Sales Revenue, Receivables, and Cash
81. The following data were taken from the records of Lilo Corporation on December 31,
2010:

Items not included in above amounts:


Estimated bad debt loss, 1% of credit sales.
Average income tax rate, 35%.
Number of shares of common stock outstanding, 10,000
Requirements:
A. Based on the above data, prepare a multiple-step income statement (including gross
margin, pretax income, and earnings per share).
B. 1. How much was the gross margin?
2. What was the gross margin ratio?
3. Explain what these two amounts mean.

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Chapter 006: Reporting and Interpreting Sales Revenue, Receivables, and Cash

B. 1. $940,000
$610,000 = $330,000
2. $330,000/$940,000 = 35.1%
3. Gross margin in dollars is the amount of markup earned on the good sold during 2010. This
is the amount "left" to cover operating expenses and income tax expense with any remainder
accruing to the owners.
Gross margin ratio is the average percent (rate) markup earned during 2010. Here, 35.1 cents
of each sales dollar is left to cover operating expenses and income tax expense with the
remainder accruing to the owners.

AACSB Tag: Analytic


Difficulty: Hard
L.O.: 2

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Chapter 006: Reporting and Interpreting Sales Revenue, Receivables, and Cash

82. A portion of the income statement for Oscar Company is shown below. Provide the
missing account titles and amounts.

A. Sales revenue
B. $350,000
$348,000 = $2,000
C. Net sales
D. Cost of goods sold; $348,000
$90,000 = $258,000

AACSB Tag: Analytic


Difficulty: Medium
L.O.: 2

83. A portion of the income statement for Lone Star Company is shown below. Provide the
missing account titles and amounts.

A. Sales revenue
B. $380,000
$20,000 = $360,000
C. Gross margin
D. $360,000
$100,000 = $260,000

AACSB Tag: Analytic


Difficulty: Medium
L.O.: 2

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Chapter 006: Reporting and Interpreting Sales Revenue, Receivables, and Cash

84. Indicate whether each of the accounts listed below normally will have a debit or a credit
balance. Record your answer to the left of each account by entering either Dr or Cr.

1. Cr; 2. Dr; 3. Dr; 4. Cr; 5. Dr; 6. Dr; 7. Cr; 8. Dr

AACSB Tag: Relative Thinking


Difficulty: Easy
L.O.: 2

85. Anthony Inc. reported the following amounts on their 2009 and 2008 income statements:

A. Compute the gross profit percentage for both years.


B. Provide at least two potential causes for the change in Anthony's gross profit percentage.
A. 2009 = 61.1% ($12,495/$20,438) 2008 = 59.7% ($12,169/$20,367)
B. Anthony may have higher sales prices, lower costs of producing their product, a change in
the sales mix of their products toward selling more of the higher margin products, lower
inventory losses, and lower storage costs.

AACSB Tag: Analytic


Difficulty: Medium
L.O.: 3

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Chapter 006: Reporting and Interpreting Sales Revenue, Receivables, and Cash

86. PhotoFly has reported the following information on their income statements for the years
2008 through 2012:

A. Compute the gross profit percentage for each year.


B. Has the gross profit ratio for PhotoFly improved over time or worsened? Explain your
answer.
A. 2012 = 31.0% ($3,517/$11,332) 2011 = 29.9% ($3,541/$11,862) 2010 = 26.7%
($2,979/$11,170) 2009 = 30.2% ($3,328/$11,038) 2008 = 30.6% ($3,040/$9,932).
B. The gross profit margin was eroding from 2008 through 2010 but then it recovered from
the low of 26.7% in 2010 to its highest level in 2012 of 31.0%.

AACSB Tag: Analytic


Difficulty: Medium
L.O.: 3

87. Hickory Corporation recorded sales revenue during the year of $350,000 of which
$100,000 was on credit. The company has experienced an average loss rate of 2% of credit
sales. Give the adjusting journal entry at the end of the year to record bad debt expense.

