Deck 6: Cash, Temporary Investments, and Accounts Notes Receivable

Question 1

Foreign currency is valued and reported on the balance sheet using the exchange rate that existed on the transaction date.

Answer 1

False

Question 2

Temporary investments that management intends to hold for less than one year are classified as current assets.

Answer 2

True

Question 3

If bad debt expense is over or underestimated in a prior period, an adjustment will be made to the allowance for doubtful accounts this period.

Answer 3

True

Question 4

The unrealized gain or loss recognized when valuing temporary investments at their fair market value is reported on the income statement.

Question 5

All of the following are monetary assets of a company except?

A)accounts receivable.
B)inventory.
C)notes receivable.
D)short-term investments.

Question 6

Compensating balances should be:

A)included with all other forms of cash.
B)classified as noncurrent assets.
C)segregated from other amounts of cash.
D)omitted from the balance sheet.

Question 7

All of the following are examples of internal controls over cash except:

A)depositing cash in the bank regularly.
B)ensuring different people are responsible for receiving and depositing cash.
C)ensuring that all cash transactions are recorded on a regular basis.
D)maintaining a separate facility for the storage of perishable inventory.

Question 8

Foreign currency held by a Canadian corporation is disclosed on the financial statements using the exchange rate that existed on the date of the:

A)financial statements.
B)purchase of the currency.
C)change in the exchange rate.
D)intended use of the currency.

Question 9

Which of the following would be classified as part of the cash account on the balance sheet?

A)Short term investments
B)Prepaid expenses
C)Currency
D)Restricted cash

Question 10

The underlying assumption that requires that domestic currency be measured at its face value is the:

A)cost assumption.
B)unit-of-measure assumption.
C)monetary unit assumption.
D)purchasing power assumption.

Question 11

Realized gains and losses on temporary investments arise when the investments are carried at market value on the balance sheet.

Question 12

Cash held by a firm is a non-earning asset and is measured at
face value.

Question 13

The allowance method of recognizing bad debt expense violates the matching principle.

Question 14

Valuation of investments of financial instruments is the same regardless of the type of investment it is.

Question 15

When preparing a bank reconciliation the balance as reported by the bank is adjusted until it agrees with the balance reported in the company's books.

Question 16

The gross amount of accounts receivable should be reflected on the balance sheet; this is what the company expects to collect in cash.

Question 17

Writing cheques instead of using cash would be a proper internal control procedure.

Question 18

During the current year Ortiz Industries purchased 24,000 euros €) on June 1.The company still held the euros on December 31, the company's year-end.Exchange rates during the year were: $$\begin{array} { l l } \text { Jan. } 1 & € 1.00 = \$ 1.45 \\\text { June } 1 & € 1.00 = \$ 1.37 \\\text { Dec. } 31 & € 1.00 = \$ 1.39\end{array}$$
The gain or loss in terms of Canadian dollars that will appear on the income statement is:

A)$900 gain
B)$480 gain
C)$1,200 loss
D)$900 loss

Question 19

All of the following are normally considered liquid assets of a company except?

A)accounts receivable.
B)inventory.
C)notes receivable.
D)short-term investments.

Question 20

The unit-of-measure assumption allows the measurement of activities in terms of a monetary unit.

Question 21

Use the following information for questions:
Terry Inc.purchased shares in three companies during the second quarter of 2011.They prepare interim financial statements each quarter and yearly statements as of December 31.Shown below are their investments in temporary investments for 2011. $\begin{array}{lrrrrrr}&\text { 2nd Qtr. } && \text { 3rd Qtr. } && \text { 4th Qtr. }\\\text { Investments } & \text { Cost } & \text { Market } & \text { Cost} & \text { Market } & \text { Cost} & \text { Market }\\\hline\text { Sunshine Co. shares } & \$ 43 & \$ 45 & \$ 43 & \$ 46 & \$ 43 & \$ 45 \\\text { New Ventures Inc. shares } & 101 & 99 & 101 & 105 & 101 & 103 \\\text { Good Day. shares } & 51 & 49 & 51 & 47 & 51 & 46\end{array}$

-At the end of the third quarter, the adjusting entry would include a:

A)debit to temporary investments for $5.
B)credit to gain on temporary investments for $3.
C)debit to unrealized loss on temporary investments for $3.
D)credit to temporary investments for $5.

