Principles of Accounting: Chapter Seven

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Chapter 7 reveals that receivables arise from a variety trade and nontrade sources. Trade receivables relate to sales of goods and services on account. Among the costs and benefits of selling on account is the risk of uncollectible accounts.

If not material in amount, a business might use the direct write-off method, wherein accounts are charged against income in the period finally deemed uncollectible. However, a better matching of revenues and expenses is achieved with an allowance method, wherein an estimated amount of expense attributed to all sales is recorded each period. There are several alternatives, and they can generally be described as either balance sheet (e.g., aging of accounts) or income statement (e.g., percentage of sales) approaches.

A receivable may be evidenced by a formal instrument called a note. Notes receivable often bear interest. Interest may be calculated by multiplying the principal of the note by the interest rate, times the number of periods (Principal X Rate X Time). Accountants must be especially carefully to accrue interest on notes at the end of each period.

Exercises

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Problems
Goals Achievement
Fill in the Blanks
Multiple Choice
Objectives
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Fill in the Blanks: Chapter Seven

1. ____________ Trade receivables arise from the sale of goods and services to customers on account.

2. Under the ____________direct write-off method, uncollectible accounts are recognized when the actual loss is confirmed.

3. The ____________net realizable value is the amount of cash expected to be collected from accounts receivable balances.

4. The allowance method places emphasis on the ____________matching principle.

5. Individual accounts receivable are categorized according to the length of time outstanding under a process known as ____________aging of accounts receivable .

6. The ____________maker promises to pay a stipulated amount of a note to the payee.

7. ____________Interest is the charge imposed on the borrower of funds, and can be computed as ____________principal X ____________rate X ____________time.

8. The maturity value of a note is the amount due on the maturity date and includes ____________principal plus ____________interest .