AACSB Tag: Analytic


Difficulty: Medium
L.O.: 4

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Chapter 006: Reporting and Interpreting Sales Revenue, Receivables, and Cash

88. Near the end of 2010, the ledger of Stivers Company included the following accounts and
balances:

Cash collections on accounts receivable during 2010 amounted to $450,000. Sales revenue
during 2010 amounted to $800,000, of which 75% was on credit, and it was estimated that 2%
of the credit sales made in 2010 would ultimately become uncollectible. Before adjusting
entries were made for 2010, (A) a $10,000 account was determined to be uncollectible and
written off by Stivers and (B) bad debt expense was recorded to 2010. These adjustments are
not reflected in the account balances above.
After the above entries were posted to the ledger, calculate the balances of the allowance for
doubtful accounts, bad debt expense and accounts receivable. Indicate whether the balance is
a debit or a credit.
Allowance for doubtful accounts $3,000 credit ($1,000 + $12,000
$10,000)
Bad debt expense $12,000 debit [($800,000
75%)
2%)]
Accounts receivable $340,000 debit [$200,000
$450,000 + ($800,000
75%)
$10,000]

AACSB Tag: Analytic


Difficulty: Hard
L.O.: 4

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Chapter 006: Reporting and Interpreting Sales Revenue, Receivables, and Cash

89. On December 31, 2009, Colonial Corporation had the following account balances related
to credit sales and receivables prior to recording adjusting entries:

Required:
Present the necessary year-end adjusting entry related to uncollectible accounts for each of
the following independent assumptions:
A. An aging of accounts receivable is completed. It is estimated that $2,150 of the
receivables outstanding at year-end will be uncollectible.
B. It is estimated that 1% of credit sales for the year will prove to be uncollectible.
C. Assume the same information presented in (1. above except that prior to adjustment, the
Allowance for Doubtful Accounts had a debit balance of $200 rather than a credit balance of
$200.
A.

B.

C.

AACSB Tag: Analytic


Difficulty: Medium
L.O.: 4

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Chapter 006: Reporting and Interpreting Sales Revenue, Receivables, and Cash

90. American Company uses the allowance method to account for uncollectible accounts. On
January 1, The Allowance for Doubtful Accounts had a credit balance of $3,000. The balance
in the Accounts Receivable account on that date was $75,000. On January 2, prior to any
credit sales, a $500 account from National Company was deemed to be uncollectible and
written off.
Required:
A. Compute the net realizable value of American's receivables on January 1.
B. Present the journal entry American would record on January 2 related to the write-off of
National's account.
C. Compute the net realizable value of American's receivables on January 2, immediately
following the write-off of National's account.
A. $75,000
B.

$3,000 = $72,000.

C. $72,000 = ($75,000

$500)

($3,000

$500)

AACSB Tag: Analytic


Difficulty: Medium
L.O.: 4

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Chapter 006: Reporting and Interpreting Sales Revenue, Receivables, and Cash

91. Cyclone Inc. reported the following figures from their financial statements for the years
2009 through 2011:

Calculate the gross profit ratio for all three years:


2011 = 78.1% ($560,421/$717,422)
2010 = 86.5% ($960,434/$1,110,178)
2009 = 84.3% ($498,605/$591,786)

AACSB Tag: Analytic


Difficulty: Easy
L.O.: 3

92. Cyclone Inc. reported the following figures from their financial statements for the years
2009 through 2011:

Calculate how the change in accounts receivable will effect the statement of cash flows for
2011 and 2010:
2011 = $21,913 increase in cash [$90,561
$68,648]
2010 = ($34,107) decrease in cash [$56,454
$90,561]

AACSB Tag: Analytic


Difficulty: Medium
L.O.: 5

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Chapter 006: Reporting and Interpreting Sales Revenue, Receivables, and Cash

93. Cyclone Inc. reported the following figures from their financial statements for the years
2009 through 2011:

Calculate the accounts receivable turnover for 2011 and 2010:


2011 = 9.01 ($717,422/$79,604.5)
2010 = 15.1 ($1,110,178/$73,507.5)

AACSB Tag: Analytic


Difficulty: Medium
L.O.: 5

94. Cyclone Inc. reported the following figures from their financial statements for the years
2009 through 2011:

Calculate the days' sales in receivables for 2011 and 2010:


2011 = 40.5 days, (365/9.01)
2010 = 24.2 days (365/15.1)

