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Principles of Accounting, Volume 1: Financial Accounting

Chapter 9

Principles of Accounting, Volume 1: Financial AccountingChapter 9

Chapter 9

Multiple Choice

1.

C

3.

B

5.

C

7.

B

9.

C

11.

A

13.

A

15.

D

17.

B

19.

B

21.

A

23.

B

Questions

1.

The matching principle states that expenses must be matched to revenues in the period in which they were incurred.

3.

Nothing will be recognized as revenue, since the flower shop will not provide flowers until June. Until then, all revenue is considered unearned.

5.

Allowance for Doubtful Accounts

7.

$22,008.88; $323,660 × 6.8%

9.

$11,393.10; ($22,480 × 6%) + ($36,540 × 17%) + ($15,330 × 25%)

11.

The receivables cycle takes a while to convert into cash, which means that cash is tied up and cannot be used for other business investments. This could also mean that the company has to borrow money from a lender to meet its cash flow demands, or that credit extensions are too tight, and good credit candidates are lost to competitors.

13.

Accounts receivable turnover ratio and number of days’ sales in receivables ratio; these ratios can tell a stakeholder how credit extension policies affect sales, and how quickly current debt is collected

15.

A decrease to bad debt expense increases net income, which can show a higher income level and improve opportunities for borrowing.

17.

A higher bad debt expense figure reduces net income, which could have a positive impact on reducing business income and other taxes.

19.

The installment method takes into account risk associated with long-term periodic payments, and it distributes revenue based on a gross profit percentage over the life of the contract.

21.

The completed contract method is used in contracts and delays reporting of both revenues and expenses until the entire contract is complete

23.
25.

The principal of a note is the initial borrowed amount, not including interest, requested by the customer.

27.

Accounts receivable is an informal, short-term payment and usually no interest, whereas notes receivable is a legal contract, long-term payment, and usually has interest.

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