Deck 7: Cash and Receivables

Question 1

When buying receivables with recourse, the purchaser assumes the risk of collectibility and absorbs any credit loss.

Answer 1

False

Question 2

Bank overdrafts are always included as part of cash in the statement of financial position.

Answer 2

False

Question 3

The percentage-of-sales method results in a more accurate valuation of receivables on the balance sheet.

Answer 3

False

Question 4

In the gross method, sales discounts are reported as a deduction from sales.

Question 5

Receivables are classified in the statement of financial position as either trade or non-trade receivables.

Question 6

The International Accounting Standard Board requires that when performing an impairment assessment, all receivables that are individually significant should be considered for impairment separately.

Question 7

Trade receivables include notes receivable and advances to officers and employees.

Question 8

Trade discounts are used to avoid frequent changes in catalogs and to alter prices for different quantities purchased.

Question 9

The International Accounting Standards Board believes that historical cost for financial instruments provides more relevant and understandable information than fair value.

Question 10

When the stated rate of interest exceeds the effective rate, the present value of the note receivable will be less than its face value.

Question 11

If substantially all the risks and rewards of ownership of the receivables are transferred, then they are derecognised.

Question 12

Companies record and report long-term notes receivable on a discounted basis.

Question 13

Companies include postdated checks and petty cash funds as cash.

Question 14

Ideally, a company should measure receivables in terms of their present value, that is, the discounted value of the cash to be received in the future.

Question 15

Cash equivalents are investments with original maturities of six months or less.

Question 16

Short-term, highly liquid investments may be included with cash on the statement of financial position.

Question 17

Savings accounts are usually classified as cash on the statement of financial position.

Question 18

The International Accounting Standard Board requires that companies assess their receivables for impairment each reporting period and begin the impairment assessment by considering whether objective evidence indicates that one or more loss events have occurred.

Question 19

Certificates of deposit are usually classified as cash on the statement of financial position.

Question 20

The percentage-of-receivables approach of estimating uncollectible accounts emphasizes matching over valuation of accounts receivable.

Question 21

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 sent to the attorney for collection.

Question 22

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 answer choices are correct.

Question 23

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.

Question 24

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

Question 25

In which account are post-dated checks received classified?

A) Receivables
B) Prepaid expenses
C) Cash
D) Payables

Question 26

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.

Question 27

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

Question 28

Under IFRS, a company may select the fair value option or amortized cost for valuing a group of receivables at each statement of financial position date.

Question 29

Bank overdrafts generally 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.

Question 30

Which of the following is considered cash?

A) Certificates of deposit (CDs)
B) Money orders
C) Money market savings certificates
D) Postdated checks

Question 31

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

Question 32

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.

Question 33

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 income and 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.

Question 34

Under IFRS, a company will derecognize its receivables when it elects to use the fair value option for a receivable.

Question 35

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 answer choices are correct.

Question 36

Under IFRS de-recognition of a receivable is determined by using lack of control as the primary criterion.

Question 37

In which account are postage stamps classified?

A) Cash
B) Supplies
C) Receivables
D) Inventory

Question 38

Under IFRS, a company will derecognize its receivables when the contractual rights to the cash flows of the receivable no longer exist.

Question 39

The accounts receivable turnover is computed by dividing net sales by the ending net receivables.

Question 40

Why do companies provide trade discounts?

A) To avoid frequent changes in catalogs only
B) To induce prompt payment
C) To easily alter prices for different customers only
D) To avoid frequent changes in catalogs and to easily alter prices

Question 41

Which of the following methods of determining annual bad debt expense best achieves the matching concept?

A) Percentage of sales
B) Percentage of ending accounts receivable
C) Percentage of average accounts receivable
D) Direct write-off

Question 42

The advantage of relating a company's bad debt expense to its outstanding accounts receivable is that this approach

A) gives a reasonably correct statement of receivables in the statement of financial position.
B) best relates bad debt expense to the period of sale.
C) is the only generally accepted method for valuing accounts receivable.
D) makes estimates of uncollectible accounts unnecessary.

