Deck 6: Cash, Receivables, and the Time Value of Money

Question 1

You invest $1,000 in an interest paying account.At the end of the first year you have $1,050, and at the end of the second year you have $1,102.50.This is an example of which of the following concepts?

A)Compound interest
B)Simple interest
C)Present value
D)Changes in purchasing power

Answer 1

A

Question 2

You invest $1,000 in a Canada Savings Bond.At the end of the first year you have $1,050, and at the end of the second year you have $1,100.00.This is an example of which of the following concepts?

A)Compound interest
B)Simple interest
C)Present value
D)Changes in purchasing power

Answer 2

B

Question 3

Sam lent his son $30,000 to help finance his education.The son must pay back the principal, but no interest, in 6 years.If Sam could have earned 5% in a GIC over the same period, the cost of their gift to their son is closest to:

A)$1,500.
B)$9,000.
C)$10,146.
D)$10,202.

Answer 3

$10,202.

Question 4

What is the process that management implements to ensure the safety of assets, the reliability of its financial reporting and compliance with relevant laws called?

A)Internal control
B)Cash management
C)GAAP
D)Internal auditing

Question 5

Which of the following is not included in the cash and cash equivalents on the balance sheet?

A)Cash in the bank
B)Cash in the cash registers
C)Cash set aside to pay off long term debt
D)Money market funds

Question 6

Wally has been saving every penny to buy himself a fishing boat when he turns eighteen.First, he selected the model boat he wanted, and then, over the past five years, has managed to save $10,000, price of the boat, from working at summer and after-school jobs.When Wally arrives at the boat dealership on his eighteenth birthday, he is disappointed to learn that the same boat now costs $11,200.The most likely reason for the price increase is:

A)he cost of boat building materials has gone down
B)Increase in purchase power of cash
C)deflation
D)a combination of cost increases and inflation

Question 7

Which of the following is not reflected in IFRS prepared financial statements?

A)Purchasing power changes
B)Foreign exchange rate changes
C)The time value of money
D)The nominal dollar

Question 8

A company invested $50,000 for two years at a rate of 8% compounded semi-annually.The amount of interest they earned over the period is closest to:

A)$4,000.
B)$8,000.
C)$8,493.
D)$9,120.

Question 9

All of the following items would qualify as a cash equivalent except:

A)guaranteed investment certificate.
B)treasury bills.
C)commercial paper.
D)short-term investments with maturity dates less than one year but more than three months.

Question 10

Which of the following is the correct formula for calculating the future value of an amount invested (A) at an interest rate of r, for n periods?

A)(1 + r) x n x A
B)(1 + r)ⁿ x A
C)r x n x A
D)(1 + n)^r x A

Question 11

What is the concept that people would rather receive a given amount of money sooner rather than later?

A)Time value of money
B)Purchasing power
C)Unit-of-measure assumption
D)Interest rate theory

Question 12

Sarah invested $15,000 three years ago at 4%.Today the total amount would be closest to:

A)$15,600.
B)$16,800.
C)$16,872.
D)$17,548.

Question 13

It is a good idea to invest idle cash because:

A)deflation will make the value of money go down.
B)it will help keep inventory levels low.
C)inflation will make the value of money go down.
D)it will assist in the payment of liabilities.

Question 14

Which of the following is normally used by Canadian companies as a unit of measure for financial reporting?

A)Discounted value of the Canadian dollar
B)Nominal value
C)Current value adjusted for inflation
D)Value when converted to the U.S.dollar

Question 15

Which of the following would be an effective internal control procedure over cash?

A)Having only one person responsible for writing and signing all cheques.
B)Having the person who receives mailed-in cheques be different than the record keeper.
C)Having many people handle the cash activities in a store and all work out of the same cash register drawer.
D)Having one person responsible for all cash handling activities and the inventory.

Question 16

What is a Letter of Credit?

A)A guarantee from the bank that the supplier will be paid
B)A letter recommending the credit risk of the seller
C)A recommendation to do business with the seller
D)A credit to the supplier for goods that were returned

Question 17

Who is responsible for ensuring the reliability and completeness of the financial statements?

