CPB / BookKeeping Accounts Receivable and Accounts Payable 2 — Questions and Answers
Question 1: What is the primary purpose of a vendor invoice in the accounts payable process?
- To record sales made to customers
- To document amounts owed by the company to a supplier (Correct answer)
- To authorize the shipment of goods to customers
- To reconcile the company's bank statement
Correct answer: To document amounts owed by the company to a supplier
A vendor invoice is the bill received from a supplier that documents the goods or services provided and the amount owed by the purchasing company.
Question 2: Under the allowance method, the entry to record estimated bad debt expense is:
- Debit Bad Debt Expense, Credit Accounts Receivable
- Debit Allowance for Doubtful Accounts, Credit Bad Debt Expense
- Debit Bad Debt Expense, Credit Allowance for Doubtful Accounts (Correct answer)
- Debit Accounts Receivable, Credit Bad Debt Expense
Correct answer: Debit Bad Debt Expense, Credit Allowance for Doubtful Accounts
The allowance method requires estimating uncollectible accounts by debiting Bad Debt Expense and crediting the contra asset Allowance for Doubtful Accounts.
Question 3: What is factoring in the context of accounts receivable?
- Breaking receivables into installment payments
- Selling receivables to a third party at a discount for immediate cash (Correct answer)
- Aging receivables into time buckets for analysis
- Converting receivables to notes payable
Correct answer: Selling receivables to a third party at a discount for immediate cash
Factoring involves selling accounts receivable to a factor (third party) at a discount, allowing the company to receive immediate cash rather than waiting for customer payments.
Question 4: Which document typically authorizes the accounts payable department to release payment to a vendor?
- Sales invoice
- Purchase requisition
- Receiving report matched with the purchase order and vendor invoice (Correct answer)
- Chart of accounts
Correct answer: Receiving report matched with the purchase order and vendor invoice
A three-way match — comparing the purchase order, receiving report, and vendor invoice — authorizes payment by confirming that what was ordered and received matches what is being billed.
Question 5: The Allowance for Doubtful Accounts is classified on the balance sheet as a:
- Current liability
- Contra-asset account reducing accounts receivable (Correct answer)
- Operating expense
- Long-term asset
Correct answer: Contra-asset account reducing accounts receivable
The Allowance for Doubtful Accounts is a contra-asset that offsets gross accounts receivable to present the net realizable value on the balance sheet.
Question 6: When a specific customer account is written off using the allowance method, the journal entry is:
- Debit Bad Debt Expense, Credit Accounts Receivable
- Debit Allowance for Doubtful Accounts, Credit Accounts Receivable (Correct answer)
- Debit Accounts Receivable, Credit Allowance for Doubtful Accounts
- Debit Cash, Credit Accounts Receivable
Correct answer: Debit Allowance for Doubtful Accounts, Credit Accounts Receivable
Writing off a specific bad debt under the allowance method debits the Allowance (reducing the reserve) and credits Accounts Receivable (removing the balance), with no impact on the income statement.
Question 7: A vendor offers terms '2/10, net 30.' What does this mean?
- Pay within 2 days and get a 10% discount; full amount due in 30 days
- A 2% discount is available if paid within 10 days; otherwise, full amount is due in 30 days (Correct answer)
- Pay 10% upfront within 2 days; balance due in 30 days
- Interest of 2% per month applies after 10 days, up to 30 days
Correct answer: A 2% discount is available if paid within 10 days; otherwise, full amount is due in 30 days
Terms '2/10, net 30' mean the buyer earns a 2% early-payment discount if the invoice is paid within 10 days; otherwise the full amount is due within 30 days.
CPB / BookKeeping Accounts Receivable and Accounts Payable 2
What is the primary purpose of a vendor invoice in the accounts payable process?