Accounting 4356 Exam 2 Practice Questions and Complete Solutions

Net realizable value of receivables is gross receivables minus estimated provision for credit losses and estimated returns and allowances Management must periodically assess the reasonableness of the allowance for credit losses if it uses the percent of sales or the percent of gross receivables method. An analyst notes that ABC Inc.'s allowance for credit losses as a percentage of year-end accounts receivable has changed. Which of the following would not be a plausible explanation for the change? The company has stopped making sales on credit. Which one of the following explanations for the growth of accounts receivable outstripping the growth of sales represents a red flag? The firm adopts an aggressive revenue recognition policy. With a loan collateralized by receivables, a company receives cash and is responsible for repaying the loan. Ambiguity can arise as to whether receivables have been sold or instead are being used as collateral for a loan whenever certain obligations, duties, or rights regarding the transferred receivables are retained by the transferor. In distinguishing between sales and collateralized borrowings using receivables, the critical issue: is whether the transferor surrenders control over the receivables. Regan, Inc. implemented a program to improve the collection of its receivables. Over the past two years, the company has collected 88% of its receivables, up from 80%. A review of the company's financial statements would be expected to show: a reduction in the percentage of the allowance for credit losses to receivables. Under current U.S. GAAP, the transferor of receivables to a securitization entity (SE) that it has formed should treat the transfer as a collateralized borrowing instead of a sale if the transferor has: the power to direct the activities of the SE and the right to participate in the SE's gains and losses.