Chapter 7 - Cash and Receivables PDF

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CHAPTER 7 CASH AND RECEIVABLES IFRS questions are available at the end of this chapter.

TRUE-FALSE—Conceptual Answer T F F F F T F F T T T F F T F F T F T F

No.

Description

1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20.

Items considered cash. Items considered cash. Items considered cash. Cash equivalents definition. Bank overdrafts. Cash equivalents. Classification of receivables. Items considered trade receivables. Trade discount uses. Sales discounts. Valuation of receivables. Percentage-of-receivables approach. Percentage-of-sales method. Reporting notes receivable. Stated interest rate vs. effective rate. Classification of notes receivable. Recourse liability. Buying receivables with recourse. Selling receivables with recourse. Computing receivables turnover.

MULTIPLE CHOICE—Conceptual Answer d b d d b a b d b d d d d d c d

No. 21. 22. 23. P 24. 25. 26. 27. 28. 29. S 30. 31. 32. 33. 34. S 35. S 36.

Description Identification of cash items. Identification of cash items. Classification of travel advance. Items included as cash. Identification of cash items. Classification of post-dated checks. Classification of postage stamps. Compensating balance definition. Classification of cash restricted for plant expansion. Cash equivalent definition. Classification of bank overdraft. Classification of compensating balances. Definition of trade receivables. Identification of trade receivables. Presentation of nontrade receivables. Cash discount definition.

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Test Bank for Intermediate Accounting, Fourteenth Edition

MULTIPLE CHOICE—Conceptual (cont.) Answer d a d c a c d a b c a d c d a b a d b c d a c c a a d c a d b c c b c P

No.

P

37. 38. 39. 40. 41. 42. 43. 44. 45. 46. 47. 48. 49. 50. 51. 52. 53. 54. 55. 56. 57. 58. 59. S 60. S 61. P 62. 63. 64. 65. 66. *67. *68. *69. *70. *71.

Description Trade discount uses. Classification of sales discounts. Reasons for trade discounts. Accounting for cash discounts and trade discounts. Theoretically correct approach for cash discounts. Accounts receivable valuation problems. Reason allowance method is preferable. Allowance method concept. Accounting for bad debts and earnings management. Recording bad debt expense. Journal entry for writing off an account. Journal entry for collection of an account previously written off. Valuation of short-term receivables. Bad debt provision and the matching concept. Bad debts as a percentage of sales. Bad debts as a percentage of sales. Bad debts as a percentage of receivables. Financial statement effect of a note recorded incorrectly. Imputed interest description. Reason a company sells receivables. Transfer of receivables as a sale. Definition of selling receivables with recourse. Factoring accounts receivable without recourse. Classification of accounts and notes receivable. Transfer of receivables with recourse. Accounts receivable turnover ratio. Accounts receivable turnover ratio. Items included in accounts receivable on balance sheet. Days to collect accounts receivable calculation. Reason for accounts receivable turnover increase. Balance per bank reconciling item. Entry to replenish Petty Cash. Purpose of Cash Over & Short account. Classification of bank service charges. Treatment of bank credits on bank reconciliation.

These questions also appear in the Problem-Solving Survival Guide. These questions also appear in the Study Guide. * This topic is dealt with in an Appendix to the chapter. S

Cash and Receivables

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MULTIPLE CHOICE—Computational Answer b d b c b c c b c a c d c b b d c b a b b d b b d b a a b c c d a b d c a c c b b c c c c

No. 72 73. 74. 75. 76. 77. 78. 79. 80. 81. 82. 83. 84. 85. 86. 87. 88. 89. 90. 91. 92. 93. 94. 95. 96. 97. 98. 99. 100. 101. 102. 103. 104. 105. 106. 107. 108. 109. 110. 111. 112. 113. 114. 115. 116.

