Accounts Receivable and Bad Debts Quiz Questions and Answers

Accounts Receivable and Bad Debts Quiz Questions and Answers

Effectively managing accounts receivable and understanding bad debt accounting are fundamental to financial accuracy and solid decision-making. This expertly developed quiz, titled Accounts Receivable and Bad Debts Quiz Questions and Answers, is designed to sharpen your grasp of credit management, write-off strategies, and reporting under GAAP and IFRS.

Whether you’re an accounting student, a professional polishing your reporting skills, or someone preparing for certification, this resource seamlessly blends exam-style questions with rich explanations to turn knowledge into confidence.

What Makes This Quiz Stand Out

The real value lies not just in the answers, but in the reasoning. This quiz goes beyond simply listing the correct option—each question comes with clear, context-rich explanations that connect accounting principles to practical scenarios. Understand why the allowance method better aligns with the matching principle, or how aging schedules fine-tune bad debt estimates.

Key Topics You’ll Master

• Accounts Receivable Fundamentals: Grasp how credit sales are recorded, monitored, and managed.
• Bad Debt Methods: Differentiate between Allowance and Direct Write-Off methods, including journal entries and their effects on financial statements.
• Aging Techniques & Percentages: Learn how aging schedules and percentage-based calculations drive realistic allowance estimates.
• Financial Statement Impacts: See how bad debts affect net income, assets, and equity — especially in relation to net realizable value.
• Credit Risk Management & Controls: Explore internal controls, credit approval processes, recoveries of previously written-off amounts, and GAAP compliance considerations.
• Ratio Analysis & Ratios: Familiarize yourself with key performance indicators like accounts receivable turnover and what they reveal about collection efficiency.
• Advanced Scenarios: Tackle topics such as factoring receivables, reinstating defaulted accounts, economic influences on bad debts, and ethical reporting practices.

Each section is structured to improve retention and deepen conceptual understanding—all while reinforcing the core theme: Accounts Receivable and Bad Debts Quiz Questions and Answers.

Who Will Benefit

• Accounting Students – Prepare for your exams with targeted practice and authoritative explanations.
• Certified Accountants & Finance Pros – Refresh your knowledge for reporting accuracy and audit readiness.
• Educators & Trainers – Utilize high‑caliber content to guide learners through complex accounting concepts.
• Small Business Owners & Managers – Build clarity on how receivables and bad debts influence your financials and cash flow.

SEO-Driven by Design

This content is intentionally structured for discoverability: the focus keyword appears naturally without forced repetition; headings and bullet points promote readability; and the tone remains professional yet conversational. This ensures smooth indexing while delivering value to both search engines and real users.

FAQ

What does the quiz cover?

It addresses key aspects of accounts receivable and bad debt accounting, including fundamental concepts, write-off methods, aging schedules, recoveries, financial reporting, and internal controls.

Are explanations included alongside answers?

Yes—each question is complemented by a robust explanation to help you understand why the correct answer is correct and what principles it reflects.

Which bad debt methods are featured in the quiz?

The quiz covers both the Allowance Method (preferred under GAAP) and the Direct Write-Off Method, including their journal entries, pros and cons, and effects on financial statements.

Does the quiz include ratio analysis?

Yes—it explores metrics like accounts receivable turnover and net realizable value, helping you assess collection efficiency and asset valuation.

Is this useful for professional exam preparation?

Absolutely. The realistic format and depth of explanations make it excellent for CPA, CMA, or accounting certification readiness.

Does the quiz include challenging real-world situations?

Yes. You’ll find scenarios related to recoveries, factoring, aging differences during economic shifts, and ethical accounting practices to build practical understanding.

Questions

What is the primary purpose of accounts receivable?

A) Record liabilities
B) Track sales on credit
C) Record cash sales
D) Manage inventory

Which of the following accounts is debited when a customer pays their outstanding balance?

A) Accounts Receivable
B) Sales Revenue
C) Cash
D) Bad Debts Expense

What type of account is “Allowance for Doubtful Accounts”?

A) Asset
B) Contra-asset
C) Liability
D) Revenue

The direct write-off method violates which accounting principle?

A) Matching principle
B) Cost principle
C) Revenue recognition principle
D) Full disclosure principle

What is the journal entry to record bad debts under the allowance method?

