Question 1

What is a bad debt provision?

Accepted Answer

A bad debt provision is a reserve that you build up over time against the future recognition of specific accounts receivable as being uncollectible Thus, if a company has issued invoices for a total of $1 million to its customers in a given month, and has a historical experience of 5% bad debts on its billings, it would be justified in creating a bad debt provision for $50,000 (which is 5% of $1 million) It is impossible to know the exact amount of bad debts that will occur at some point in the future from the current account receivable, so it is entirely normal to continually readjust the bad debt provision, as you gain a greater understanding of how collectible the accounts receivable really are These adjustments may lead to future increases or decreases in the bad debt expense Since these adjustments can be viewed as a means of manipulating a company's reported profits, you should fully document your reasons for making the adjustments You would create a bad debt provision with a debit to the bad debt expense account, and a credit to the bad debt provision account The bad debt provision account is an accounts receivable contra account, which means that it contains a balance that is the reverse of the normal debit balance found in the associated accounts receivable account Later, when a specific invoice is found to be uncollectible, you create a credit memo in the accounting software for the amount of the invoice that is uncollectible The credit memo reduces the bad debt provision account with a debit, and reduces the accounts receivable account with a credit Thus, the initial creation of the bad debt provision creates an expense, while the later reduction of the bad debt provision against the accounts receivable balance is merely a reduction in offsetting accounts on the balance sheet, with no further impact on the income statement The reason for a bad debt provision is that, under the matching principle, you should match revenues with related expenses in the same accounting period Doing so shows the full effect of a billed sale transaction in a single accounting period If you were to not use a bad debt provision, and instead used the direct write off method to only charge bad debts to expense when you were certain that a specific invoice was not collectible, then the charge to expense might be many months later than the initial revenue recognition associated with the billing Thus, under the direct write off method, profits will be too high in the period of the billing to the customer, and too low in the later period when you finally charge some portion or all of an invoice to the bad debt expense

Question 2

What is accounts receivable aging?

Accepted Answer

An accounts receivable aging is a report that lists unpaid customer invoices and unused credit memos by date ranges A typical aging report lists invoices in 30-day "buckets," where the left-most column contains all invoices that are 30 days old or less, the next column contains invoices that are 31-60 days old, the next column contains invoices that are 61-90 days old, and the final column contains all older invoices The report is sorted by customer name, with all invoices for each customer itemized directly below the customer name, usually sorted by either invoice number or invoice date A sample report follows, though without the individual invoice detail that is usually found in such a report: Customer Name Total A/R 0-30 Days 31-60 Days 61-90 Days 90+ Days Abercrombie $15,000 $10,000 $5,000 Bufford Inc 29,000 20,000 9,000 Chesterton Co 83,000 47,000 21,000 12,000 3,000 Denver Brothers 8,000 8,000 Totals $135,000 $57,000 $46,000 $21,000 $11,000 If the report is generated by an accounting software system (which is usually the case), then you can usually reconfigure the report for different date ranges For example, if your payment terms are net 15 days, then the date range in the left-most column should only be for the first 15 days This drops 16-day old invoices into the second column, which highlights that they are now overdue for payment The report primarily contains invoices, but it may also contain credit memos that have not been used by customers, or which have not yet been matched against an unpaid invoice The aging report is the primary tool used by collections personnel to determine which invoices are overdue for payment, and which therefore require them to contact customers Given its use as a collection tool, the report may be configured to also contain contact information for each customer The aging report is also used as a tool for estimating potential bad debts, which are then used to revise the allowance for doubtful accounts The usual method for doing so is to derive the historical percentage of invoice dollar amounts in each date range that usually become a bad debt, and apply these percentages to the column totals in the most recent aging report An additional use of the aging report is by the credit department, which can view the current payment status of any outstanding invoices to see if customer credit limits should be changed This is not an ideal use of the report, since the credit department should also review invoices that have already been paid in the recent past Nonetheless, the report does give a good indication of the near-term financial situation of customers

Question 3

How important does accounts receivable useful for small business and why?

Accepted Answer

Accounts receivables help small businesses by providing quick-time period liquidity Additionally continued sales on credit provide the much-needed continuity for small companies

Question 4

On a bank reconciliation, deposits in transit are

Accepted Answer

A deposit in transit is cash (currency, coins, checks, electronic transfers) that a company has received and is rightfully reported as Cash on its balance sheet, but does not appear on the bank statement until a later date.

Question 5

Who buys Municipal bonds?

