TEST BANK FOR Receivables and Investments CHAPTER 7 UPDATED
VERSION 2026 WITH A CORRECT ANSWERS
True / False
1. The reason the allowance method of recognizing bad debts is used is primarily because it recognizes the maximum
amount of write-off in each period.
a. True
b. False
ANSWER: False
DIFFICULTY: Easy
LEARNING OBJECTIVES: FACC.PONO.13.07-01 - LO: 07-01
KEYWORDS: Bloom's: Remembering
2. Bad Debts expense is debited and Accounts Receivable is credited at the end of the period to recognize bad debts under
the allowance method.
a. True
b. False
ANSWER: False
DIFFICULTY: Moderate
LEARNING OBJECTIVES: FACC.PONO.13.07-01 - LO: 07-01
KEYWORDS: Bloom's: Remembering
3. The percentage of net credit sales approach for recognizing bad debts considers any existing balance in Allowance for
Doubtful Accounts.
a. True
b. False
ANSWER: False
DIFFICULTY: Easy
LEARNING OBJECTIVES: FACC.PONO.13.07-01 - LO: 07-01
KEYWORDS: Bloom's: Remembering
4. Selling on credit protects a company from the risk that some of its receivables will never be collected.
a. True
b. False
ANSWER: False
DIFFICULTY: Moderate
LEARNING OBJECTIVES: FACC.PONO.13.07-01 - LO: 07-01
KEYWORDS: Bloom's: Remembering
5. Accounts receivable are shown on the balance sheet at their net realizable value.
a. True
b. False
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
,Chapter 7: Receivables and Investments
ANSWER: True
DIFFICULTY: Easy
LEARNING OBJECTIVES: FACC.PONO.13.07-01 - LO: 07-01
KEYWORDS: Bloom's: Remembering
6. The use of the allowance method is an attempt by accountants to match bad debts as an expense with the revenue of the
period in which a sale on credit takes place.
a. True
b. False
ANSWER: True
DIFFICULTY: Easy
LEARNING OBJECTIVES: FACC.PONO.13.07-01 - LO: 07-01
KEYWORDS: Bloom's: Remembering
7. One of the problems with the use of the allowance method to account for bad debts is that it often violates the matching
principle.
a. True
b. False
ANSWER: False
DIFFICULTY: Easy
LEARNING OBJECTIVES: FACC.PONO.13.07-01 - LO: 07-01
KEYWORDS: Bloom's: Remembering
8. Under the allowance method of accounting for bad debts, the company estimates the amount of bad debts before those
debts actually occur.
a. True
b. False
ANSWER: True
DIFFICULTY: Easy
LEARNING OBJECTIVES: FACC.PONO.13.07-01 - LO: 07-01
KEYWORDS: Bloom's: Remembering
9. Bad Debts Expense is a contra account that is used to reduce accounts receivable to its net realizable value.
a. True
b. False
ANSWER: False
DIFFICULTY: Easy
LEARNING OBJECTIVES: FACC.PONO.13.07-01 - LO: 07-01
KEYWORDS: Bloom's: Remembering
10. Because the allowance method results in better matching, accounting standards require its use rather than the direct
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
,Chapter 7: Receivables and Investments
write-off method, unless bad debts are immaterial.
a. True
b. False
ANSWER: True
DIFFICULTY: Easy
LEARNING OBJECTIVES: FACC.PONO.13.07-01 - LO: 07-01
KEYWORDS: Bloom's: Remembering
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
, Chapter 7: Receivables and Investments
11. An aging schedule typically categorizes the various accounts by the length of time each invoice is outstanding.
a. True
b. False
ANSWER: True
DIFFICULTY: Easy
LEARNING OBJECTIVES: FACC.PONO.13.07-01 - LO: 07-01
KEYWORDS: Bloom's: Remembering
12. The accounts receivable turnover ratio is a measure of how well a company manages its receivables.
a. True
b. False
ANSWER: True
DIFFICULTY: Easy
LEARNING OBJECTIVES: FACC.PONO.13.07-02 - LO: 07-02
KEYWORDS: Bloom's: Remembering
13. The accounts receivable turnover ratio is computed by dividing net income by average accounts receivable.
a. True
b. False
ANSWER: False
DIFFICULTY: Easy
LEARNING OBJECTIVES: FACC.PONO.13.07-02 - LO: 07-02
KEYWORDS: Bloom's: Remembering
14. Typically, the lower the accounts receivable turnover ratio, the better.
a. True
b. False
ANSWER: False
DIFFICULTY: Easy
LEARNING OBJECTIVES: FACC.PONO.13.07-02 - LO: 07-02
KEYWORDS: Bloom's: Remembering
15. If Ash Company had sales during the year of $10,000,000, an average accounts receivable of $2,000,000, and net
income of $500,000, its accounts receivable turnover ratio would be 0.25.