Question 22

Use the following information for questions:
Terry Inc.purchased shares in three companies during the second quarter of 2011.They prepare interim financial statements each quarter and yearly statements as of December 31.Shown below are their investments in temporary investments for 2011. $\begin{array}{lrrrrrr}&\text { 2nd Qtr. } && \text { 3rd Qtr. } && \text { 4th Qtr. }\\\text { Investments } & \text { Cost } & \text { Market } & \text { Cost} & \text { Market } & \text { Cost} & \text { Market }\\\hline\text { Sunshine Co. shares } & \$ 43 & \$ 45 & \$ 43 & \$ 46 & \$ 43 & \$ 45 \\\text { New Ventures Inc. shares } & 101 & 99 & 101 & 105 & 101 & 103 \\\text { Good Day. shares } & 51 & 49 & 51 & 47 & 51 & 46\end{array}$

-When preparing the balance sheet as at December 31, 2011, temporary investments will be reported at:

A)$194.
B)$193.
C)$198.
D)$195

Question 23

When the market value of a company's temporary investments is less than its cost, the difference is:

A)not recognized in the financial statements.
B)only disclosed in the financial statement footnotes.
C)reported as a loss on the balance sheet.
D)reported as an unrealized loss on the income statement.

Question 24

Policies and procedures that are established to protect and manage a company's assets are known as:

A)a record-keeping system.
B)an accounting system.
C)internal controls.
D)management controls.

Question 25

Unrealized gains on temporary investments are:

A)reported on the income statement.
B)never recognized in the financial statements.
C)disclosed in the financial statement footnotes.
D)classified as an adjustment to shareholders' equity.

Question 26

The recovery of unrealized losses on temporary investments is recognized as an):

A)gain on the income statement.
B)adjustment to the valuation allowance account.
C)adjustment to the realized losses report.
D)footnote to the financial statements.

Question 27

As part of the bank reconciliation process the following must occur:

A)bank adjusting entries
B)company adjusting entries
C)verification of bank charges
D)inventory of company cheques

Question 28

All of the following are reasons companies purchase temporary investments except:

A)to earn a return on excess cash.
B)to have investments that can be quickly converted into cash.
C)to exercise control over another company.
D)to minimize its cash balance.

Question 29

Bank reconciliations are not:

A)an important cash control
B)done be all companies
C)sufficient to determine fraud
D)useful

Question 30

Which of the following types of investments may be classified as a temporary or short term investment depending on management's intentions:

A)Available for sale
B)Held to maturity
C)Held for sales
D)Controlling interest equity securities

Question 31

On January 1, 2011 Mellie Co.had $43,000 in its temporary investments account.At December 31, 2011 their portfolio consisted of: $\begin{array}{lrr}\text { Investments }& \text { Cost } &\text { Market }\\\hline\text { Jenelle Inc. shares } & \$ 8,000 & \$ 8,500 \\\text { Amy Co. shares } & 23,000 & 28,000 \\\text { Aisha Inc. shares } & 12,000 & 9,000\end{array}$
The adjusting entry prepared at year end included a:

A)debit to the temporary investments account for $2,500.
B)credit to the temporary investments account for 2,500.
C)debit to the cash account for $47,500.
D)credit to the unrealized loss account for $2,500.

Question 32

Dividend income is recognized when the dividend is:

A)received.
B)declared.
C)projected.
D)accrued.

Question 33

Which of the following is not a reconciling item when preparing a bank reconciliation?

A)Bank service charges not recorded by the corporation
B)Outstanding cheques
C)Interest collected on a note receivable by the bank and recorded by the corporation
D)Outstanding deposits

Question 34

Who should be responsible for preparing the bank reconciliation?

A)The person who makes the deposits.
B)The person who writes the cheques.
C)The person who maintains the accounting records.
D)A person not involved in the day-to-day banking activities.