A) Debit Bad Debts Expense; Credit Accounts Receivable
B) Debit Bad Debts Expense; Credit Allowance for Doubtful Accounts
C) Debit Accounts Receivable; Credit Allowance for Doubtful Accounts
D) Debit Allowance for Doubtful Accounts; Credit Bad Debts Expense

Which method estimates uncollectible accounts based on the percentage of sales?

A) Direct write-off method
B) Aging of receivables method
C) Percentage of sales method
D) Percentage of accounts receivable method

Under the aging of receivables method, older receivables are:

A) Less likely to be collected
B) More likely to be collected
C) Ignored in bad debt estimation
D) Always written off

If a company uses the percentage of receivables method, what is the focus?

A) Net sales
B) Total sales
C) Year-end accounts receivable balance
D) Total expenses

What is the effect of recording bad debts expense on total assets?

A) Increases total assets
B) Decreases total assets
C) No effect on total assets
D) Increases liabilities

Which document authorizes the extension of credit to a customer?

A) Invoice
B) Sales order
C) Credit memo
D) Credit approval form

The term “net realizable value” refers to:

A) Total credit sales
B) Accounts receivable less allowance for doubtful accounts
C) Total cash received
D) Gross accounts receivable balance

A customer’s account is written off as uncollectible. This affects:

A) Net income
B) Total liabilities
C) Accounts receivable and allowance for doubtful accounts
D) Sales revenue

Which of the following is an internal control over accounts receivable?

A) Allowing any employee to approve credit sales
B) Regularly reviewing the aging schedule
C) Writing off accounts without documentation
D) Extending credit to all customers

How are bad debts recorded under the direct write-off method?

A) As an estimate
B) As an expense when specific accounts are deemed uncollectible
C) As a reduction to revenue
D) As a prepaid expense

Which method complies with GAAP for recording bad debts?

A) Direct write-off method
B) Allowance method
C) Accrual method
D) Cash method

An increase in Allowance for Doubtful Accounts will:

A) Increase total assets
B) Decrease total assets
C) Increase total liabilities
D) Have no effect on financial statements

Which account is debited when writing off an uncollectible account under the allowance method?

A) Bad Debts Expense
B) Cash
C) Allowance for Doubtful Accounts
D) Accounts Receivable

Accounts receivable turnover measures:

A) The average collection period for receivables
B) How quickly receivables are collected
C) The profitability of credit sales
D) The amount of credit sales

A higher accounts receivable turnover ratio indicates:

A) Slower collections
B) Faster collections
C) Greater credit sales
D) Poor liquidity

What is the primary disadvantage of the direct write-off method?

A) Violates the cost principle
B) Overstates net income
C) Fails to match expenses with revenues
D) Reduces net sales

A credit memo issued to a customer for a returned item will:

A) Increase accounts receivable
B) Decrease accounts receivable
C) Increase cash
D) Decrease cash

What is the typical balance of Allowance for Doubtful Accounts?

A) Debit
B) Credit
C) Zero
D) Depends on the accounting period

To record the reinstatement of a previously written-off account, the entry would include:

A) Debit Accounts Receivable; Credit Allowance for Doubtful Accounts
B) Debit Bad Debts Expense; Credit Cash
C) Debit Cash; Credit Accounts Receivable
D) Debit Allowance for Doubtful Accounts; Credit Bad Debts Expense

Which of the following is not included in net accounts receivable?

A) Gross accounts receivable
B) Allowance for doubtful accounts
C) Cash payments
D) Customer balances

When using the percentage of sales method, bad debts expense is calculated as:

A) A percentage of total assets
B) A percentage of total liabilities
C) A percentage of credit sales
D) A percentage of total cash sales

What type of analysis is performed to estimate the allowance for doubtful accounts using the aging method?

A) Horizontal analysis
B) Vertical analysis
C) Trend analysis
D) Aging schedule analysis

If a company’s Allowance for Doubtful Accounts has a debit balance before adjustment, it means:

A) The previous estimate was too low
B) The previous estimate was too high
C) There were no bad debts
D) Bad debts expense is understated

Recording a recovery of a previously written-off account will:

A) Increase net income
B) Decrease net income
C) Have no effect on net income
D) Increase total liabilities

Which of the following would not appear in an accounts receivable aging report?

