Working Capital_Financial Accounting Theory and Analysis

Increasing a credit period from 30 to 60 days, in response to a similar action taken by company’s competitors, would likely result in:

• a.   An increase in the average collection period.

• b.   A decrease in bad debt losses.

• c.   An increase in sales.

• d.   Higher profits.

A high accounts receivable turnover ratio indicates

• a.         Customers are making payments quickly

•       b.   A large portion of the company’s sales are on credit

•       c.   Many customers are not paying their receivables in a timely manner

• d.         The company’s sales have increased

What is a possible reason for accounts receivable turnover to increase from one year to the next year?

• a. Improved collection process.

• b. Granting credit to customers with lower credit quality.

• c. Decreased credit sales during a recession.

• d. Write-off uncollectible receivables.

During the year Snedicker reported net sales of $1,920,000. The company had accounts receivable of $150,000 at the beginning of the year and $240,000 at the end of the year Compute Snedicker’s average collection period (assume 365 days a year.)

• a.  28.5 days

• b.  45.7 days.

• c.  37.1 days.

• d.  74.2 days.

The accounts receivable turnover and inventory turnover ratios are used to analyze

• a.   Long-term solvency

• b.   Profitability

• c.   Liquidity

• d.   Leverage

The Villas Corporation’s annual sales (all on credit) totaled $540,000 in 2023.

The company’s accounts receivable turnover ratio was 5. Villas’ average accounts receivable collection period and year end accounts receivable balance respectively were:

• a.   365 days and $108,000.

• b.   73 days and $120,000

• c.   73 days and $108,000

• d.   81 days and $108,000

23.  Which of the following methods of determining annual bad debt expense best achieves the matching concept?

• a.      Percentage of average accounts receivable

• b. Direct write-off

• c. Percentage of sales

• d. Percentage of ending accounts receivable

Why is the allowance method preferred over the direct write-off method of accounting for bad debts?

• a. Determining worthless accounts under direct write-off method is difficult to do.

• b. Improved matching of bad debt expense with revenue.

• c. Allowance method is used for tax purposes.

• d. Estimates are used.

The total amount of working capital is

• a.   $155,000.

• b.   $145,000.

• c.   $60,000.

• d.   $150,000.

The current ratio is

• a.   1.86: 1.

• b.   2.00: 1.

• c.   3.38: 1.

• d.   2.93: 1.