A)Auditors
B)Bookkeepers
C)Internal auditors
D)Management

Question 18

A Canadian company does some business in the U.S.and as a part of these activities they keep US$50,000 on deposit in a U.S.Bank account.The bookkeeper noticed that this year when the account was placed on the balance sheet it was less than last the year's comparative number, even though the amount in the account hadn't changed.What would explain this apparent change?

A)Poor internal controls
B)Changes in purchasing power
C)Exchange rate differences
D)Time value of money

Question 19

Which of the following would be an example of restricted cash?

A)Guaranteed Investment Certificates
B)Cash held in trust for clients
C)Petty cash
D)Cash deposits received from customers

Question 20

You have borrowed $20,000 from your parents to pay for your education.You are going to pay them back in 8 years.They are charging you 2% interest on the loan.The total amount that you will have to pay them in 8 years is closest to:

A)$21,600.
B)$23,200.
C)$23,328.
D)$23,433.

Question 21

Your friend has invited you to participate in his latest business venture.You expect to receive $10,000 a year for the next 10 years, starting one year from now.If interest rates are 7% the amount you would be willing to invest would be closest to?

A)$48,684
B)$50,834
C)$70,000
D)$70,235

Question 22

Which of the following related to sales on credit is known with certainty at the balance sheet date?

A)The gross amount of accounts receivable.
B)The amount of bad debts.
C)The returns of goods.
D)The discounts customers take when paying their accounts.

Question 23

A company owes 2 more payments of $15,000 each on an instalment purchase they made for a piece of equipment.One payment is due tomorrow and the last one a year from now.The company is going to offer the equipment manufacturer one lump-sum payment tomorrow for both payments.If interest rates are 8% compounded semi-annually, the amount the company should offer to pay tomorrow is closest to:

A)$28,227.
B)$28,868.
C)$28,888.
D)$30,000.

Question 24

Ines Corporation bought a new machine and agreed to pay for it in equal annual instalments of $10,000 at the end of each of the next four years.The payments include both interest and principal.The rate of interest for this transaction is 8%.The amount that Ines should record the cost of the machine at is closest to?

A)$29,401
B)$33,121
C)$37,037
D)$40,000

Question 25

At what amount are accounts receivable shown on the balance sheet?

A)At their gross amount.
B)At their gross amount plus expected interest revenue.
C)At their net realizable amount plus expected interest revenue.
D)At their net realizable amount.

Question 26

If a shareholder has borrowed money from a company and is expected to pay it back within 9 months, how would the amount be reported on the balance sheet?

A)As an accounts receivable.
B)As a loan receivable in current assets.
C)As a loan receivable in shareholders' equity.
D)As a reduction from retained earnings.

Question 27

The present value of an annuity stream of $5,000 per year for 10 years at 6% is closest to?

A)$27,919
B)$36,800
C)$39,008
D)$50,000

Question 28

Mrs.Bertucci wants to give her new granddaughter $40,000 on her 21st birthday.If she can invest the money at 4%, the amount she needs to set aside when her granddaughter is born is closest to:

A)$6,400.
B)$17,553.
C)$17,355.
D)$18,255.

Question 29

Which of the following is not a required condition for using the present value annuity formula?

A)The cash flow is the same in each year.
B)There is an even number of cash flows.
C)The same discount rate is applied to each year.
D)The cash flow occurs in every year, beginning one year from the present.

Question 30

A company recognizes bad debts by writing off the receivable only when it becomes certain that the customer will not be paying.What is this method called?

A)Direct writeoff method
B)Allowance method
C)Net realizable value method
D)Percentage-of-credit-sales method

Question 31

The lottery has a choice of two different prize payouts.One is to receive a lump sum now; the second is to receive an annual payment of $25,000 a year for the next 40 years starting in one year.If interest rates are 5% the amount of the lump sum that would make you indifferent to the two prizes is closest to?

A)$66,780
B)$425,426
C)$428,977
D)$1,000,000

Question 32

Which of the following measurement conventions primarily supports the use of the allowance for uncollectible accounts?

A)Historical cost
B)Full disclosure
C)Revenue recognition
D)Matching principle

Question 33

A company has borrowed money at discount; that is, they will not pay any interest on it during the 5 years when the loan is outstanding.If interest rates are 8% and the total repayment will be $50,000, the amount they will receive now from the bank is closest to:

A)$33,841.
B)$34,029.
C)$46,000.
D)$50,000.