A) Customer name
B) Credit limit
C) Amount past due
D) Invoice date

Writing off an account under the allowance method will:

A) Increase net income
B) Decrease net income
C) Have no effect on net income
D) Increase bad debts expense

What happens when a company’s Allowance for Doubtful Accounts is underestimated?

A) Total assets are overstated
B) Total liabilities are understated
C) Net income is overstated
D) Both A and C

What is the effect of recognizing bad debts expense on the income statement?

A) Increases net income
B) Decreases net income
C) Increases total revenue
D) No effect on net income

What happens if an account is collected after it was written off?

A) Record a new sale
B) Reverse the write-off and record the payment
C) Increase bad debts expense
D) Adjust net income

Which of the following is the most conservative approach to estimating bad debts?

A) Direct write-off method
B) Percentage of accounts receivable method
C) Aging of receivables method
D) Percentage of sales method

Which account is credited when recognizing bad debts under the allowance method?

A) Accounts Receivable
B) Allowance for Doubtful Accounts
C) Cash
D) Bad Debts Expense

If the Allowance for Doubtful Accounts has a credit balance before adjustment, this indicates:

A) All receivables are collectible
B) Previous bad debts estimates were accurate
C) Previous estimates exceeded actual uncollectibles
D) Bad debts expense needs to be increased

What type of analysis helps in estimating the collectibility of accounts receivable?

A) Ratio analysis
B) Sensitivity analysis
C) Aging analysis
D) Cost-benefit analysis

Which is a disadvantage of extending credit to customers?

A) Increased sales
B) Potential bad debts
C) Decreased cash flow
D) Both B and C

What is the primary objective of the accounts receivable aging method?

A) Estimate the total sales
B) Determine overdue accounts
C) Predict cash inflows
D) Estimate uncollectible accounts

Which of the following is not part of the credit approval process?

A) Evaluating the customer’s creditworthiness
B) Reviewing customer’s payment history
C) Recording cash payments
D) Assigning a credit limit

Writing off a bad debt under the direct write-off method impacts:

A) Only the balance sheet
B) Only the income statement
C) Both the income statement and balance sheet
D) No financial statements

Under GAAP, which method must be used to account for bad debts?

A) Direct write-off method
B) Allowance method
C) Percentage of net income method
D) Cash method

A longer average collection period for receivables indicates:

A) Improved cash flow
B) Slower collections
C) Greater profitability
D) Increased credit sales

Which of the following does not affect the balance of accounts receivable?

A) Sales on account
B) Write-offs
C) Cash collections
D) Depreciation expense

When recording a specific write-off under the direct write-off method, the journal entry includes:

A) Debit to Accounts Receivable
B) Debit to Allowance for Doubtful Accounts
C) Debit to Bad Debts Expense
D) Credit to Sales Revenue

Which of the following is a primary disadvantage of accounts receivable?

A) Increases revenue
B) Increases cash flow
C) Potential for uncollectible accounts
D) Decreases liabilities

When estimating bad debts using the percentage of receivables method, what is the key input?

A) Total credit sales
B) Ending accounts receivable balance
C) Net income
D) Total cash collected

A company’s credit policy is considered too lenient if:

A) Accounts receivable turnover is very high
B) The average collection period is very long
C) Bad debts are consistently low
D) Sales returns are frequent

To record the collection of a written-off account, the process includes:

A) Debit to Bad Debts Expense
B) Debit to Allowance for Doubtful Accounts
C) Debit to Accounts Receivable and then a Debit to Cash
D) Credit to Bad Debts Expense

Which principle justifies the use of the allowance method?

A) Consistency principle
B) Matching principle
C) Conservatism principle
D) Revenue recognition principle

Accounts receivable are typically classified as:

A) Long-term liabilities
B) Current assets
C) Fixed assets
D) Contra-assets

Which of the following reduces the accounts receivable balance?

A) Bad debts expense
B) Sales returns
C) New credit sales
D) Credit approvals

What is the primary purpose of credit terms such as “2/10, net 30”?