Question 43

Morley Manufacturing has notes receivable that have a fair value of €810,000 and a carrying amount of €620,000. Morley decides on December 31, 2019, to use the fair value option for these recently-acquired receivables. Which of the following statements is correct regarding the election of the fair value option by Morley?

A) Morley can elect to use the fair value option or amortized cost for these notes at each statement of financial position date.
B) Morley reports the receivables at fair value, with any unrealized holding gains and losses reported as a separate component of comprehensive income.
C) The unrealized holding gain is the difference between the fair value and the carrying amount.
D) All of the choices are correct regarding the fair value option.

Question 44

Why would a company sell receivables to another company?

A) To improve the quality of its credit granting process
B) To limit its legal liability
C) To accelerate access to amounts collected
D) To comply with customer agreements

Question 45

Which of the following statements is incorrect when a company chooses the fair value option for its receivables?

A) Receivables are recorded at fair value in the statement of financial position.
B) Unrealized holding gains and losses from fair value adjustments are reported as a component of comprehensive income.
C) The International Accounting Standards Board believes that fair value measurement for financial instruments provides more relevant and understandable information than historical cost.
D) An unrealized holding gain or loss is the net change in the fair value of the receivable from one period to another, exclusive of interest revenue recognized but not recorded.

Question 46

How can accounting for bad debts be used for earnings management?

A) Determining which accounts to write-off
B) Changing the percentage of sales recorded as bad debt expense
C) Using an aging of the accounts receivable balance to determine bad debt expense
D) Reversing previous write-offs

Question 47

Under IFRS, which of the following is not permitted for accounting for material amounts of uncollectable accounts receivable?

A) Percentage of receivables, allowance method
B) Percentage of sales, allowance method
C) Direct write-off method
D) All of these answer choices are acceptable under IFRS

Question 48

What is the normal journal entry when writing-off an account as uncollectible under the allowance method?

A) Debit Allowance for Doubtful Accounts, credit Accounts Receivable
B) Debit Allowance for Doubtful Accounts, credit Bad Debt Expense
C) Debit Bad Debt Expense, credit Allowance for Doubtful Accounts
D) Debit Accounts Receivable, credit Allowance for Doubtful Accounts

Question 49

What is imputed interest?

A) Interest based on the stated interest rate
B) Interest based on the implicit interest rate
C) Interest based on the average interest rate
D) Interest based on the coupon rate

Question 50

What is the normal journal entry for recording bad debt expense under the allowance method?

A) Debit Allowance for Doubtful Accounts, credit Accounts Receivable
B) Debit Allowance for Doubtful Accounts, credit Bad Debt Expense
C) Debit Bad Debt Expense, credit Allowance for Doubtful Accounts
D) Debit Accounts Receivable, credit Allowance for Doubtful Accounts

Question 51

Which of the following is a generally accepted method of determining the amount of the adjustment to bad debt expense?

A) A percentage of sales adjusted for the balance in the allowance
B) A percentage of sales not adjusted for the balance in the allowance
C) A percentage of accounts receivable not adjusted for the balance in the allowance
D) An amount derived from aging accounts receivable and not adjusted for the balance in the allowance

Question 52

At the beginning of 2017, Gannon Company received a three-year zero-interest-bearing €1,000 trade note. The market rate for equivalent notes was 8% at that time. Gannon reported this note as a €1,000 trade note receivable on its 2017 year-end statement of financial position and €1,000 as sales revenue for 2017. What effect did this accounting for the note have on Gannon's net earnings for 2017, 2018, 2019, and its retained earnings at the end of 2019, respectively?

A) Overstate, overstate, understate, zero
B) Overstate, understate, understate, understate
C) Overstate, overstate, overstate, overstate
D) None of these answer choices are correct.

Question 53

IFRS requires all of the following when classifying receivables except

A) Indicate the receivables classified as current and non-current in the statement of financial position.
B) Disclose any receivables pledged as collateral.
C) Disclose all significant concentrations of credit risk arising from receivables.
D) All of these answer choices are required by IFRS when classifying receivables.