Question 34

Carlos wants to invest enough money now to have $25,000 in three years to buy a new car.If interest rates are 4%, the amount he needs to invest now is closest to:

A)$22,000.
B)$22,212.
C)$22,224.
D)$24,000.

Question 35

Ines Corporation bought a new machine and agreed to pay for it in equal annual instalments of $10,000 at the end of each of the next four years.The payments include both interest and principal.The rate of interest for this transaction is 8%.The total amount of interest that Ines will pay is closest to?

A)$2,963
B)$3,200
C)$6,879
D)The interest cost can't be determined.

Question 36

Which of the following is an advantage of allowing customers to buy on credit?

A)It lengthens the cash cycle.
B)It allows the company to claim bad debt expense.
C)It increases sales.
D)It allows the company to claim more tax refunds.

Question 37

You are considering a cell phone package that needs no money down but has monthly payments of $18.50 for 36 months.The monthly interest rate for you is 1% per month.Alternatively, you can buy the cell phone outright for one fixed price.At which of the following prices would you be better to buy the cell phone?

A)$500
B)$557
C)$575
D)$666

Question 38

Which of the following is the correct formula for calculating the present value of an amount invested (A) at an interest rate of r, for n periods?

A)A x (1/(1 + r)) x n
B)A x (1/(1 + r)ⁿ)
C)A x (1/(r x n))
D)A x (1/(1 + n)^r

Question 39

Which of the following would be classified as an accounts receivable?

A)Dividends owing to the company on an investment.
B)A loan to an employee.
C)Amounts due from customers.
D)Amounts due from the tax department.

Question 40

Your rich uncle wants to set up a fund that allows you to withdraw $12,000 per year for the four years you are at university.The first payment will be made the day you start, followed by three other payments starting one year from then.If interest rates are 4%, the amount your uncle needs to have on hand the day before the first payment is closest to?

A)$33,301
B)$43,558
C)$45,301
D)$46,080

Question 41

The accounts receivable clerk had prepared the following aging of Northumberland Corp's accounts receivable.The current balance in the allowance for uncollectible receivables is $9,800 CR.What is the bad debt expense for the year? $\begin{array}{ccc}\text { Date since due: } & \$ & \% \text { uncollectible } \\0-30 \text { days } & 500,000 & 1 \% \\30-60 \text { days } & 200,000 & 4 \% \\\text { Over } 60 \text { davs } & 100,000 & 10 \%\\\text { Total }&\$800,000&5 \% \text { (average) }\end{array}$

A)$13,200
B)$23,000
C)$32,800
D)$40,000

Question 42

Which one of the following is an advantage of the direct writeoff method?

A)It provides good matching.
B)It can be manipulated by management.
C)It is straightforward.
D)It is based on accrual accounting.

Question 43

How does a company determine the net realizable value of accounts receivable?

A)Accounts receivable + allowance for uncollectible accounts
B)Accounts receivable - allowance for uncollectible accounts
C)Accounts receivable + bad debt expense
D)Accounts receivable - bad debt expense

Question 44

On January 1, 2014, Classic Bedding Limited's balances in the Accounts receivable account and the Allowance for uncollectible accounts were $833,000 DR and $125,000 CR, respectively.On February 1, 2014, the company gave up trying to collect from a customer and wrote off an account receivable of $3,000.What were the net carrying values of the accounts receivable before and after the writeoff?
$\begin{array}{lc}&\text { Before } & \text { After } \\A.&\$ 833,000 & \$ 830,000 \\B.&\$ 708,000 & \$ 705,000 \\C.&\$ 708,000 & \$ 711,000 \\D.&\$ 708,000 & \$ 708,000\end{array}$

A)Option A
B)Option B
C)Option C
D)Option D
($833,000 - $125,000) and ($830,000 - $122,000)

Question 45

On January 1, 2013, Murphy Printing Company's allowance for doubtful accounts had a credit balance of $6,000.Sales revenue for 2013 was $1,000,000, of which 80% was on credit.Historical data indicates that 3% of gross credit sales prove uncollectible.What should the balance in the allowance account be after the adjusting entry for doubtful accounts is made?

A)$18,000 credit
B)$24,000 credit
C)$30,000 credit
D)$18,000 debit

Question 46

A company is using the percentage-of-credit-sales method to estimate their bad debts and has noticed that over the past few years there has been a build-up of a debit balance in the Allowance for uncollectibles account.Which of the following is most likely the cause?