A) Offer a discount to encourage early payment
B) Increase credit sales
C) Reduce bad debts
D) Improve profitability

The accounts receivable turnover ratio is calculated by dividing:

A) Net credit sales by average accounts receivable
B) Net credit sales by total assets
C) Total sales by ending accounts receivable
D) Average accounts receivable by net income

What happens to bad debts expense when a previously written-off account is reinstated?

A) It increases
B) It decreases
C) It remains unchanged
D) It is debited

The direct write-off method is typically used by:

A) Large corporations
B) GAAP-compliant entities
C) Small businesses
D) Nonprofit organizations

Which of the following could result in an overstatement of accounts receivable?

A) Underestimating bad debts
B) Overestimating cash collections
C) Overestimating sales returns
D) Recognizing unearned revenue

Which type of account is used to estimate uncollectible accounts?

A) Revenue
B) Asset
C) Contra-asset
D) Liability

What financial statement impact occurs when accounts are written off under the allowance method?

A) Increases total expenses
B) No effect on total assets
C) Decreases total liabilities
D) Increases total liabilities

If a customer defaults on a payment, what action should be taken first?

A) Write off the account immediately
B) Attempt to collect payment
C) Record it as a bad debt expense
D) Increase credit sales

What is the typical classification of Notes Receivable that will mature within a year?

A) Current liability
B) Long-term liability
C) Current asset
D) Long-term asset

Under the allowance method, bad debts expense is recorded:

A) When an account is determined to be uncollectible
B) When cash is received from the customer
C) At the end of the period based on estimates
D) When receivables are sold to a third party

What is the key drawback of the direct write-off method?

A) Violates the matching principle
B) Requires complex calculations
C) Cannot be used for tax purposes
D) Requires allowance for doubtful accounts

When using the percentage of sales method to estimate bad debts, the calculation is based on:

A) Credit sales
B) Total sales
C) Total receivables
D) Ending inventory

A company’s Accounts Receivable Turnover ratio increases. What does this indicate?

A) Faster collections of receivables
B) Higher uncollectible accounts
C) Decreased credit sales
D) Increased average collection period

The write-off of an account under the allowance method affects:

A) Total assets and net income
B) Only net income
C) Only total assets
D) Neither total assets nor net income

Why is the Allowance for Doubtful Accounts used?

A) To comply with the cash basis of accounting
B) To estimate bad debts and match expenses with revenues
C) To increase net income
D) To reduce operating expenses

What is the adjusting entry for recording bad debts expense under the allowance method?

A) Debit Accounts Receivable; Credit Allowance for Doubtful Accounts
B) Debit Bad Debts Expense; Credit Allowance for Doubtful Accounts
C) Debit Allowance for Doubtful Accounts; Credit Bad Debts Expense
D) Debit Bad Debts Expense; Credit Accounts Receivable

What type of account is “Allowance for Doubtful Accounts”?

A) Contra-asset
B) Liability
C) Expense
D) Revenue

What happens to the Allowance for Doubtful Accounts when a specific account is written off?

A) It decreases
B) It increases
C) It has no effect
D) It is closed out

Which of the following does not impact the cash realizable value of accounts receivable?

A) Write-offs of specific accounts
B) Collection of accounts receivable
C) Recording of credit sales
D) Adjustment for estimated bad debts

A company writes off $2,000 of accounts receivable under the allowance method. What is the journal entry?

A) Debit Bad Debts Expense; Credit Accounts Receivable
B) Debit Allowance for Doubtful Accounts; Credit Accounts Receivable
C) Debit Accounts Receivable; Credit Allowance for Doubtful Accounts
D) Debit Cash; Credit Allowance for Doubtful Accounts

What does a high accounts receivable turnover ratio indicate?

A) Inefficient collection processes
B) Good liquidity and collection efficiency
C) High levels of uncollectible accounts
D) Over-reliance on credit sales

In the aging method, which accounts are assigned the highest percentage of uncollectibility?

A) Current accounts
B) Accounts 31–60 days overdue
C) Accounts 61–90 days overdue
D) Accounts over 90 days overdue

Which of the following is not a method for estimating uncollectible accounts?

A) Aging of receivables method
B) Percentage of receivables method
C) Percentage of sales method
D) Direct write-off method

How does a company account for accounts receivable sold to a factor?