Accepted Answer

The persons whose primary investing objective is to preserve capital while generating a tax-free income stream, then municipal bonds are worth considering Municipal bonds (munis) are debt obligations issued by government entities When you buy a municipal bond, you are loaning money to the issuer in exchange for a set number of interest payments over a predetermined period At the end of that period, the bond reaches its maturity date, and the full amount of your original investment is returned to you Types of Municipal Bonds : Municipal bonds come in the following two varieties: 1 General obligation bonds (GO) 2 Revenue bonds General obligation bonds, issued to raise immediate capital to cover expenses, are supported by the taxing power of the issuer Revenue bonds, which are issued to fund infrastructure projects, are supported by the income generated by those projects Both types of bonds are tax exempt and particularly attractive to risk-averse investors due to the high likelihood that the issuers will repay their debts

Question 6

Which of the following is not true about enterprise systems?

Accepted Answer

Enterprise systems (ES) are large-scale application software packages that support business processes, information flows, reporting, and data analytics in complex organizations.

Question 7

Accounts Receivable financing is based on

Accepted Answer

Accounts-receivable financing is a type of asset-financing arrangement in which a company uses its receivables — outstanding invoices or money owed by customers — to receive financing when a business sells its AR (accounts receivable) to a factoring company and receives short-term business funding in return, this is what called as Accounts Receivable Financing How it works :: Business-to-business sales are often offered with payment terms of 30, 60 or 90 days The buyer receives the product, but doesn't submit payment until the mutually agreed-upon date The seller records the sale as revenues and increases the accounts receivable by the amount of the sale When the payment arrives, the seller decreases the accounts receivable and increases cash Accounts receivable financing allows the seller to get the cash immediately by selling the receivable to a third party This is called factoring

Question 8

Depreciation is a process of

Accepted Answer

Depreciation is a process of cost allocation, not valuation. In accounting, the term depreciation refers to the allocation of cost of a tangible asset to expense to the periods in which the asset is expected to be used to obtain the economic benefit. In brief, Depreciation is fall in the value of assets due to wear and tear over a period of time, it is a loss.

Question 9

Unearned revenue is classified as

Accepted Answer

Unearned revenue is the money or revenue earned for the product or the service that is not yet sold or provided to the customer. Hence, it comes under liabilities.

Question 10

The APC is calculated as

Accepted Answer

The average propensity to consume (APC) is the ratio of consumption expenditures (C) to disposable income (DI), or APC = C / DI. Hence, APC = consumption/income.

Question 11

Is accounts receivable an asset or liability?

Accepted Answer

Accounts receivable is the amount to be received by the seller from the customer Hence, it comes under asset

Question 12

Which of the following best describes term life insurance?

Accepted Answer

The insured pays a premium for a specified number of years.

Question 13

The principle of diversification tells us that

Accepted Answer

The principle of diversification tells us that spreading an investment across many diverse assets will eliminate some of the total risk.

Question 14

when a purchase on account is made the invoice becomes

Accepted Answer

debt

Question 15

What type of account is accounts receivable?

Accepted Answer

Accounts receivable is listed as a current asset in the balance sheet, since it is usually convertible into cash in less than one year as it is the amount owed by the customer to the seller.

Question 16

Invoice is an example of

Accepted Answer

Accounts Receivable

Question 17

Bad debt expense is reported on the income statement as

Accepted Answer

Bad debts expense often refers to the loss that a company experiences because it sold goods or provided services and did not require immediate payment The loss occurs when the customer does not pay the amount owed In other words, bad debts expense is related to a company's current asset accounts receivable You have already recorded the Rs 100 in your accounts receivable, and you need to eliminate that amount As you use double-entry accounting, you must record a Rs 100 credit to your accounts receivable and a Rs 100 debit to your allowance for doubtful accounts or your bad debts expense column

Question 18

Other things the same, when the interest rate rises

Accepted Answer

Other things the same, when the interest rate rises people would want to lend more, making the quantity of loanable funds supplied increase.

Question 19

Assets minus liabilities equals

Accepted Answer

Equity

Question 20

Which one of the following is not a 'Money Market Instrument'?

Accepted Answer

Money market instruments are debt securities that generally give the owner the unconditional right to receive a stated, fixed sum of money on a specified date. There are several money market instruments in most Western countries, including treasury bills, commercial paper, bankers' acceptances, deposits, certificates of deposit, bills of exchange, repurchase agreements, federal funds, and short-lived mortgage- and asset-backed securities.

Accounting and Finance Questions