A)They have been consistently overestimating the bad debt expense.
B)They have been consistently underestimating the bad debt expense.
C)They have not written off enough accounts.
D)They have been selling more items on credit.

Question 47

Which method of estimating the bad debt expense requires the preparation of an aging of accounts receivable?

A)The percentage-of-receivables method
B)The percentage-of-credit-sales method
C)The direct writeoff method
D)The allowance for uncollectibles method

Question 48

When a company uses the percentage-of-receivables method to recognize bad debt expense, what is the effect of a writeoff of a specific account?

A)It decreases net income.
B)It decreases current assets.
C)It increases current assets.
D)It has no effect on net income.

Question 49

The Sales returns account is classified as a(n):

A)Asset account.
B)Contra-asset account.
C)Expense account.
D)Contra-revenue account.

Question 50

What kind of account is "allowance for uncollectibles"?

A)An expense account
B)A liability account
C)An assets account
D)A contra-asset account

Question 51

If the company makes the following journal entry to record bad debt expense, which method of accounting for bad debts is it using? Dr. Bad debt expense $\quad$$\quad$$\quad$ xxx
Cr. Allowance for uncollectible accounts $\quad$ xxx

A)Direct writeoff method
B)Allowance method
C)Net realizable value method
D)Bad debt expense method

Question 52

Which of the following methods of calculating bad debt expense is known as the balance sheet approach?

A)The percentage-of-receivables method
B)The percentage-of-credit-sales method
C)The direct writeoff method
D)The allowance for uncollectibles method

Question 53

The accounts receivable clerk had prepared the following aging of Northumberland Corp's accounts receivable.The current balance in the allowance for uncollectibles is $9,800 DR.What is the bad debt expense for the year? $\begin{array}{lrc}\text { Age since due }&\text { Amount }&\text { \% uncollectible }\\\hline0-30 \text { days } & \$ 500,000 & 1 \% \\30-60 \text { days } & 200,000 & 4 \% \\\text { over } 60 \text { days } & 100,000 & 10 \% \\\text { Total } & \$ 800,000 & 5 \% \text { (average) }\end{array}$

A)$13,200
B)$23,000
C)$32,800
D)$40,000

Question 54

Which of the following statements concerning the estimation of bad debt expense using the percentage-of-credit-sales method is correct?

A)It produces the same results as an aging of accounts receivable.
B)It causes an adjustment to the allowance account based on the balance in that account immediately prior to the adjustment.
C)It is based on the net realizable value of the accounts receivable.
D)It emphasizes the matching of revenues and expenses on the income statement.

Question 55

A company is using the percentage-of- credit- sales method to estimate their bad debts and has noticed that over the past few years there has been a build-up of a debit balance in the Allowance for uncollectible accounts.Which of the following is a possible cause?

A)Management might be trying to "manage the numbers".
B)Management have been consistently overestimating the bad debt expense.
C)The company has not written off enough accounts.
D)The company has been selling more items on credit.

Question 56

Ralston Hardware reported the following items for 2014: $$\begin{array} { l c } \text { Accounts receivable balance, January 1, 2014 } & \$ 125,000 \\\text { Allowance for doubtful accounts balance, January 1, 2014 } & 3,000 \mathrm { CR } . \\\text { Total credit sales during 2014 } & 653,000 \\\text { Total collections on accounts receivable during 2014 } & 567,000\end{array}$$ Experience indicates that 3% of the outstanding accounts receivable at the end of each year ultimately will be uncollectible.What should be the December 31, 2014, bad debt expense using the percentage- of-receivables method?

A)$3,330
B)$6,330
C)$9,330
D)$19,590

Question 57

Worley Limited uses the allowance method to account for bad debts.In 2013, a customer owing $650 of goods purchased on credit went bankrupt.The full amount of the receivable was considered uncollectible.What entry should be made to reflect this information?

A)Option A
B)Option B
C)Option C
D)Option D

Question 58

Which of the following methods of calculating bad debt expense is known as the income statement approach?