A) As a loan repayment
B) As an asset disposal
C) As a liability adjustment
D) As an off-balance-sheet transaction

When using the percentage of receivables method, what balance is adjusted?

A) Accounts Receivable
B) Allowance for Doubtful Accounts
C) Bad Debts Expense
D) Revenue

A credit sale of $10,000 on terms 2/10, net 30, was paid within 10 days. How much cash is received?

A) $9,800
B) $10,000
C) $9,700
D) $10,200

If a company underestimates bad debts expense, what is the effect?

A) Overstatement of net income and total assets
B) Understatement of net income and total assets
C) No effect on financial statements
D) Overstatement of liabilities

What type of journal entry reverses a previously written-off account?

A) Debit Bad Debts Expense; Credit Accounts Receivable
B) Debit Allowance for Doubtful Accounts; Credit Accounts Receivable
C) Debit Accounts Receivable; Credit Allowance for Doubtful Accounts
D) Debit Accounts Receivable; Credit Revenue

Which of the following impacts both the income statement and the balance sheet?

A) Adjustment for bad debts expense
B) Write-off of accounts receivable
C) Credit sales transaction
D) Collection of receivables

Under the direct write-off method, bad debts are recognized:

A) When the sale is made
B) At the end of the accounting period
C) When an account is deemed uncollectible
D) Based on an aging schedule

Which of the following would increase the accounts receivable balance?

A) Cash collections
B) Credit sales
C) Write-offs
D) Bad debts expense adjustment

Which financial ratio indicates the effectiveness of credit and collection policies?

A) Debt-to-equity ratio
B) Current ratio
C) Accounts receivable turnover
D) Gross margin percentage

What is the primary benefit of offering discounts for early payment?

A) Reduce bad debts expense
B) Improve liquidity
C) Increase gross profit
D) Decrease sales returns

The term “net realizable value” of accounts receivable refers to:

A) The total amount of receivables recorded in the books
B) Receivables after adjusting for doubtful accounts
C) Receivables minus cash discounts offered
D) The amount of receivables expected to be written off

Which of the following is a limitation of the direct write-off method?

A) It is complicated to implement
B) It does not recognize expenses in the same period as revenue
C) It requires allowance for doubtful accounts
D) It is required by GAAP

When a customer pays an account previously written off, which accounts are affected?

A) Accounts Receivable and Revenue
B) Allowance for Doubtful Accounts and Cash
C) Accounts Receivable, Allowance for Doubtful Accounts, and Cash
D) Bad Debts Expense and Cash

Which of the following actions will reduce the balance of accounts receivable?

A) Recording bad debts expense
B) Writing off uncollectible accounts
C) Estimating uncollectible accounts
D) Recording credit sales

The aging of accounts receivable method primarily focuses on:

A) Total credit sales
B) Length of time receivables are outstanding
C) Historical percentages of bad debts
D) Current period’s bad debt expense

How does the direct write-off method impact financial statements when an account is written off?

A) Net income is reduced
B) Total assets remain unchanged
C) Total assets are reduced
D) No impact on net income

When an account is reinstated after being written off, the first step is to:

A) Reverse the previous write-off entry
B) Record the payment
C) Record bad debts expense
D) Credit Cash

The percentage of receivables method for estimating bad debts bases the calculation on:

A) Current period credit sales
B) All receivables, including those past due
C) Accounts determined to be uncollectible
D) A historical average of write-offs

An increase in the Allowance for Doubtful Accounts will:

A) Decrease net income
B) Increase net income
C) Have no effect on total assets
D) Increase accounts receivable

The term “factoring” refers to:

A) Selling receivables to a third party at a discount
B) Using receivables as collateral for a loan
C) Writing off uncollectible accounts
D) Allocating bad debt expense

If a company’s collection period is increasing, it may indicate:

A) More efficient collection processes
B) A decrease in credit sales
C) Slower collections from customers
D) Higher turnover of receivables

Which of the following scenarios typically requires the use of an Allowance for Doubtful Accounts?

A) Cash basis accounting
B) Credit sales
C) Factoring of receivables
D) Loan repayments

What is the journal entry to record the recovery of a previously written-off account?