Description Calculate cash balance. Calculate effective interest on loan with required compensatory balance. Reporting cash. Cash and cash equivalents. Reporting cash. Cash and cash equivalents. Determine effective annual interest rate of sales discount. Calculate sales revenue using net method. Entry for credit sale using gross method. Entry for credit sale using net method. Calculate ending allowance for doubtful accounts balance. Calculate bad debt expense. Calculate ending allowance for doubtful accounts balance. Calculate balance of accounts receivable. Calculate net realizable value of accounts receivable. Calculate net realizable value of accounts receivable. Calculate bad debt expense using aging of receivables. Calculate bad debt expense using percent of sales. Calculate bad debt expense using percent of receivables. Valuation of accounts receivable. Calculation of bad debt expense. Calculate Allowance for Doubtful Accounts balance. Valuation of accounts receivable. Calculation of bad debt expense. Calculate Allowance for Doubtful Accounts balance. Determine appropriate interest rate for a zero-interest-bearing note. Calculate present value of a zero-interest-bearing note. Calculation of sales revenue. Entry for exchange of goods for note receivable. Calculate amount of interest. Calculate interest revenue on a zero-interest-bearing note. Calculate note payable amount. Calculate gain (loss) on transfer of receivables. Calculate gain (loss) on transfer of receivables. Calculation of gain (loss) on transfer of receivables. Calculate proceeds from transfer of receivables with recourse. Record assignment of accounts receivables. Calculate cash proceeds from transfer of receivables. Entry to record collection of assigned receivables. Factoring receivables without recourse. Factoring receivables with recourse. Calculate loss on sale of receivables. Calculate loss on sale of receivables. Calculate accounts receivable turnover. Calculate accounts receivable turnover.

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Test Bank for Intermediate Accounting, Fourteenth Edition

MULTIPLE CHOICE—Computational (cont.) Answer d b b c b c

No. *117. *118. *119. *120. *121. *122.

Description Entry to replenish petty cash. Calculate correct balance in bank account. Calculate correct cash balance. Calculate correct cash balance. Calculate correct cash balance. Calculate correct cash balance.

MULTIPLE CHOICE—CPA Adapted Answer a d d b c d c c b a a

No. 123. 124. 125. 126. 127. 128. 129. 130. 131. *132. *133.

Description Determine current net receivables. Calculate adjustment for bad debts. Calculate bad debt expense. Calculate adjustment to write off bad debts. Effect of a write-off under the allowance method. Determine balance in the Allowance for Doubtful Accounts. Determine interest revenue of a zero-interest-bearing note. Determine interest receivable at year end. Assignment and factoring of accounts receivable. Calculate correct cash balance. Calculate the cash balance per books.

EXERCISES Item E7-134 E7-135 E7-136 E7-137 E7-138

Description Asset classification. Allowance for doubtful accounts. Entries for bad debt expense. Fair value option. Accounts receivable assigned.

PROBLEMS Item P7-139 P7-140 P7-141 *P7-142 *P7-143

Description Entries for bad debt expense. Amortization of discount on note. Accounts receivable assigned. Factoring accounts receivable. Bank reconciliation.

Cash and Receivables

CHAPTER LEARNING OBJECTIVES' 1. 2. 3. 4. 5. 6. 7. 8. 9. *10.

Identify items considered as cash. Indicate how to report cash and related items. Define receivables and identify the different types of receivables. Explain accounting issues related to recognition of accounts receivable. Explain accounting issues related to valuation of accounts receivable. Explain accounting issues related to recognition and valuation of notes receivable. Explain the fair value option. Explain accounting issues related to disposition of accounts and notes receivable. Explain how to report and analyze receivables. Explain common techniques employed to control cash.

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Test Bank for Intermediate Accounting, Fourteenth Edition

SUMMARY OF LEARNING OBJECTIVES BY QUESTIONS Item

Type

Item

Type

Item

1. 2.

TF TF

3. 21.

TF MC

4. 5.

TF TF

6. 28.

TF MC

7.

TF

8.

TF

33.

9. 10.

TF TF

36. 37.

MC MC

38. 39.

11. 12. 13. 42. 43. 44.

TF TF TF MC MC MC

45. 46. 47. 48. 49. 50.

MC MC MC MC MC MC

51. 52. 53. 82. 83. 84.

14. 15. 16.

TF TF TF

137.

E

S P

54. 55. 97.

22. 23.

S

29. 30.

MC MC MC

98. 99. 100.