Question 35

Use the following information for questions:
Terry Inc.purchased shares in three companies during the second quarter of 2011.They prepare interim financial statements each quarter and yearly statements as of December 31.Shown below are their investments in temporary investments for 2011. $\begin{array}{lrrrrrr}&\text { 2nd Qtr. } && \text { 3rd Qtr. } && \text { 4th Qtr. }\\\text { Investments } & \text { Cost } & \text { Market } & \text { Cost} & \text { Market } & \text { Cost} & \text { Market }\\\hline\text { Sunshine Co. shares } & \$ 43 & \$ 45 & \$ 43 & \$ 46 & \$ 43 & \$ 45 \\\text { New Ventures Inc. shares } & 101 & 99 & 101 & 105 & 101 & 103 \\\text { Good Day. shares } & 51 & 49 & 51 & 47 & 51 & 46\end{array}$

-At the end of the second quarter, the income statement would show:

A)a realized loss on sale of temporary investments for $2.
B)an unrealized loss on temporary investments for $2.
C)an unrealized gain on temporary investments for $2.
D)no gain or loss related to temporary investments.

Question 36

The ending balance on the bank statement for December is $1,425.33.The company has outstanding cheques of $263.35, outstanding deposits of $729.61, and incurred bank service fees of $12.00 during the month.The adjusted cash balance for the company as at December 31 is:

A)$947.07
B)$1,891.59
C)$1,879.59
D)$1903.59

Question 37

Opportunities for employee fraud arises when:

A)An employee is in charge of purchasing, inspecting and recording assets
B)Employees verify each other's work
C)An employee has clear documentation procedures
D)An employee is responsible for making the daily cash bank deposit

Question 38

Investments made by a company for non-strategic reasons can be classified as one of four types.Which of the following is not a type of investment?

A)Held for trading
B)Held to maturity
C)Held for sale
D)Available for sale

Question 39

The decision of how to classify a temporary investment is based on the:

A)dollar amount involved.
B)type of investment involved.
C)number of shares or units purchased
D)length of time management intends to hold the investment.

Question 40

An investment in marketable securities to be used to replace equipment of the company in two years should be classified as an):

A)noncurrent asset.
B)current asset.
C)fixed asset.
D)intangible asset.

Question 41

Which of the following do not affect the amounts collected on accounts receivables?

A)Credit policy
B)Returns policy
C)Discounts policy
D)The allowance for doubtful accounts

Question 42

Which of the following violates the matching principle?

A)Direct write-off method
B)Allowance method
C)Percentage of credit sales method
D)Aging of accounts receivable method

Question 43

Candy Co.had accounts receivable totalling $450,000 and an allowance for doubtful accounts with a balance of $5,000 on June 1, 2011.On June 2 Candy wrote off $7,500 of uncollectible accounts.The net carrying value of accounts receivable before and after the write-off was:

Question 44

A subsidiary account for temporary investments:

A)is the account reported on the balance sheet.
B)contains the details of each individual investment.
C)is the summary account of all of the investments.
D)is where the dividend and income revenue from the investment is recorded.

Question 45

When an account receivable that has previously been written off is later paid, under the allowance method the correct accounting is to:

Question 46

Use the following information for questions:
Armada Inc.'s books revealed the following data for 2011 after all adjustments were made: $\begin{array}{lr}\text { Cash sales } & \$ 825,000 \\\text { Sales returns (on credit sales) } & 35,000 \\\text { Allowance for doubtful accounts (credit balance) } & 3,800 \\\text { Credit sales } & 575,000 \\\text { Accounts receivable } & 168,000\end{array}$ Armada estimates bad debt expense based on 2% of net credit sales.

-The net carrying value of accounts receivable before the bad debt expense is recognized is:

A)$156,500
B)$164,200
C)$168,000
D)$171,800

Question 47

A realized gain on temporary investments:

A)occurs when the investment increases in price and the company still holds it.
B)is the difference between the selling price of the investment and its original purchase price.
C)is the difference between the selling price of the investment and the most recent carrying value of the investment when the investment is sold.
D)occurs when the investment recovers in price to their original cost if a loss was previously recorded.