A) Debit Cash; Credit Bad Debts Expense
B) Debit Bad Debts Expense; Credit Allowance for Doubtful Accounts
C) Debit Accounts Receivable; Credit Allowance for Doubtful Accounts
D) Debit Cash; Credit Accounts Receivable

The accounts receivable turnover ratio is calculated as:

A) Net credit sales ÷ Average accounts receivable
B) Average accounts receivable ÷ Net credit sales
C) Accounts receivable ÷ Total sales
D) Net credit sales ÷ Ending accounts receivable

A customer has a credit limit of $10,000 and an outstanding balance of $9,500. If the company approves a $1,000 sale, this is an example of:

A) Violating internal controls
B) Good credit management
C) Increasing bad debt risk
D) Factoring receivables

A specific account is written off under the allowance method. How is this treated?

A) As a revenue deduction
B) As a reduction in total receivables
C) As an increase in net income
D) As a liability

When a company applies the percentage of sales method, which account is adjusted?

A) Bad Debts Expense
B) Allowance for Doubtful Accounts
C) Accounts Receivable
D) Cash

Which method complies with GAAP for recording uncollectible accounts?

A) Direct write-off method
B) Allowance method
C) Percentage of completion method
D) Net realizable value method

A debit balance in the Allowance for Doubtful Accounts indicates:

A) Overestimation of bad debts
B) Underestimation of bad debts
C) Normal operations
D) Accurate estimation of bad debts

Notes Receivable are classified as a current asset when:

A) They are due within one year
B) They are overdue
C) They bear interest
D) They are larger than $10,000

Writing off an account directly impacts:

A) Bad Debts Expense
B) Allowance for Doubtful Accounts
C) Retained Earnings
D) Sales Revenue

The entry to establish a Note Receivable includes a debit to:

A) Accounts Receivable
B) Note Receivable
C) Bad Debts Expense
D) Cash

If bad debts are understated in one period, what is the impact on the next period?

A) Higher net income
B) Lower net income
C) Overstated liabilities
D) Higher cash flow

How are Notes Receivable reported on the balance sheet?

A) At cost
B) At present value
C) At maturity value
D) At net realizable value

How does a company decide the amount for the Allowance for Doubtful Accounts?

A) Based on cash receipts
B) Using historical data and estimates
C) Fixed percentage of total revenue
D) Regulatory guidelines

Which of the following is the primary purpose of maintaining an Allowance for Doubtful Accounts?

A) To match expenses with revenues
B) To simplify write-offs
C) To comply with the cash basis of accounting
D) To eliminate the need for bad debt expense

What type of account is the Allowance for Doubtful Accounts?

A) Liability
B) Contra-asset
C) Expense
D) Revenue

Under the allowance method, bad debt expense is recorded:

A) When a specific account is determined uncollectible
B) At the time of each credit sale
C) At the end of the accounting period based on estimates
D) Only when cash collections decrease

When estimating bad debts using the percentage of sales method, which financial statement is directly affected?

A) Balance Sheet
B) Income Statement
C) Statement of Cash Flows
D) Statement of Changes in Equity

What happens when a company writes off a specific receivable under the allowance method?

A) Total assets decrease
B) Bad debt expense increases
C) Net realizable value of receivables remains unchanged
D) Accounts receivable turnover ratio decreases

Which method is not compliant with GAAP for bad debts?

A) Allowance method
B) Percentage of receivables method
C) Direct write-off method
D) Aging of receivables method

Notes Receivable differ from Accounts Receivable because they typically include:

A) A due date and interest
B) Larger balances
C) Only cash transactions
D) A reserve for bad debts

A debit to Bad Debts Expense and a credit to Allowance for Doubtful Accounts reflects:

A) Writing off uncollectible accounts
B) Reinstating an account
C) Estimating uncollectible accounts
D) Recording a credit sale

Factoring accounts receivable involves:

A) Using receivables as collateral for a loan
B) Selling receivables to a third party
C) Writing off uncollectible accounts
D) Applying the aging method to receivables

The maturity value of a note receivable is:

A) Its face value
B) Its face value plus interest
C) Its net realizable value
D) Its discounted value

A long collection period may indicate:

A) High liquidity
B) Inefficient credit policies
C) Effective credit control
D) Reduced risk of bad debts

Which of the following would not affect the balance of Accounts Receivable?