S

Type

Item

Type

Item

Learning Objective 1 P MC 24. MC 26. MC 25. MC 27. Learning Objective 2 MC 31. MC 73. MC 32. MC 74. Learning Objective 3 S MC 34. MC 35. Learning Objective 4 MC 40. MC 78. MC 41. MC 79. Learning Objective 5 MC 85. MC 91. MC 86. MC 92. MC 87. MC 93. MC 88. MC 94. MC 89. MC 95. MC 90. MC 96. Learning Objective 6 MC 101. MC 129. MC 102. MC 130. MC 103. MC 140. Learning Objective 7

Type

Item

Type

Item

Type

MC MC

72.

MC

MC MC

75. 76.

MC MC

77. 134.

MC E

MC MC

80. 81.

MC MC

123.

MC

MC MC MC MC MC MC

124. 125. 126. 127. 128. 135.

MC MC MC MC MC E

136. 139.

E P

MC MC MC MC

131. 138. 141. 142.

MC E P P

MC MC

122. 132.

MC MC

133. 143.

MC P

MC

MC MC P

Learning Objective 8 17. 18. 19. 56.

TF TF TF MC

57. 58. 59. S 60.

MC MC MC MC

61. 104. 105. 106.

20. 62.

TF MC

63. 64.

MC MC

65. 66.

MC 107. MC 111. MC 108. MC 112. MC 109. MC 113. MC 110. MC 114. Learning Objective 9 MC 115. MC MC 116. MC

71. 117.

Learning Objective *10 MC 118. MC 120. MC 119. MC 121.

P

67. 68. Note:

MC MC

69. 70.

MC MC

TF = True-False MC = Multiple Choice

E = Exercise P = Problem

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TRUE-FALSE—Conceptual 1. Savings accounts are usually classified as cash on the balance sheet. 2. Certificates of deposit are usually classified as cash on the balance sheet. 3. Companies include postdated checks and petty cash funds as cash. 4. Cash equivalents are investments with original maturities of six months or less. 5. Bank overdrafts are always offset against the cash account in the balance sheet. 6. Short-term, highly liquid investments may be included with cash on the balance sheet. 7. All claims held against customers and others for money, goods, or services are reported as current assets. 8. Trade receivables include notes receivable and advances to officers and employees. 9. Trade discounts are used to avoid frequent changes in catalogs and to alter prices for different quantities purchased. 10. In the gross method, sales discounts are reported as a deduction from sales. 11. The net amount reported for short-term receivables is not affected when a specific account receivable is determined to be uncollectible. 12. The percentage-of-receivables approach of estimating uncollectible accounts emphasizes matching over valuation of accounts receivable. 13. The percentage-of-sales method results in a more accurate valuation of receivables on the balance sheet. 14. Companies record and report long-term notes receivable at the present value of the cash they expect to collect. 15. When the stated rate of interest exceeds the effective rate, the present value of the note receivable will be less than its face value. 16. Notes receivable are generally reported as noncurrent assets. 17. Recognition of a recourse liability will make a loss on sale of receivables larger than it would otherwise have been. 18. When buying receivables with recourse, the purchaser assumes the risk of collectibility and absorbs any credit loss. 19. For receivables sold with recourse, the seller guarantees payment to the purchaser if the debtor fails to pay.

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Test Bank for Intermediate Accounting, Fourteenth Edition

20. The receivables turnover ratio is computed by dividing net sales by the ending net receivables.

True False Answers—Conceptual Item 1. 2. 3. 4. 5.

Ans. T F F F F

Item 6. 7. 8. 9. 10.

Ans. T F F T T

Item 11. 12. 13. 14. 15.

Ans. T F F T F

Item 16. 17. 18. 19. 20.

Ans. F T F T F

MULTIPLE CHOICE—Conceptual

P

21.

Which of the following is not considered cash for financial reporting purposes? a. Petty cash funds and change funds b. Money orders, certified checks, and personal checks c. Coin, currency, and available funds d. Postdated checks and I.O.U.'s

22.

Which of the following is considered cash? a. Certificates of deposit (CDs) b. Money market checking accounts c. Money market savings certificates d. Postdated checks

23.

Travel advances should be reported as a. supplies. b. cash because they represent the equivalent of money. c. investments. d. none of these.

24.

Which of the following items should not be included in the Cash caption on the balance sheet? a. Coins and currency in the cash register b. Checks from other parties presently in the cash register c. Amounts on deposit in checking account at the bank d. Postage stamps on hand

25.