Question 48

Which of the following is a contra account?

A)Bad debts
B)Accounts receivable recoveries
C)Allowance for doubtful accounts
D)Credit sales

Question 49

Use the following information to answer questions
Bayne Inc.bought bonds at a cost of $12,000 on March 1, 2011.At the end of the first quarter, March 31, Waba prepared financial statements and the bonds had a market value of $12,800.Bayne sold the bonds for $12,100 on May 18 before receiving any interest for them.
On their first quarter financial statements prepared for the period ending March 31, Bayne should have recorded:

A)An unrealized gain of $800
B)An unrealized loss of $300
C)A realized gain of $300
D)no adjustment was required

Question 50

If a company is experiencing cash flow difficulties it may opt to sell its receivables to a third party to generate cash.This is known as:

A)internal cash controls
B)pledging
C)factoring
D)cash managment

Question 51

The use of the estimated bad debt expense and allowance accounts is required under which accounting concept?

A)The revenue recognition principle
B)The matching principle
C)The materiality constraint
D)The unit of measure assumption

Question 52

Rodeo Company purchased 10,000 shares of Calgary Co.on July 15, 2011 for $12.00 per share.Calgary declared and paid a dividend of $1.20 per share in August.On September 30, the shares were trading on the stock exchange for $13.50.For the quarter ending September 30, which of the following would Rodeo report on its income statement?

A)Dividend income $12,000
B)Dividend income $12,000, Unrealized gain on temporary investments of $1,500
C)Dividend income $12,000, Realized gain on temporary investments of $15,000
D)Dividend income $12,000, Unrealized gain on temporary investments $15,000.

Question 53

Canadian practice is that accounts receivable be valued using which of the following methods?

A)Gross payments
B)Present value less allowances
C)Net realizable value
D)Market value

Question 54

Use the following information to answer questions
Bayne Inc.bought bonds at a cost of $12,000 on March 1, 2011.At the end of the first quarter, March 31, Waba prepared financial statements and the bonds had a market value of $12,800.Bayne sold the bonds for $12,100 on May 18 before receiving any interest for them.
On their second quarter financial statements prepared for the period ending June 30 Bayne should have recognized a):

A)$700 realized loss.
B)$300 realized loss.
C)$300 realized gain and a $400 unrealized gain.
D)$12,100 cash.

Question 55

Use the following information for questions:
Armada Inc.'s books revealed the following data for 2011 after all adjustments were made: $\begin{array}{lr}\text { Cash sales } & \$ 825,000 \\\text { Sales returns (on credit sales) } & 35,000 \\\text { Allowance for doubtful accounts (credit balance) } & 3,800 \\\text { Credit sales } & 575,000 \\\text { Accounts receivable } & 168,000\end{array}$ Armada estimates bad debt expense based on 2% of net credit sales.

-The bad debt expense for 2011 was:

A)$10,800
B)$11,500
C)$14,600
D)$3,360

Question 56

When managing a company's cash position, management may invest in securities that can easily be converted back into cash.The ability to turn an investment back into cash is known as:

A)liquidity.
B)solvency.
C)cash equivalents.
D)compensating balances.

Question 57

Which of the following entries would be the appropriate entry for writing off an uncollectible account receivable under the allowance method?

A)Dr.Bad debt expense Cr.Accounts receivable
B)Dr.Sales Cr.Accounts receivable
C)Dr.Accounts receivable Cr.Bad debt expense
D)Dr.Allowance for doubtful accounts Cr.Accounts receivable

Question 58

When valuing accounts receivable on the balance sheet the reported value makes allowances for all of the following except:

A)bad debts.
B)present value.
C)price adjustments.
D)potential returns.

Question 59

When is it acceptable to use the direct write-off method to account for uncollectible accounts?

A)When the expected bad debts are significant.
B)When the company factors its accounts receivable.
C)When the company uses the percentage of sales method.
D)When the expected bad debts are not significant.