a. True
b. False
ANSWER: False
DIFFICULTY: Easy
LEARNING OBJECTIVES: FACC.PONO.13.07-02 - LO: 07-02
KEYWORDS: Bloom's: Analyzing
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
VERSION 2026 WITH A CORRECT ANSWERS
True / False
1. The reason the allowance method of recognizing bad debts is used is primarily because it recognizes the maximum
amount of write-off in each period.
a. True
b. False
ANSWER: False
DIFFICULTY: Easy
LEARNING OBJECTIVES: FACC.PONO.13.07-01 - LO: 07-01
KEYWORDS: Bloom's: Remembering
2. Bad Debts expense is debited and Accounts Receivable is credited at the end of the period to recognize bad debts under
the allowance method.
a. True
b. False
ANSWER: False
DIFFICULTY: Moderate
LEARNING OBJECTIVES: FACC.PONO.13.07-01 - LO: 07-01
KEYWORDS: Bloom's: Remembering
3. The percentage of net credit sales approach for recognizing bad debts considers any existing balance in Allowance for
Doubtful Accounts.
a. True
b. False
ANSWER: False
DIFFICULTY: Easy
LEARNING OBJECTIVES: FACC.PONO.13.07-01 - LO: 07-01
KEYWORDS: Bloom's: Remembering
4. Selling on credit protects a company from the risk that some of its receivables will never be collected.
a. True
b. False
ANSWER: False
DIFFICULTY: Moderate
LEARNING OBJECTIVES: FACC.PONO.13.07-01 - LO: 07-01
KEYWORDS: Bloom's: Remembering
5. Accounts receivable are shown on the balance sheet at their net realizable value.
a. True
b. False
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
,Chapter 7: Receivables and Investments
ANSWER: True
DIFFICULTY: Easy
LEARNING OBJECTIVES: FACC.PONO.13.07-01 - LO: 07-01
KEYWORDS: Bloom's: Remembering
6. The use of the allowance method is an attempt by accountants to match bad debts as an expense with the revenue of the
period in which a sale on credit takes place.
a. True
b. False
ANSWER: True
DIFFICULTY: Easy
LEARNING OBJECTIVES: FACC.PONO.13.07-01 - LO: 07-01
KEYWORDS: Bloom's: Remembering
7. One of the problems with the use of the allowance method to account for bad debts is that it often violates the matching
principle.
a. True
b. False
ANSWER: False
DIFFICULTY: Easy
LEARNING OBJECTIVES: FACC.PONO.13.07-01 - LO: 07-01
KEYWORDS: Bloom's: Remembering
8. Under the allowance method of accounting for bad debts, the company estimates the amount of bad debts before those
debts actually occur.
a. True
b. False
ANSWER: True
DIFFICULTY: Easy
LEARNING OBJECTIVES: FACC.PONO.13.07-01 - LO: 07-01
KEYWORDS: Bloom's: Remembering
9. Bad Debts Expense is a contra account that is used to reduce accounts receivable to its net realizable value.
a. True
b. False
ANSWER: False
DIFFICULTY: Easy
LEARNING OBJECTIVES: FACC.PONO.13.07-01 - LO: 07-01
KEYWORDS: Bloom's: Remembering
10. Because the allowance method results in better matching, accounting standards require its use rather than the direct
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
,Chapter 7: Receivables and Investments
write-off method, unless bad debts are immaterial.
a. True
b. False
ANSWER: True
DIFFICULTY: Easy
LEARNING OBJECTIVES: FACC.PONO.13.07-01 - LO: 07-01
KEYWORDS: Bloom's: Remembering
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
, Chapter 7: Receivables and Investments
11. An aging schedule typically categorizes the various accounts by the length of time each invoice is outstanding.
a. True
b. False
ANSWER: True
DIFFICULTY: Easy
LEARNING OBJECTIVES: FACC.PONO.13.07-01 - LO: 07-01
KEYWORDS: Bloom's: Remembering
12. The accounts receivable turnover ratio is a measure of how well a company manages its receivables.
a. True
b. False
ANSWER: True
DIFFICULTY: Easy
LEARNING OBJECTIVES: FACC.PONO.13.07-02 - LO: 07-02
KEYWORDS: Bloom's: Remembering
13. The accounts receivable turnover ratio is computed by dividing net income by average accounts receivable.
a. True
b. False
ANSWER: False
DIFFICULTY: Easy
LEARNING OBJECTIVES: FACC.PONO.13.07-02 - LO: 07-02
KEYWORDS: Bloom's: Remembering
14. Typically, the lower the accounts receivable turnover ratio, the better.
a. True
b. False
ANSWER: False
DIFFICULTY: Easy
LEARNING OBJECTIVES: FACC.PONO.13.07-02 - LO: 07-02
KEYWORDS: Bloom's: Remembering
15. If Ash Company had sales during the year of $10,000,000, an average accounts receivable of $2,000,000, and net
income of $500,000, its accounts receivable turnover ratio would be 0.25.
a. True
b. False
ANSWER: False
DIFFICULTY: Easy
LEARNING OBJECTIVES: FACC.PONO.13.07-02 - LO: 07-02
KEYWORDS: Bloom's: Analyzing
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