A) Credit sales
B) Write-offs
C) Estimation of bad debts
D) Customer payments

When bad debts are understated, what is the impact on total assets?

A) No impact
B) Overstated
C) Understated
D) Correctly stated

Under the percentage of receivables method, the focus is on:

A) Income statement accounts
B) Balance sheet accounts
C) Cash flows
D) Sales transactions

A credit balance in the Allowance for Doubtful Accounts indicates:

A) Underestimated bad debts
B) Overestimated bad debts
C) Normal operation
D) A loss for the period

When using the allowance method, writing off an account will:

A) Affect both net income and total assets
B) Affect only net income
C) Affect only total assets
D) Not affect net income or total assets

To record a dishonored note, the appropriate entry includes a debit to:

A) Notes Receivable
B) Accounts Receivable
C) Bad Debts Expense
D) Cash

How is the accounts receivable turnover ratio calculated?

A) Average accounts receivable ÷ Net credit sales
B) Ending accounts receivable ÷ Total revenue
C) Net credit sales ÷ Average accounts receivable
D) Net credit sales ÷ Total accounts receivable

Which account is credited when recovering a previously written-off account?

A) Bad Debts Expense
B) Accounts Receivable
C) Cash
D) Allowance for Doubtful Accounts

If a company uses the aging method and estimates $10,000 as uncollectible, but the Allowance for Doubtful Accounts has a $2,000 debit balance, the adjusting entry will:

A) Debit Bad Debts Expense $10,000
B) Credit Allowance for Doubtful Accounts $10,000
C) Debit Bad Debts Expense $12,000
D) Credit Allowance for Doubtful Accounts $12,000

The Allowance for Doubtful Accounts appears on which financial statement?

A) Income Statement
B) Balance Sheet
C) Statement of Cash Flows
D) Statement of Retained Earnings

When estimating bad debts using the percentage of sales method, the adjusting entry focuses on:

A) Accounts Receivable
B) Allowance for Doubtful Accounts
C) Bad Debts Expense
D) Net Income

To compute interest revenue on a note receivable, you need:

A) Principal amount and maturity date
B) Interest rate, principal, and time period
C) Principal amount and discount rate
D) Only the maturity value

Which of the following is true about the direct write-off method?

A) It matches expenses with revenues
B) It is required under GAAP
C) It recognizes bad debts as they occur
D) It requires an adjusting entry for allowance

Allowance for Doubtful Accounts is closed:

A) At the end of each fiscal year
B) When receivables are written off
C) When estimating bad debts
D) Never; it is a permanent account

A higher accounts receivable turnover ratio suggests:

A) Efficient credit management
B) Poor credit policies
C) Longer collection periods
D) Ineffective receivables management

What is the purpose of a note receivable’s interest?

A) To compensate for bad debts
B) To reward early payment
C) To provide income to the lender
D) To reduce the principal amount owed

The net realizable value of receivables equals:

A) Total receivables plus allowance for doubtful accounts
B) Total receivables minus allowance for doubtful accounts
C) Credit sales minus write-offs
D) Cash collected plus ending receivables

Why is the percentage of receivables method often preferred over the percentage of sales method?

A) It is easier to apply
B) It provides a more accurate balance sheet valuation
C) It is based on historical data
D) It reduces bad debt expense

A higher bad debt expense results in which of the following?

A) Increase in net income
B) Increase in accounts receivable
C) Decrease in net income
D) Decrease in total liabilities

Which of the following does NOT affect the Allowance for Doubtful Accounts?

A) Estimating bad debts
B) Writing off uncollectible accounts
C) Recovering previously written-off accounts
D) Recording credit sales

The main difference between the direct write-off and allowance methods is:

A) The timing of recognizing bad debts
B) The calculation of interest
C) The effect on cash flow
D) The treatment of recovered accounts

What is the primary disadvantage of the direct write-off method?