Question 60

Use the following information for questions: $$\begin{array} { l c c } \text { Days outstanding } & \text { Balance } & \text { Estimated percentage uncollectible } \\0 - 30 \text { days } & \$ 350,000 & 1 \% \\31 - 60 \text { days } & 275,000 & 2 \% \\61 - 90 \text { days } & 67,500 & 5 \% \\ \text { over } 90 \text { days } & 37,500 & 25 \%\end{array}$$ The balance in their allowance for doubtful accounts before year-end adjustments is a $2,000 credit.

-The bad debt expense for 2011 is:

A)$21,750
B)$23,750.
C)$19,750.
D)$35,000.

Question 61

Use the following information for questions: $\begin{array}{l}\begin{array}{lrr}&2011&2010\\\text { Current Assets }\\\text { Cash } & \$ 25,000 & \$ 26,250 \\\text { Accounts Receivable } & 247,500 & 299,000 \\\text { Inventory } & 1,950,000 & 1,725,000 \\\text { Prepaid expenses } & 4,000 & 4,000\\\text { Total Current Assets } & \$ 2,226,500&\$ 2,054,250\\\\\text { Current Liabilities } & \$ 1,400,000 & \$ 1,225,000 \\\text { Net Credit Sales } & \$ 2,400,000 & \$ 2,255,000\end{array}\end{array}$ Melrose Enterprise's credit terms are net 30 days.

-Melrose Enterprise Ltd's 2011 current ratio is:

A)1.59:1
B)1.39:1
C)1.00:1
D)0.19:1

Question 62

Use the following information for questions: $\begin{array}{l}\begin{array}{lrr}&2011&2010\\\text { Current Assets }\\\text { Cash } & \$ 25,000 & \$ 26,250 \\\text { Accounts Receivable } & 247,500 & 299,000 \\\text { Inventory } & 1,950,000 & 1,725,000 \\\text { Prepaid expenses } & 4,000 & 4,000\\\text { Total Current Assets } & \$ 2,226,500&\$ 2,054,250\\\\\text { Current Liabilities } & \$ 1,400,000 & \$ 1,225,000 \\\text { Net Credit Sales } & \$ 2,400,000 & \$ 2,255,000\end{array}\end{array}$ Melrose Enterprise's credit terms are net 30 days.

-Melrose Enterprise's quick ratio for 2011 is:

A)1.59:1
B)1.39:1
C)0.88:1
D)0.19:1

Question 63

All of the following are characteristics of notes receivable except, notes receivable:

A)are usually evidenced by a more formal agreement called a promissory note.
B)generally require the maker to pay interest on the receivable.
C)are generally for a longer period than a regular accounts receivable.
D)are used by most businesses for very large amounts and are therefore almost always shown separately on the financial statements.

Question 64

Intercity Industries accepted a one-year, non-interest-bearing note with a $21,000 face value in exchange for goods with a sale price of $19,534.What was the implied interest rate on the note?

A)There is no implied interest rate.
B)7.8%
C)7.5%
D)6.9 %

Question 65

Gomez Agencies accepts an 20-month, 6%, $7,500 note receivable from a client in settlement of an outstanding accounts receivable on November 1, 2009.The client pays off the note on June 30, 2011.Gomez has a December 31 year-end.Gomez should recognize interest revenue in 2011 of:

A)$150
B)$225
C)$450
D)$750

Question 66

Use the following information for questions: $$\begin{array} { l c c } \text { Days outstanding } & \text { Balance } & \text { Estimated percentage uncollectible } \\0 - 30 \text { days } & \$ 350,000 & 1 \% \\31 - 60 \text { days } & 275,000 & 2 \% \\61 - 90 \text { days } & 67,500 & 5 \% \\ \text { over } 90 \text { days } & 37,500 & 25 \%\end{array}$$ The balance in their allowance for doubtful accounts before year-end adjustments is a $2,000 credit.

-The balance in the allowance for doubtful accounts after year-end adjustments will be:

A)$2,000.
B)$23,750.
C)$21,750.
D)$19,750.

Question 67

A note in which the interest is implicit is called a:

A)secured note.
B)negotiable note.
C)factored note.
D)discounted note.