FAC Accounts Receivable & Accounts Payable Management

Question 1

What does the payment term 'net 30' mean in accounts receivable?

Accepted Answer

Payment is due within 30 days of the invoice date

Answer

A 30% discount is available if paid early

Answer

The invoice covers a 30-day billing cycle

Answer

Interest accrues after 30 days at the net rate

Question 2

An accounts receivable aging schedule categorizes outstanding receivables primarily by:

Accepted Answer

The length of time invoices have been outstanding

Answer

Customer credit score and industry type

Answer

Geographic region of the customer

Answer

The size of the invoice amount

Question 3

Under the direct write-off method, a bad debt is recorded when:

Accepted Answer

Management decides a specific account is uncollectible

Answer

An estimate is made at year-end based on historical loss rates

Answer

The customer files for bankruptcy protection

Answer

The invoice exceeds 90 days past due

Question 4

The allowance method of accounting for uncollectible accounts is preferred under GAAP because it:

Accepted Answer

Matches bad debt expense to the period revenue was earned

Answer

Eliminates the need for an aging schedule

Answer

Is simpler to calculate than the direct write-off method

Answer

Requires no adjusting entries at year-end

Question 5

When a customer pays an account that was previously written off under the allowance method, the company should:

Accepted Answer

Reverse the write-off entry and then record the cash receipt

Answer

Credit bad debt expense directly for the amount received

Answer

Record the cash received as miscellaneous income

Answer

Leave the allowance account unchanged and record only the cash

Question 6

Days Sales Outstanding (DSO) is best described as:

Accepted Answer

The average number of days it takes to collect payment after a sale

Answer

The number of days inventory sits before being sold

Answer

The time between placing a purchase order and receiving goods

Answer

The number of outstanding invoices divided by daily sales

Question 7

A credit memo issued by a seller to a customer in accounts receivable most commonly indicates:

Accepted Answer

A reduction in the amount owed due to returns, allowances, or billing errors

Answer

The customer has made an overpayment requiring a refund credit

Answer

Authorization for the customer to take an early payment discount

Answer

The customer's credit limit has been increased