CH07 TB 8e final - practice questions PDF

Preview

Summary

practice questions...

Description

Chapter 7 Cash and Receivables True/False Questions 1. Cash equivalents would include investments in marketable equity securities as long as management intends to sell the securities in the next three months. Answer: False Level of Learning: 1 Easy Learning Objective: 07-01 Topic Area: Cash and cash equivalents Blooms: Remember AACSB: Reflective thinking AICPA: BB Critical Thinking AICPA: FN Measurement 2. From a financial accounting perspective, the main purposes of a system of internal control are to improve the accuracy and reliability of accounting information and to safeguard assets. Answer: True Level of Learning: 1 Easy Learning Objective: 07-01 Topic Area: Internal control Blooms: Remember AACSB: Reflective thinking AICPA: BB Critical Thinking AICPA: FN Risk analysis 3. In a good system of internal control, the person who initiates a transaction should be allowed to effectively control the processing of the transaction through its final inclusion in the accounting records. Answer: False Level of Learning: 1 Easy Learning Objective: 07-01 Topic Area: Internal control Blooms: Remember AACSB: Reflective thinking AICPA: BB Critical Thinking AICPA: FN Risk analysis 4. Depending on the circumstances, the classification of a compensating balance may be either current or noncurrent, and the arrangement should be disclosed in the notes. Answer: True Level of Learning: 1 Easy Learning Objective: 07-02 Topic Area: Restricted cash and compensating balances Blooms: Remember AACSB: Reflective thinking AICPA: AICPA: FN Measurement

5. Under IFRS, an overdraft in a cash account at one bank can be offset against a positive balance in the account at another bank for purposes of reporting cash on the company’s Intermediate Accounting, Eighth Edition,Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 7–1

Chapter 7 Cash and Receivables balance sheet. Answer: True Level of Learning: 1 Easy Learning Objective: 07-10 Topic Area: IFRS – Cash and cash equivalents Blooms: Remember AACSB: Reflective thinking AICPA: BB Global AICPA: FN Measurement 6. The net method of accounting for cash discounts requires adjusting entries for discounts taken. Answer: False Level of Learning: 1 Easy Learning Objective: 07-03 Topic Area: Cash discounts Blooms: Remember AACSB: Reflective thinking AICPA: BB Critical Thinking AICPA: FN Measurement 7. Recognizing sales returns when merchandise is returned could result in an overstatement of income in the period of the related sale. Answer: True Level of Learning: 2 Medium Learning Objective: 07-04 Topic Area: Sales returns Blooms: Evaluate AACSB: Reflective thinking AICPA: BB Critical Thinking AICPA: FN Measurement 8. If cash has been collected from a customer, recognizing estimated sales returns results in recognizing a refund liability. Answer: True Level of Learning: 2 Medium Learning Objective: 07-04 Topic Area: Sales returns Blooms: Remember AACSB: Reflective thinking AICPA: BB Critical Thinking AICPA: FN Measurement

9. The income statement approach to estimating bad debts requires an adjusting entry at the end of the period to reduce receivables to net realizable value. Answer: False Level of Learning: 2 Medium Learning Objective: 07-06 Intermediate Accounting, Eighth Edition,Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 7–2

Chapter 7 Cash and Receivables Topic Area: Uncollectible accounts receivable – Income statement approach Blooms: Remember AACSB: Reflective thinking AICPA: BB Critical Thinking AICPA: FN Measurement 10. Under IFRS, accounts receivable can be accounted for at fair value whenever company management wants to do so. Answer: False Level of Learning: 1 Easy Learning Objective: 07-10 Topic Area: IFRS – Accounts receivable Blooms: Remember AACSB: Reflective thinking AACSB: Diversity AICPA: BB Global AICPA: FN Measurement 11. Under IFRS, accounts receivable can be accounted for as “available for sale” if that approach is elected upon initial recognition of the receivable. Answer: True Level of Learning: 1 Easy Learning Objective: 07-10 Topic Area: IFRS – Accounts receivable Blooms: Remember AACSB: Reflective thinking AACSB: Diversity AICPA: BB Global AICPA: FN Measurement 12. Using the balance sheet approach, bad debt expense is an indirect result of estimating the net realizable value of accounts receivable. Answer: True Level of Learning: 1 Easy Learning Objective: 07-06 Topic Area: Uncollectible accounts – Balance sheet approach Blooms: Understand AACSB: Reflective thinking AICPA: BB Critical Thinking AICPA: FN Measurement 13. Discounts on notes receivable are recognized as interest earned over the term of the related note. Answer: True Level of Learning: 1 Easy Learning Objective: 07-07 Topic Area: Notes receivable – noninterest-bearing Blooms: Remember AACSB: Reflective thinking Intermediate Accounting, Eighth Edition,Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 7–3