AACSB Tag: Analytic


Difficulty: Medium
L.O.: 5

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Chapter 006: Reporting and Interpreting Sales Revenue, Receivables, and Cash

95. A recent annual report for Pap's Pop contained the following data:

A. Calculate the accounts receivable turnover ratio and average days' sales in receivables for
2011.
B. Explain the meaning of each number.
A. Accounts receivable turnover ratio = 9.6 ($18,158/$1,893.5)
Average days' sales in receivables = 38 days (365 days/9.6).
B. The turnover ratio indicates the number of times on average that the receivables are
collected while the days sales in receivables shows the length of time in days it takes the
company to collect its receivables from the credit customers. The higher the turnover ratio,
the fewer days it takes to collect our receivables, thereby increasing liquidity of the
receivables.

AACSB Tag: Analytic


Difficulty: Medium
L.O.: 5

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Chapter 006: Reporting and Interpreting Sales Revenue, Receivables, and Cash

96. During 2009, Charles Inc. recorded credit sales of $2,000,000. Based on prior experience,
it estimates a 1 percent bad debt rate on credit sales. At the beginning of the year, the balance
in accounts receivable, net was $150,000. At the end of the year, but before the bad debt
expense adjustment was recorded and before any bad debts had been written off, the balance
in accounts receivable, net was $125,000.
A. Assume that on December 31, 2009, the appropriate bad debt expense adjustment was
recorded for the year 2009 and accounts receivable totaling $10,000 were written off for the
year, what was the receivables turnover ratio for the year?
B. Assume that on December 31, 2009, the appropriate bad debt expense adjustment was
recorded for the year 2009 and accounts receivable totaling $12,000 were written off for the
year, what was the receivables turnover ratio for the year?
C. Explain why the answers to parts 1 and 2 differ or do not differ.
A. 15.69 ($2,000,000/ [$150,000 + $105,000]/2)
B. 15.69 (same calculation)
C. The ratio stayed the same because only the adjusting entry affects the balance of accounts
receivable, net while the actual write off of customer accounts simply offset the asset against
the contra-asset account so that net receivables do not change.

AACSB Tag: Analytic


Difficulty: Hard
L.O.: 5

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Chapter 006: Reporting and Interpreting Sales Revenue, Receivables, and Cash

97. Where, if at all, do items A through G (listed below) belong in the following bank
reconciliation?

Items:
A. Checks written during June that had not cleared the bank by June 30.
B. Bank service charges for June which were not known until the June 30th bank statement
arrived.
C. Deposit made on June 30 that did not reach the bank until July 1.
D. Upon reviewing the company's cash receipts book after June 30, it was discovered the
accounting clerk had neglected to post one receipt to the cash account.
E. The bank statement reported a "NSF check" during June.
F. The bank incorrectly deducted the check of another company to the bank account during
June.
G. The company was paid interest on its account by the bank.
(1.) C, F; (2.) A; (3.) D, G; (4.) B, E.

AACSB Tag: Relative Thinking


Difficulty: Hard
L.O.: 6

98. Why is the reconciliation of a company's cash account to the bank statement so important
for effective internal control for cash?
The reconciliation of the cash account is very important in determining the correct, up-to-date
balance for cash to be presented on the company's balance sheet. It is also a good tool for
detecting errors in the cash account.

AACSB Tag: Relative Thinking


Difficulty: Medium
L.O.: 6

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Chapter 006: Reporting and Interpreting Sales Revenue, Receivables, and Cash

99. Illinois Company prepared the following bank reconciliation at May 31:

Give all of the journal entries for Illinois Company required by the May 31 bank
reconciliation.

AACSB Tag: Analytic


Difficulty: Medium
L.O.: 6

6-41
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Chapter 006: Reporting and Interpreting Sales Revenue, Receivables, and Cash
100. Chicago Company has hired you to reconcile its bank statement and cash account. For
June, the Cash account showed the following:

The June bank statement, just received, showed the following:

There were neither outstanding checks nor deposits in transit at May 31.
A. Prepare the bank reconciliation.
B. Prepare the adjusting journal entries needed due to the bank reconciliation.
C. What is the June 30 ending cash balance?