All of the following may be included under the heading of "cash" except a. currency. b. money market funds. c. checking account balance. d. savings account balance.

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26.

In which account are post-dated checks received classified? a. Receivables. b. Prepaid expenses. c. Cash. d. Payables.

27.

In which account are postage stamps classified? a. Cash. b. Office supplies. c. Receivables. d. Inventory.

28.

What is a compensating balance? a. Savings account balances. b. Margin accounts held with brokers. c. Temporary investments serving as collateral for outstanding loans. d. Minimum deposits required to be maintained in connection with a borrowing arrangement.

29.

Under which section of the balance sheet is "cash restricted for plant expansion" reported? a. Current assets. b. Non-current assets. c. Current liabilities. d. Stockholders' equity.

S

30.

A cash equivalent is a short-term, highly liquid investment that is readily convertible into known amounts of cash and a. is acceptable as a means to pay current liabilities. b. has a current market value that is greater than its original cost c. bears an interest rate that is at least equal to the prime rate of interest at the date of liquidation. d. is so near its maturity that it presents insignificant risk of changes in interest rates.

31.

Bank overdrafts, if material, should be a. reported as a deduction from the current asset section. b. reported as a deduction from cash. c. netted against cash and a net cash amount reported. d. reported as a current liability.

32.

Deposits held as compensating balances a. usually do not earn interest. b. if legally restricted and held against short-term credit may be included as cash. c. if legally restricted and held against long-term credit may be included among current assets. d. none of these.

33.

The category "trade receivables" includes a. advances to officers and employees. b. income tax refunds receivable. c. claims against insurance companies for casualties sustained. d. none of these.

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Test Bank for Intermediate Accounting, Fourteenth Edition

34.

Which of the following should be recorded in Accounts Receivable? a. Receivables from officers b. Receivables from subsidiaries c. Dividends receivable d. None of these

S

35.

What is the preferable presentation of accounts receivable from officers, employees, or affiliated companies on a balance sheet? a. As offsets to capital. b. By means of footnotes only. c. As assets but separately from other receivables. d. As trade notes and accounts receivable if they otherwise qualify as current assets.

S

36.

When a customer purchases merchandise inventory from a business organization, she may be given a discount which is designed to induce prompt payment. Such a discount is called a(n) a. trade discount. b. nominal discount. c. enhancement discount. d. cash discount.

P

37.

Trade discounts are a. not recorded in the accounts; rather they are a means of computing a price. b. used to avoid frequent changes in catalogues. c. used to quote different prices for different quantities purchased. d. all of the above.

38.

If a company employs the gross method of recording accounts receivable from customers, then sales discounts taken should be reported as a. a deduction from sales in the income statement. b. an item of "other expense" in the income statement. c. a deduction from accounts receivable in determining the net realizable value of accounts receivable. d. sales discounts forfeited in the cost of goods sold section of the income statement.

39.

Why do companies provide trade discounts? a. To avoid frequent changes in catalogs. b. To induce prompt payment. c. To easily alter prices for different customers. d. Both a. and c.

40.

The accounting for cash discounts and trade discounts are a. the same. b. always recorded net. c. not the same. d. tied to the timing of cash collections on the account.

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41.

Of the approaches to record cash discounts related to accounts receivable, which is more theoretically correct? a. Net approach. b. Gross approach. c. Allowance approach. d. All three approaches are theoretically correct.

42.

All of the following are problems associated with the valuation of accounts receivable except for a. uncollectible accounts. b. returns. c. cash discounts under the net method. d. allowances granted.

43.

Why is the allowance method preferred over the direct write-off method of accounting for bad debts? a. Allowance method is used for tax purposes. b. Estimates are used. c. Determining worthless accounts under direct write-off method is difficult to do. d. Improved matching of bad debt expense with revenue.

44.

Which of the following concepts relates to using the allowance method in accounting for accounts receivable? a. Bad debt expense is an estimate that is based on historical and prospective information. b. Bad debt expense is based on the actual amounts determined to be uncollectible. c. Bad debt expense is an estimate that is based only on an analysis of the receivables aging. d. Bad debt expense is management's determination of which accounts will be ...