Chapter 7 Cash and Receivables AICPA: BB Critical Thinking AICPA: FN Measurement 14. If a long-term noninterest-bearing note is received in exchange for merchandise sold, the amount of sales revenue recognized will be greater than the amount of the note. Answer: False Level of Learning: 2 Medium Learning Objective: 07-07 Topic Area: Notes receivable – noninterest-bearing Blooms: Remember AACSB: Reflective thinking AICPA: BB Critical Thinking AICPA: FN Measurement 15. Unless specific sales criteria are met, the factoring of accounts receivable with recourse is accounted for as a loan. Answer: True Level of Learning: 1 Easy Learning Objective: 07-08 Topic Area: Financing with receivables – with recourse Blooms: Remember AACSB: Reflective thinking AICPA: BB Critical Thinking AICPA: FN Measurement 16. Securitization of receivables is a type of secured borrowing. Answer: False Level of Learning: 1 Easy Learning Objective: 07-08 Topic Area: Financing with receivables Blooms: Remember AACSB: Reflective thinking AICPA: BB Resource management AICPA: FN Measurement 17. Under IFRS, transfer of risks and rewards of ownership, rather than transfer of control, is the primary factor determining whether a factored receivable can be treated as sold rather than as part of a secured borrowing. Answer: True Level of Learning: 1 Easy Learning Objective: 07-10 Topic Area: IFRS ‒ Transfers of receivables Blooms: Remember AACSB: Reflective thinking AACSB: Diversity AICPA: BB Global AICPA: FN Measurement 18. The receivables turnover ratio provides a way for an analyst to assess the effectiveness of a Intermediate Accounting, Eighth Edition,Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 7–4

Chapter 7 Cash and Receivables company in managing its investment in receivables. Answer: True Level of Learning: 1 Easy Learning Objective: 07-09 Topic Area: Receivables management Blooms: Remember AACSB: Reflective thinking AICPA: FN Risk analysis AICPA: FN Measurement 19. In a bank reconciliation, adjustments to the bank balance could include adding deposits in transit and deducting bank service charges. Answer: False Level of Learning: 1 Easy Learning Objective: Appendix 7A Topic Area: Bank reconciliation Blooms: Remember AACSB: Reflective thinking AICPA: BB Critical Thinking AICPA: FN Measurement 20. In a bank reconciliation, adjustments to the book balance could include adding or subtracting company errors. Answer: True Level of Learning: 1 Easy Learning Objective: Appendix 7A Topic Area: Bank reconciliation Blooms: Remember AACSB: Reflective thinking AICPA: BB Critical Thinking AICPA: FN Measurement 21. The journal entry to record the replenishment of a petty cash fund includes a credit to the petty cash fund. Answer: False Level of Learning: 1 Easy Learning Objective: Appendix 7A Topic Area: Petty cash Blooms: Analyze AACSB: Analytical thinking AICPA: BB Critical Thinking AICPA: FN Measurement 22. When a creditor's receivable becomes impaired, the receivable is revalued based on the discounted present value of currently expected cash flows at the loan's original effective rate. Answer: True Level of Learning: 1 Easy Learning Objective: Appendix 7B Intermediate Accounting, Eighth Edition,Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 7–5

Chapter 7 Cash and Receivables Topic Area: Impairment of a receivable Blooms: Remember AACSB: Reflective thinking AICPA: BB Critical Thinking AICPA: FN Measurement 23. Under IFRS, accounts receivable impairments are not recognized. Answer: False Level of Learning: 1 Easy Learning Objective: 07-10 Learning Objective: Appendix 7B Topic Area: IFRS ‒ Impairment of receivables Blooms: Remember AACSB: Reflective thinking AACSB: Diversity AICPA: BB Global AICPA: FN Measurement

Multiple Choice Questions 24. Important elements of an internal control system for cash disbursements include each of the following except: a. Only authorized personnel should sign checks. b. All expenditures should be authorized before a check is prepared. c. All disbursements, other than very small disbursements, should be made by check. d. The same person that prepares the check should also record it in the proper journal. Answer: d Level of Learning: 1 Easy Learning Objective: 07-01 Topic Area: Internal control Blooms: Remember AACSB: Reflective thinking AICPA: BB Critical Thinking AICPA: FN Risk analysis

25. COSO defines internal control as a process, affected by an entity's board of directors, management, and other personnel, designed to provide reasonable assurance regarding the achievement of objectives in: a. Effectiveness and efficiency of operations. b. Reliability of financial advice. c. Compliance with local ordinances. d. All of these answer choices are correct. Answer: a Level of Learning: 1 Easy Learning Objective: 07-01 Topic Area: Internal control Blooms: Remember Intermediate Accounting, Eighth Edition,Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 7–6

