Historical Art Is a New Business

question 28

Multiple Choice

Historical Art is a new business.During its first year of operations,credit sales were $55,000 and collections on credit sales were $33,000.One account of $500 was written off.Management uses the percent-of-sales method to account for bad debts expense and estimates 3% of credit sales to be uncollectible.The ending balance of Allowance for Bad Debts account is ________.

• A) $1150
• B) $1650
• C) $645
• D) $2625

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Definitions:

Indirect Method

A technique used in cash flow statements to convert net income into net cash flow from operating activities, by adjusting for non-cash transactions.

Direct Method

A cash flow statement approach that involves listing all major operating cash receipts and payments to calculate net cash from operating activities.

Cash Flows

The total amount of money being transferred into and out of a business, especially affecting liquidity.

Quality Of Income Ratio

The quality of income ratio measures the proportion of income that has been realized in cash or is easily convertible into cash, indicating the company's earnings sustainability.