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Chapter 006: Reporting and Interpreting Sales Revenue, Receivables, and Cash

AACSB Tag: Analytic


Difficulty: Medium
L.O.: 6

6-43
2009 McGraw-Hill Inc. Test Bank to accompany Libby Financial Accounting 6/e

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Chapter 006: Reporting and Interpreting Sales Revenue, Receivables, and Cash
101. A comparison of the balance in Cottonwood Company's cash account (per its books) as
of April 30, 2009, and the bank statement dated April 30, 2009, revealed the following
information:

Required:
Prepare a bank reconciliation using the format below. Indicate the proper handling of each of
the items given above by listing the appropriate item code (letter) and amount under each
section of the reconciliation statement form below. Then determine the correct cash balance.
Note: If one or more of the items given above should not appear on the reconciliation
statement, do not include the item(s).

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Chapter 006: Reporting and Interpreting Sales Revenue, Receivables, and Cash

AACSB Tag: Analytic


Difficulty: Medium
L.O.: 6

6-45
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Chapter 006: Reporting and Interpreting Sales Revenue, Receivables, and Cash
102. Burke Company has just received its June 30 bank statement from Urban Bank. The
bank statement and the cash account, summarized below, are to be reconciled for the month of
June.

Required:
A. Prepare a bank reconciliation.
B. Give the journal entries that should be made in the accounts of Burke Company as a result
of the above bank reconciliation.

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Chapter 006: Reporting and Interpreting Sales Revenue, Receivables, and Cash

AACSB Tag: Analytic


Difficulty: Medium
L.O.: 6

6-47
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Chapter 006: Reporting and Interpreting Sales Revenue, Receivables, and Cash
103. Kerr Company received the following October 31, 2009 bank statement:

The cash account reflected the following for October:

The September 30 bank reconciliation showed deposits in transit, $3,000, and outstanding
checks, $500.
Required:
A. What was the amount of the deposits in transit at October 31?
B. What was the amount of outstanding checks at October 31?
C. Prepare a bank reconciliation for October. Use the following format:

D. Give the journal entries that should be made by Kerr Company based on the bank
reconciliation.

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Chapter 006: Reporting and Interpreting Sales Revenue, Receivables, and Cash
A. [$38,000

(40,000

B. [$38,600

($38,300

3,000)] = $1,000
500)] = $800

C.

D. Entries

AACSB Tag: Analytic


Difficulty: Hard
L.O.: 6

104. What are "cash equivalents"? Specifically where would they appear on the financial
statements?
Cash equivalents are short-term investments that can be readily converted into cash and
whose value is unlikely to change. They normally have maturities of three months or less.
They usually appear with cash on the balance sheet as the first listed current asset.

AACSB Tag: Relative Thinking


Difficulty: Easy
L.O.: 6

6-49
2009 McGraw-Hill Inc. Test Bank to accompany Libby Financial Accounting 6/e

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Chapter 006: Reporting and Interpreting Sales Revenue, Receivables, and Cash

105. You are the new manager of West Coast Company. The company distributes goods
throughout the Rocky Mountain area. Customers are billed after the shipments are sent. Most
customers pay within two weeks. You notice that one employee is responsible for opening all
incoming payments, recording them in the accounting records, and depositing all receipts in
the bank daily. When asked why this one person performed all of these duties, you were told
that it was more efficient for one person to handle cash and to keep track of things. If any cash
was missing, responsibility could be easily determined. Do you agree with this arrangement?
If you were to make changes, what would you do, and why?
Note: Answers may vary. This is definitely not a good system. One person should not be
responsible for the receipt of cash, accounting for cash, and depositing in the bank. The duties
of handling cash and accounting for cash should definitely be separated. This person could be
stealing from the firm; since he/she is the only one handling the receipt of cash, the theft
could easily be concealed. For example, when a customer pays cash on account, the employee
could debit sales returns and allowances instead of the cash account. To prevent such an
occurrence, different employees should have the responsibility of receiving cash, accounting
for cash, and depositing cash in the bank on a daily basis.