Chapter 7 Cash and Receivables AACSB: Reflective thinking AICPA: BB Critical Thinking AICPA: FN Risk analysis 26. Cashmere Soap Corporation had the following items listed in its trial balance at 12/31/2016: Currency and coins Balance in checking account Customer checks waiting to be deposited Treasury bills, purchased on 11/1/2016, mature on 4/30/2017 Marketable equity securities Commercial paper, purchased on 11/1/2016, mature on 1/30/2017

$ 650 2,600 1,200 3,000 10,200 5,000

What amount will Cashmere Soap include in its year-end balance sheet as cash and cash equivalents? a. $ 9,450. b. $12,450. c. $ 7,450. d. $19,650. Answer: a Level of Learning: 3 Hard Learning Objective: 07-01 Topic Area: Cash and cash equivalents Blooms: Apply AACSB: Knowledge application AICPA: FN Measurement Feedback: $650 + 2,600 + 1,200 + 5,000 = $9,450

27. Cash equivalents do not include: a. Money market funds. b. High grade marketable equity securities. c. U.S. treasury bills. d. Commercial paper. Answer: b Level of Learning: 1 Easy Learning Objective: 07-01 Topic Area: Cash and cash equivalents Blooms: Remember AACSB: Reflective thinking AICPA: BB Critical Thinking AICPA: FN Measurement

28.

Cash may not include: a. Foreign currency. b. Money orders. c. Restricted cash. d. Undeposited customer checks.

Intermediate Accounting, Eighth Edition,Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 7–7

Chapter 7 Cash and Receivables Answer: c Level of Learning: 1 Easy Learning Objective: 07-01 Learning Objective: 07-02 Topic Area: Cash and cash equivalents Topic Area: Restricted cash and compensating balances Blooms: Remember AACSB: Reflective thinking AICPA: BB Critical Thinking AICPA: FN Measurement 29. Compensating balances represent: a. Funds in a bank account that can’t be spent. b. Balances in a payroll checking account. c. Accounts that are subject to bank service charges. d. Accounts on which banks pay interest, e.g., NOW accounts. Answer: a Level of Learning: 1 Easy Learning Objective: 07-02 Topic Area: Restricted cash and compensating balances Blooms: Remember AACSB: Reflective thinking AICPA: BB Critical Thinking AICPA: FN Measurement 30. Cash that is restricted and not available for current operations is reported in the balance sheet as: a. Equity. b. Investments. c. Liabilities. d. A separate section between liabilities and equity. Answer: b Level of Learning: 1 Easy Learning Objective: 07-02 Topic Area: Restricted cash and compensating balances Blooms: Remember AACSB: Reflective thinking AICPA: BB Critical Thinking AICPA: FN Measurement 31. Logistics Company had the following items listed in its trial balance at 12/31/2016: Balance in checking account, Bank of the East Treasury bills, purchased on 11/1/2016, mature on 1/30/2017 Loan payable, long-term, Bank of the East

$442,000 20,000 300,000

Included in the checking account balance is $50,000 of restricted cash that Bank of the East requires as a compensating balance for the $300,000 note. What amount will Logistics include in its year-end balance sheet as cash and cash equivalents? Intermediate Accounting, Eighth Edition,Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 7–8

Chapter 7 Cash and Receivables a. b. c. d.

$412,000. $462,000. $392,000. $442,000.

Answer: a Level of Learning: 3 Hard Learning Objective: 07-01 Topic Area: Cash and cash equivalents Blooms: Apply AACSB: Knowledge application AICPA: FN Measurement Feedback: $442,000 – 50,000 + 20,000 = $412,000

32. Which of the following is true about reporting cash under IFRS? a. Cash accounts include loans made to customers, but not to related parties. b. Overdrafts typically cannot be offset against positive balance in other cash accounts on the balance sheet. c. Cash overdrafts are not allowed. d. Overdrafts typically are not shown as current liabilities on the balance sheet. Answer: d Learning Objective: 07-10 Level of Learning: 2 Medium Topic Area: IFRS ‒ Cash and cash equivalents Blooms: Remember AACSB: Reflective thinking AACSB: Diversity AICPA: BB Global AICPA: FN Measurement Use the following to answer questions 33 and 34: Wilson Company had the following cash balance items listed in its trial balance at 12/31/2016: Peterson Savings and Loan: Right Bank: Clinton County Trust Bank:

