Application Problems - Chapter 7 & 8

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Answer the following questions:

1.      What is meant by the net realizable value for accounts receivable?

  The total value of Accounts receivable minus the allowance for uncollectible accounts (bad debt) is called the net realizable value of Accounts receivables. Also termed as book value of Accounts receivables. Net realizable value sometimes refers to as balance in the general ledger account Accounts receivables minus the balance in the account Allowance for Doubtful debts (or Allowance for Uncollectible accounts).

2.      What is aging of accounts receivable, and how is it used to account for uncollectible accounts?

  The current balance of the accounts receivable is analyzed by use of an aging schedule to determine the desired ending balance for the Allowance for Doubtful accounts. The uncollectible accounts expense for the period is determined based on the (unadjusted) balance in the Allowance, the desired ending balance in the Allowance account and any write-offs of uncollectible accounts during the period.

3.      How is the accounts receivable turnover computed? What information does this ratio provide?

The formula for computing the accounts receivable turnover ratio is:

Accounts receivable turnover ratio = Net credit sales / Average accounts receivables.

Where Average accounts receivables = (Beginning receivables + Ending receivables) / 2


  This ratio is used to measure a firm’s effectiveness in extending credit as well as collecting debt. The receivables turnover ratio is an activity ratio, measuring how efficiently a firm uses its assets.

4.      Describe what is meant by the term "goodwill."

  An account that can be found on a company's balance sheet. It is seen as an intangible asset because it is not a physical assets like building and equipment. Goodwill typically reflects the value of intangible assets such as a strong brand name, good customer relations, good employee relations and any patents or proprietary technologies.

    • 7 years ago
    Application Problems - Chapter 7 & 8

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