AACSB Tag: Ethics


Difficulty: Medium
L.O.: 6

6-50
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Chapter 006: Reporting and Interpreting Sales Revenue, Receivables, and Cash

106. Asia Company sold $10,000 of goods to Euro Company on credit on May 1. At the time
of the sale, Asia recorded a debit to Accounts Receivable and a credit to Sales Revenue for
$10,000. Terms were 2/10, n/30.
Required: Present the entries Asia Company would record for each of the following
independent situations:
A. Euro paid the balance due, less the discount, on May 10.
B. Euro returned half of the goods for credit on May 4. Euro paid the balance due, less the
discount, on May 10.
C. Euro paid their bill on May 30 (there were no returns).

AACSB Tag: Analytic


Difficulty: Hard
L.O.: Sup A

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Chapter 006: Reporting and Interpreting Sales Revenue, Receivables, and Cash

107. On July 10, 2010, Rex Company sold merchandise at an invoice price of $5,000 with
terms of 2/10, n/30. Give the journal entries required below by indicating the account code of
the appropriate account for each debit and credit and the amounts involved.

AACSB Tag: Analytic


Difficulty: Medium
L.O.: Sup B

6-52
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Chapter 006: Reporting and Interpreting Sales Revenue, Receivables, and Cash

108. On June 1, 2010, Concorde Company sold merchandise on credit at an invoice price of
$1,000; terms 2/10, n/30. Give the journal entries to record the following:
A. To record the sale.
B. Assumption A: To record collection on June 28, 2010.
C. Assumption B: To record collection on June 9, 2010.

AACSB Tag: Analytic


Difficulty: Medium
L.O.: Sup B

6-53
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Chapter 006: Reporting and Interpreting Sales Revenue, Receivables, and Cash

109. Thomas' Toy World sells a variety of toys at discount prices. The following transactions
occurred on May 16. Consider credit card discount a selling expense.
A. Sold a bike for $250 cash.
B. Sold a $900 swing set; customer will be billed at the end of the month.
C. Customer returned a $45 doll that had been purchased for cash on May 12; gave customer
a cash refund.
D. Sold a pair of $100 roller blades; customer paid with a credit card. The credit card
company charges Thomas' Toy World a 2% fee for this service.
Required:
a. Present journal entries for each of the above transactions.
b. Compute the net sales for the day.
a.

b. Net sales = Sales Revenue


$1203 = $1,250
$45
$2

Sales R&A

Credit Card Discounts

AACSB Tag: Analytic


Difficulty: Medium
L.O.: 2 and Sup B

6-54
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Chapter 006: Reporting and Interpreting Sales Revenue, Receivables, and Cash

Matching Questions
110. This question relates to accounting for cash. For each item listed, indicate the best
description.
1. Cash reported on
the balance sheet
2. Outstanding
checks

Checks written but not yet cashed by the bank 2

None of the answers apply


Deposits made but not yet reflected on the bank
3. NSF check
statement
A check received from a customer, then deposited in
the bank and later returned as a "bounced" check or "bad"
4. Cash equivalents
check due to lack of funds in the customer's account
The "true" amount for the company and the bank as
reflected on the bank reconciliation (assuming no
5. Deposits in transit
undeposited cash)

4
5

AACSB Tag: Relative Thinking


Difficulty: Medium
L.O.: 6

6-55
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Chapter 006: Reporting and Interpreting Sales Revenue, Receivables, and Cash

111. Indicate the effect on a monthly bank reconciliation of each of the items listed below.

1. A deposit in transit

2. Interest paid by the bank

3. The monthly service fee charged by the bank


4. A company recorded a check as a credit to its cash
account in the books. The check was recorded for $360
but it was actually written to a supplier for $630.
Assume the bank correctly recorded this check for $630
when cleared

5. An outstanding check

6. A customer's check returned by the bank marked


NSF

Deduction from the


balance in the
company's Cash
account 3
Deduction from the
balance in the
company's Cash
account 6
Addition to the
balance on the bank
statement 1
Addition to the
balance in the
company's Cash
account 2
Deduction from the
balance on the bank
statement 5
Deduction from the
balance in the
company's Cash
account 4

AACSB Tag: Relative Thinking


Difficulty: Medium
L.O.: 6

6-56
2009 McGraw-Hill Inc. Test Bank to accompany Libby Financial Accounting 6/e

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