$50,000 ( 5,000) 10,000

33. If Wilson reports under IFRS, its 12/31/2016 balance sheet would show what cash balance? a. ($5,000). b. $55,000. c. $60,000. d. None of these answer choices are correct. Answer: b Level of Learning: 3 Hard Learning Objective: 07-10 Topic Area: IFRS ‒ Cash and cash equivalents Blooms: Apply AACSB: Knowledge application AACSB: Diversity Intermediate Accounting, Eighth Edition,Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 7–9

Chapter 7 Cash and Receivables AICPA: BB Global AICPA: FN Measurement Feedback: $50,000 – 5,000 + 10,000 = $55,000

34. If Wilson reports under U.S. GAAP, its 12/31/2016 balance sheet would show what cash balance? a. ($5,000). b. $55,000. c. $60,000. d. None these answer choices are correct. Answer: c Level of Learning: 3 Hard Learning Objective: 07-02 Topic Area: Cash and cash equivalents Blooms: Apply AACSB: Knowledge application AICPA: FN Measurement Feedback: $50,000 + 10,000 = $60,000. The ($5,000) overdraft would be reported as a current liability.

Use the following to answer questions 35–37: On November 10 of the current year, Flores Mills sold carpet to a customer for $8,000 with credit terms 2/10, n/30. Flores uses the gross method of accounting for cash discounts. 35. What is the correct entry for Flores on November 10? a. Accounts receivable 7,840 Sales 7,840 b. Accounts receivable 8,000 Sales 8,000 c. Accounts receivable 7,840 Cash discounts 160 Sales 8,000 d. Accounts receivable 8,000 Cash discounts 160 Sales 7,840 Answer: b Level of Learning: 1 Easy Learning Objective: 07-03 Topic Area: Cash discounts Blooms: Apply AACSB: Knowledge application AICPA: FN Measurement 36. What is the correct entry for Flores on November 17, assuming the correct payment was received on that date? a. Cash 7,840 Accounts receivable 7,840 Intermediate Accounting, Eighth Edition,Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 7–10

Chapter 7 Cash and Receivables b.

c.

d.

Cash Sales discounts Accounts receivable Cash Sales Accounts receivable Cash Sales discounts Accounts receivable Sales

7,840 160 8,000 7,840 160 8,000 8,000 160 8,000 160

Answer: b Level of Learning: 2 Medium Learning Objective: 07-03 Topic Area: Cash discounts Blooms: Apply AACSB: Knowledge application AICPA: FN Measurement 37. What is the correct entry for Flores on December 5, assuming the correct payment was received on that date? a. Cash 8,000 Accounts receivable 7,840 Discounts revenue 160 b. Cash 8,000 Accounts receivable 7,840 Interest revenue 160 c. Cash 8,160 Accounts receivable 8,000 Interest revenue 160 d. Cash 8,000 Accounts receivable 8,000 Answer: d Level of Learning: 1 Easy Learning Objective: 07-03 Topic Area: Cash discounts Blooms: Apply AACSB: Knowledge application AICPA: FN Measurement Use the following to answer questions 38–40: Oswego Clay Pipe Company sold $46,000 of pipe to Southeast Water District #45 on April 12 of the current year with terms 1/15, n/60. Oswego uses the gross method of accounting for cash discounts. 38. What entry would Oswego make on April 12? a. Accounts receivable 46,000 Sales 46,000 b. Accounts receivable 46,000 Sales 45,540 Intermediate Accounting, Eighth Edition,Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 7–11

Chapter 7 Cash and Receivables c. d.

Sales discounts Accounts receivable Sales Accounts receivable Sales discounts Sales

460 45,540 45,540 45,540 460 46,000

Answer: a Level of Learning: 1 Easy Learning Objective: 07-03 Topic Area: Cash discounts Blooms: Apply AACSB: Knowledge application AICPA: FN Measurement 39. What entry would Oswego make on the correct payment on that date? a. Cash 45,540 Sales 460 Accounts receivable b. Cash 46,000 Sales discounts 460 Accounts receivable Interest revenue c. Cash 45,540 Sales discounts 460 Accounts receivable d. Cash 46,000 Accounts receivable Sales

April 23, assuming the customer made

46,000

46,000 460

46,000 45,540 460

Answer: c Level of Learning: 2 Medium Learning Objective: 07-03 Topic Area: Cash discounts Blooms: Apply AACSB: Knowledge application AICPA: FN Measurement 40. What entry would Oswego make on the correct payment on that date? a. Cash 46,000 Accounts receivable Discounts receivable b. Cash 46,000 Accounts receivable Interest revenue c. Cash 46,000 Accounts receivable d. Cash 46,460 Accounts receivable

June 10, assuming the customer made

45,540 460 45,540 460 46,000 46,000

Intermediate Accounting, Eighth Edition,Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 7–12

Chapter 7 Cash and Receivables Interest revenue

...