A)The percentage-of-receivables method
B)The percentage-of-credit-sales method
C)The direct writeoff method
D)The allowance for uncollectibles method

Question 59

If the company makes the following journal entry to record bad debt expense, which method of accounting for bad debts is it using? Dr. Bad debt expense $\quad$$\quad$ xxx
Cr. Accounts receivable $\quad$$\quad$ xxx

A)Direct writeoff method
B)Allowance method
C)Net realizable value method
D)Bad debt expense method

Question 60

A company is using the percentage-of-credit-sales method to estimate their bad debts and has noticed that over the past few years there has been a build-up of a credit balance in the Allowance for uncollectible accounts.Which of the following is most likely the cause?

A)They have been consistently overestimating the bad debt expense.
B)They have been consistently underestimating the bad debt expense.
C)They have written off too many accounts.
D)They have been selling fewer items on credit

Question 61

Which of the following can management use to create hidden reserves?

A)Accounting policy choices
B)Accounting estimate choices
C)Measurement choices
D)Revenue recognition choices

Question 62

Gros-Morne Inc.has the following assets and liabilities on their balance sheet: $$\begin{array} { l l } \text { Cash and temporary investments } & \$ 25,000 \\\text { Accounts receivable } & 125,000 \\\text { Inventory } & 225,000 \\\text { Capital assets (net) } & 462,500 \\\text { Accounts payable } & 115,000 \\\text { Other payables } & 138,000 \\\text { Bonds payable } & 100,000\end{array}$$ What is their current ratio?

A)1.06
B)1.48
C)2.37
D)3.31

Question 63

Signal Hill Ltd.had the following accounts on their balance sheet: Cash $10,000, Accounts receivable $50,000, Inventory $45,000, Prepaid rent $2,500, Long-term receivable $12,000, Accounts payable $27,500, Interest payable $1,200, Current portion of long-term bank debt $50,000, and Long-term debt $100,000.What was their current ratio?

A)1.36
B)1.39
C)1.51
D)3.72

Question 64

A company has the following current assets and current liabilities (all figures in '000s): $$\begin{array} { l r } \text { Cash and accounts receivable } & \$ 1,000 \\\text { Inventory and prepaid expense } & 1,000 \\\text { Current liabilities } & 1,500\end{array}$$ The company is concerned about not looking liquid enough and is considering using $500,000 of their cash to pay down the some bank debt.What would be the effect on their current ratio and quick ratio?
$\begin{array}{ll}&\text { Current } & \text { Quick } \\&\text { Ratio } & \text { Ratio }\\A.&\text { Increase } & \text { Increase } \\B.&\text { Increase } & \text { Decrease } \\C.&\text { Decrease } & \text { Increase } \\D.&\text { Decrease } & \text { Decrease }\end{array}$

A)Option A
B)Option B
C)Option C
D)Option D

Question 65

Which of the following is included in the current ratio but not the quick ratio?

A)Temporary investments
B)Accounts payable
C)Accounts receivable
D)Prepaid insurance

Question 66

The sales returns account does not provide information to management about:

A)Possible inferior merchandise.
B)Inefficiencies in filling orders
C)The percentage of credit sales versus cash sales.
D)Errors in billing customers.

Question 67

Selkirk Inc.sold a $500,000 machine to Gimly Company.The terms of the sale are that the full amount is due in 2 years plus interest payable annually at 6%.What amount would be recorded as revenue on the day the sale is made?

A)$444,998
B)$470,000
C)$500,000
D)$530,000

Question 68

The Allowance for sales returns account is classified as a(n):

A)asset account.
B)contra asset account.
C)expense account.
D)contra revenue account.

Question 69

Based on the following chart comparing the current and quick ratio for Green Grocers Ltd.(GGL) to the industry averages for the food retailing business, which of the following statements is true? $$\begin{array} { l l l } & \begin{array} { l } \text { Current } \\\text { Ratio }\end{array} & \begin{array} { l } \text { Quick } \\\text { Ratio }\end{array} \\\text { GGL } & \underline { 1.50 } & .60 \\\text { Industry } & 1.20 & .60\end{array}$$

A)GGL has more inventory on hand than the industry.
B)GGL has less inventory on hand than the industry.
C)GGL has more cash and accounts receivable on hand than the industry.
D)GGL is more liquid than the industry.