A) It does not provide for bad debts
B) It violates the matching principle
C) It increases accounts receivable turnover
D) It is difficult to apply

If the Allowance for Doubtful Accounts has a credit balance of $1,500 and estimated uncollectibles are $7,000, the adjusting entry will:

A) Debit Bad Debts Expense $8,500
B) Credit Allowance for Doubtful Accounts $5,500
C) Debit Bad Debts Expense $7,000
D) Credit Allowance for Doubtful Accounts $7,000

What happens to the Allowance for Doubtful Accounts when a specific account is written off?

A) It increases
B) It decreases
C) It remains unchanged
D) It is closed out

The aging method estimates uncollectibles by:

A) Applying a single percentage to all receivables
B) Assigning higher percentages to older receivables
C) Using historical write-offs as a guide
D) Applying a flat rate to credit sales

What type of journal entry is made to reinstate a previously written-off account?

A) Debit Bad Debts Expense, Credit Accounts Receivable
B) Debit Accounts Receivable, Credit Allowance for Doubtful Accounts
C) Debit Allowance for Doubtful Accounts, Credit Bad Debts Expense
D) Debit Cash, Credit Allowance for Doubtful Accounts

Which document is created when a customer owes money but disputes the amount?

A) Invoice
B) Credit memo
C) Debit memo
D) Dispute report

A note is classified as dishonored when:

A) It is not paid by the maturity date
B) Interest is not collected
C) The maker requests an extension
D) The lender sells it to another party

The credit period offered to customers affects which ratio?

A) Gross profit margin
B) Accounts receivable turnover
C) Debt-to-equity ratio
D) Quick ratio

The entry to record bad debt expense includes a:

A) Debit to Allowance for Doubtful Accounts
B) Credit to Accounts Receivable
C) Debit to Bad Debts Expense
D) Credit to Interest Revenue

Why might a company use factoring?

A) To manage inventory
B) To accelerate cash inflow
C) To avoid recording bad debts
D) To improve interest revenue

A short collection period for receivables is typically desirable because:

A) It increases interest income
B) It enhances liquidity
C) It reduces operating expenses
D) It eliminates bad debt risk

Which of the following is not included in the calculation of net realizable value?

A) Total accounts receivable
B) Allowance for doubtful accounts
C) Bad debts expense
D) Recoveries of previously written-off accounts

If a company underestimates its bad debts, what is the effect on net income?

A) No effect
B) Net income is overstated
C) Net income is understated
D) Net income is unaffected until write-offs occur

A long collection period for receivables indicates:

A) Efficient credit management
B) Potential liquidity issues
C) Strong cash flow
D) Reduced need for bad debt allowances

Which ratio measures how efficiently a company collects receivables?

A) Current ratio
B) Accounts receivable turnover
C) Debt ratio
D) Return on assets

To record the acceptance of a note in settlement of an account, the journal entry includes:

A) Debit Accounts Receivable, Credit Notes Receivable
B) Debit Notes Receivable, Credit Accounts Receivable
C) Debit Notes Receivable, Credit Cash
D) Debit Cash, Credit Notes Receivable

A company using the allowance method writes off an account. What is the effect on total assets?

A) Total assets decrease
B) Total assets increase
C) Total assets remain the same
D) It depends on the amount written off

The entry to record interest earned on a note includes:

A) Debit to Cash
B) Debit to Notes Receivable
C) Debit to Interest Revenue
D) Credit to Interest Revenue

What does the accounts receivable aging schedule provide?

A) A breakdown of receivables by customer
B) A detailed analysis of overdue accountsa
C) An estimate of cash collections
D) An analysis of inventory turnover

If a note receivable is dishonored, the company should:

A) Write off the note
B) Record it as bad debt expense
C) Transfer it back to accounts receivable
D) Record interest earned in the period of dishonor

A customer’s payment on a dishonored note includes:

A) Principal only
B) Principal plus penalties
C) Principal plus interest
D) Interest only

Which of the following is NOT a reason for a company to offer credit to customers?

A) Increase sales
B) Foster customer loyalty
C) Accelerate cash inflows
D) Compete with rivals

Recovering a written-off account under the allowance method involves:

A) A debit to Bad Debts Expense
B) A debit to Cash and a credit to Accounts Receivable
C) A debit to Accounts Receivable and a credit to Allowance for Doubtful Accounts
D) A debit to Accounts Receivable and a credit to Bad Debts Expense