4. Use the following information for questions 1-5:

A company is expecting thousands of credit sales transactions each week with terms of net 30 days. The company uses the allowance method and it prepares weekly financial statements. It believes that 0.001 of its credit sales will be uncollectible. The company's credit sales for its first week of operations are $500,000. The credit sales for its second week are $600,000.

1. The company's bad debts expense for its first week of operations will be $________.

2. The balance in Allowance for Doubtful Accounts at the end of the first week will likely be $____________.

3. The company's bad debts expense for its second week of operations will be $___________.

4. The amount of accounts receivable that you expect will be written off by the end of the company's second week of operations is $___________.

5. The balance in Allowance for Doubtful Accounts at the end of the second week of operations will likely be $_____________.

Use the following information for questions 6 - 14:

A company's Allowance for Doubtful Accounts has a credit balance of $25,000. It learns that one of its accounts receivable amounting to $1,800 is worthless and needs to be written off.

6. Which account should be debited for $1,800 when writing off the account?

a) Allowance for Doubtful Accounts

b) Accounts Receivable

c) Bad Debts Expense

7. Which account should be credited for $1,800 when writing off the account?

a) Allowance for Doubtful Accounts

b) Accounts Receivable

c) Bad Debts Expense

8. Assuming that after the account is written off, the supplier receives full payment from the customer. Which account will not be involved in the accounting entries made at the time when the payment is received?

a) Allowance for Doubtful Accounts

b) Accounts Receivable

c) Bad Debts Expense

9. Under the direct write off method, which account is debited when a company writes off one of its accounts receivable?

a) Allowance for Doubtful Accounts

b) Accounts Receivable

c) Bad Debts Expense

10. Sorting a company's accounts receivable into classifications such as current, 1-30 days past due, and 31-60 days past due is known as the ________ ___ of accounts receivables.

11. The receivable turnover ratio is computed by dividing the net credit _______ ___ for the year by the average amount of accounts receivable during the year.

12. The days' sales in accounts receivable is calculated by dividing ________ days by the receivables turnover ratio during the year.

13. A company's accounts receivable minus its allowance for doubtful accounts equals the net ___________ _____ value of the accounts receivable.

14. In some industries, companies often sell their accounts receivable to a firm known as a______________.

4. Read the article and discuss What are the differences among accounting revenue, gain, and net income?

Sometimes there is confusion when wordsrevenue,income, gross profit, gain, profit, and net income are used. These are all accounting terms that have different meanings in light of an income statement. Unfortunately, it is not always understood that the word revenue can be used interchangeably with the word profit, for example. To clear up things with these accounting terms, let’s review them in detail and then look at an example of an income statement with all these elements.

We will start at the top of income statement and progress downwards by explaining each element.

Revenue is usually understood to be total income of a company resulting from its main operating activities. Main operating activities may be manufacturing and selling goods for a manufacturing company, providing legal services for a law firm, or providing leased assets for a leasing company. Revenue represents the total amount of income before any expenses are subtracted. In pure accounting terms, revenue is an increase in assets or decrease in liabilities on the company’s books. Revenues are also called sales, especially in context of companies producing or selling tangible products.

Income may have several meanings. First, income can be used interchangeably with revenue. Second, income may refer to revenue from sources other than main operating activities (we will call them secondary revenue types); for example, interest income, rent income, or commission income. Third, income may refer to the excess of revenue over expenses: this excess represents net income. In our example in the following section we will use the second meaning of income (i.e., secondary types of revenues).

Gross profit is the difference between revenue and cost of goods sold (cost of sales). Revenue was defined above. Cost of goods sold is the cost of goods which a company sold to generate that revenue. In pure accounting terms, cost of goods sold is the difference between cost of goods available for sale and cost of goods on hand at the end of an accounting period. As we will see in the example presented further, gross profit is an intermediate step in arriving at net income.

Gain is similar to income as a secondary type of revenue, except that gain refers to incidental and nonrecurring transactions. For example, rent income may be received by a company regularly, which is why it will be an income. On the other hand, gain on disposal of fixed assets is called a gain because sale of fixed assets does not take place regularly.

Profit is the difference between revenue and expenses. Profit can also be called net income, net profit, or“bottom line” because it’s usually the last line on an income statement.