Question 54

Under IFRS Morley Manufacturing will derecognize its receivables in all of the following cases except

A) When Morley elects to use the fair value option for a receivable.
B) When the contractual rights to the cash flows of the receivable no longer exist; for example when one of Morley's customers declares bankruptcy.
C) When Morley collects a receivable when due.
D) All of these answer choices require Morley Manufacturing to derecognize its receivables.

Question 55

Which of the following statement is incorrect regarding how the IASB requires that the impairment assessment be performed?

A) Receivables that are individually significant should be considered for impairment separately, if impaired, the company recognizes it.
B) Receivables that are not individually significant are assessed individually. If impaired, the company recognizes it.
C) Any receivable individually assessed that is not considered impaired should be included with a group of assets with similar credit-risk characteristics and collectively assessed for impairment.
D) Any receivables not individually assessed should be collectively assessed for impairment.

Question 56

On December 31, 2018, Hunter Corporation has elected to use the fair value option for one of its notes receivable. The note was accepted in late September, 2018 from a customer who was unable to pay its accounts receivable. The transaction with the customer had been delivery of accounting services valued at €25,000. The customer made a partial payment, resulting in a carrying value for the note of €22,000. At year-end, Hunter Corporation estimates the fair value of the note to be €17,500. Which of the following is incorrect regarding this note?

A) Hunter will report the note on its statement of financial position at €17,500.
B) Hunter will report an unrealized loss of €7,500 in its income statement for the year ended December 31, 2018.
C) Hunter will be required to use the fair value option for this note for the duration of its existence.
D) In 2019, Hunter will calculate the unrealized holding gain or loss as the net change in the fair value of the receivable from 2018 to 2019, exclusive of interest revenue recognized but not recorded.

Question 57

The accounts receivable turnover is computed by dividing

A) gross sales by ending net receivables.
B) gross sales by average net receivables.
C) net sales by ending net receivables.
D) net sales by average net receivables.

Question 58

Which of the following methods of determining bad debt expense does not properly match expense and revenue?

A) Charging bad debts with a percentage of sales under the allowance method
B) Charging bad debts with an amount derived from a percentage of accounts receivable under the allowance method
C) Charging bad debts with an amount derived from aging accounts receivable under the allowance method
D) Charging bad debts as accounts are written off as uncollectible

Question 59

Which of the following is included in the normal journal entry to record the collection of accounts receivable previously written off when using the allowance method?

A) Debit Allowance for Doubtful Accounts, credit Accounts Receivable
B) Debit Allowance for Doubtful Accounts, credit Bad Debt Expense
C) Debit Bad Debt Expense, credit Allowance for Doubtful Accounts
D) Debit Accounts Receivable, credit Allowance for Doubtful Accounts

Question 60

Assuming that the ideal measure of short-term receivables in the statement of financial position is the discounted value of the cash to be received in the future, failure to follow this practice usually does not make the statement of financial position misleading because

A) most short-term receivables are not interest-bearing.
B) the allowance for uncollectible accounts includes a discount element.
C) the amount of the discount is not material.
D) most receivables can be sold to a bank or factor.

Question 61

Which of the following is an appropriate reconciling item to the balance per bank in a
Bank reconciliation?

A) Bank service charge
B) Deposit in transit
C) Bank interest
D) Chargeback for NSF check

Question 62

Which of the following items affect the accounts receivable amount reported on the statement of financial position?

A) Notes receivable
B) Interest receivable
C) Allowance for doubtful accounts
D) Advances to related parties and officers

Question 63

What is a possible reason for accounts receivable turnover to increase from one year to the next year?

A) Decreased credit sales during a recession
B) Write-off uncollectible receivables
C) Granting credit to customers with lower credit quality
D) Improved collection process

Question 64

How is days to collect accounts receivable determined?

A) 365 days divided by accounts receivable turnover
B) Net sales divided by 365
C) Net sales divided by average net trade receivables
D) Accounts receivable turnover divided by 365 days