FAC Accounts Receivable & Accounts Payable Management 1 — Questions and Answers
Question 1: What does the payment term 'net 30' mean in accounts receivable?
- Payment is due within 30 days of the invoice date (Correct answer)
- A 30% discount is available if paid early
- The invoice covers a 30-day billing cycle
- Interest accrues after 30 days at the net rate
Correct answer: Payment is due within 30 days of the invoice date
Net 30 means the full invoice amount is due within 30 calendar days from the invoice date, with no early-payment discount offered.
Question 2: An accounts receivable aging schedule categorizes outstanding receivables primarily by:
- Customer credit score and industry type
- The length of time invoices have been outstanding (Correct answer)
- Geographic region of the customer
- The size of the invoice amount
Correct answer: The length of time invoices have been outstanding
An AR aging schedule groups outstanding invoices by how long they have been unpaid (e.g., 0–30 days, 31–60 days), helping identify overdue accounts.
Question 3: Under the direct write-off method, a bad debt is recorded when:
- An estimate is made at year-end based on historical loss rates
- Management decides a specific account is uncollectible (Correct answer)
- The customer files for bankruptcy protection
- The invoice exceeds 90 days past due
Correct answer: Management decides a specific account is uncollectible
The direct write-off method recognizes bad debt expense only when a specific receivable is deemed uncollectible, rather than using estimates.
Question 4: The allowance method of accounting for uncollectible accounts is preferred under GAAP because it:
- Eliminates the need for an aging schedule
- Matches bad debt expense to the period revenue was earned (Correct answer)
- Is simpler to calculate than the direct write-off method
- Requires no adjusting entries at year-end
Correct answer: Matches bad debt expense to the period revenue was earned
The allowance method adheres to the matching principle by estimating and recording bad debt expense in the same period the related revenue is recognized.
Question 5: When a customer pays an account that was previously written off under the allowance method, the company should:
- Credit bad debt expense directly for the amount received
- Reverse the write-off entry and then record the cash receipt (Correct answer)
- Record the cash received as miscellaneous income
- Leave the allowance account unchanged and record only the cash
Correct answer: Reverse the write-off entry and then record the cash receipt
The write-off must first be reversed to reinstate the receivable, and then the cash receipt is recorded normally, ensuring the allowance account remains accurate.
Question 6: Days Sales Outstanding (DSO) is best described as:
- The number of days inventory sits before being sold
- The average number of days it takes to collect payment after a sale (Correct answer)
- The time between placing a purchase order and receiving goods
- The number of outstanding invoices divided by daily sales
Correct answer: The average number of days it takes to collect payment after a sale
DSO measures collection efficiency by calculating the average number of days between a credit sale and receipt of payment, with a lower DSO indicating faster collection.
Question 7: A credit memo issued by a seller to a customer in accounts receivable most commonly indicates:
- The customer has made an overpayment requiring a refund credit
- A reduction in the amount owed due to returns, allowances, or billing errors (Correct answer)
- Authorization for the customer to take an early payment discount
- The customer's credit limit has been increased
Correct answer: A reduction in the amount owed due to returns, allowances, or billing errors
A credit memo reduces the customer's outstanding balance, typically issued for returned goods, price adjustments, or corrections to billing errors.
FAC Accounts Receivable & Accounts Payable Management 1
What does the payment term 'net 30' mean in accounts receivable?