Question 70

If a company has a long-term account receivable outstanding and the receivable does not require interest, what is the effect on revenue and the receivable account?
$\begin{array}{ll}&\text { Revenue }&\text { Receivable }\\\hlineA.&\text { Overstated } & \text { Overstated } \\B.&\text { Overstated } & \text { Understated } \\C.&\text { Understated } & \text { Overstated } \\D.&\text { Understated } & \text { Understated }\end{array}$

A)Option A
B)Option B
C)Option C
D)Option D

Question 71

Which of the following is an account that could contain hidden reserves?

A)Accounts receivable
B)Prepaid expenses
C)Allowance for uncollectibles
D)Accumulated amortization

Question 72

Which of the following is the strictest test of a company's liquidity?

A)Current ratio
B)Quick ratio
C)Debt-to-equity
D)Cash from operations

Question 73

Signal Hill Ltd.had the following accounts on their balance sheet: Cash $10,000, Accounts receivable $50,000, Inventory $45,000, Prepaid rent $2,500, Long-term receivable $12,000, Accounts payable $27,500, Interest payable $1,200, Current portion of long-term bank debt $50,000, and Long-term debt $100,000.What was their quick ratio?

A)0.58
B)0.76
C)0.79
D)2.09

Question 74

The entry to record the return of goods from a customer would include a:

A)debit to Sales.
B)credit to Sales.
C)debit to Sales Returns.
D)credit to Sales Returns.

Question 75

Company A sells $500 of merchandise on account to Company B and offers credit terms of thirty days with a 2% discount if Co.B pays within ten days.If Company B takes advantage of the discount offered, what is the amount Company B will pay?

A)$410.
B)$490.
C)$470.
D)$500.

Question 76

Kamloops Corp.has several years of declining results.The Board of Directors hired new management to turn the company around and have offered the new management a bonus based on the increase in net income in their first full year of operation.The new management team took over in the middle of the 2013 fiscal year.Which of the following could management implement to ensure that they get the largest bonus possible?

A)Decrease the allowance for uncollectibles from 5% of credit sales to 3% only for 2013.
B)Decrease the allowance for uncollectibles from 5% of credit sales to 3%, starting in 2014.
C)Increase the allowance for uncollectibles from 3% of credit sales to 5% starting in 2014.
D)Increase the allowance for uncollectibles from 3% of credit sales to 5% only for 2013.

Question 77

A company has the following current assets and current liabilities (all figures in '000s): $$\begin{array} { l r } \text { Cash and accounts receivable } & \$ 1,000 \\\text { Inventory and prepaid expenses } & 1,000 \\\text { Current liabilities } & 1,500\end{array}$$ The company is concerned about not looking liquid enough and is considering borrowing $500,000 from the bank to buy short-term highly liquid investments.What would be the effect on their current ratio and quick ratio? $\begin{array}{ll}&\text { Current } & \text { Quick } \\&\text { Ratio } & \text { Ratio }\\A.&\text { Increase } & \text { Increase } \\B.&\text { Increase } & \text { Decrease } \\C.&\text { Decrease } & \text { Increase } \\D.&\text { Decrease } & \text { Decrease }\end{array}$

A)Option A
B)Option B
C)Option C
D)Option D

Question 78

The collection of a $500 account with the 2 percent discount will result in a:

A)Debit to Sales Discounts for $10.
B)Debit to Accounts Receivable for $490.
C)Credit to Cash for $490.
D)Credit to Accounts Receivable for $490

Question 79

If management thought that the current year's net income was going to be higher than next year's and wanted to create a hidden reserve, which of the following actions could they take?

A)Overestimate the allowance for uncollectibles in the current year.
B)Underestimate the allowance for uncollectibles in the current year.
C)Overestimate the allowance for uncollectibles in the next year.
D)Underestimate the allowance for uncollectibles in the next year.

Question 80

Gros-Morne Inc.has the following assets and liabilities on their balance sheet: $$\begin{array} { l l } \text { Cash and temporary investments } & \$ 25,000 \\\text { Accounts receivable } & 125,000 \\\text { Inventory } & 225,000 \\\text { Capital assets (net) } & 462,500 \\\text { Accounts payable } & 115,000 \\\text { Other payables } & 138,000 \\\text { Bonds payable } & 100,000\end{array}$$ What is their quick ratio?

A)0.59
B)1.30
C)1.48
D)3.26