THEORIES - Part I

Under which section of the balance sheet is _______ reported? 1. cash restricted for plant expansion 2. savings accounts 3. certificates of deposit

1. Noncurrent asset 2. Cash 3. Cash equivalents

An entity uses the allowance method to recognize doubtful accounts expense. What is the impact of a collection of an account previously written off?

Increase in allowance for doubtful accounts and no effect on doubtful accounts expense

What is the basic requirement for "cash and cash equivalent'?

Unrestricted in use for current operations.

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.

a. Bad debt expense is an estimate that is based on historical and prospective information.

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.

a. Debit Allowance for Doubtful Accounts, credit Accounts Receivable.

Which of the following violates the concept of faithful representation? a. Financial statements included property with a carrying amount increased to management estimate of market value b. Financial statements were issued nine months late c. Report data on segments having the same expected risks and growth rates to analysts estimating future profit d. Management reports to shareholders regularly refer to new projects undertaken but the financial statements never report project results

a. Financial statements included property with a carrying amount increased to management estimate of market value

Which of the following is incorrect in preparing proof of cash using adjusted balance method? a. Outstanding checks of the current month are deducted from the bank disbursements of the current month. b. Debit memos of the current month are added to the book disbursements of the current month. c. Deposits in transit of the previous month are deducted from the bank receipts for the current month because deposits in transit of the previous month increased the bank receipts of the current month. d. The book receipts of the current month are overstated in relation to the correct receipts for the current month thus, credit memos of the previous month are deducted from the book receipts of the current month.

a. Outstanding checks of the current month are deducted from the bank disbursements of the current month.

Which of the following relates to both relevance and faithful representation? a. Timeliness b. Predictive value c. Completeness d. Neutrality

a. Timeliness

Which of the following statements in relation to petty cash fund is incorrect? a. With the establishment of an imprest petty cash fund, one person is given the authority and responsibility for issuing checks to cover minor disbursements. b. At any time, the sum of the cash in the petty cash fund and the total of petty cash vouchers shall equal the amount for which the imprest petty cash fund was established. c. The creation of a petty cash fund requires a journal entry to reflect the transfer of funds out of the general cash account. d. Each disbursement from petty cash shall be supported by a petty cash voucher.

a. With the establishment of an imprest petty cash fund, one person is given the authority and responsibility for issuing checks to cover minor disbursements.

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.

a. a deduction from sales in the income statement.

A method of estimating doubtful accounts that emphasizes asset valuation rather than income measurement is the allowance method based on

aging the accounts receivable.

What is the underlying concept that supports estimating a fixed asset impairment charge? a. Substance over form b. Consistency c. Matching d. Faithful representation

d. Faithful representation

Which of the following is the first step within the hierarchy of guidance when selecting accounting policies? a. Consider the most recent pronouncements of other standard setting bodies. b. Apply a standard from PFRS if it specifically relates to the transaction, other event or condition. c. Consider the applicability of the definitions, recognition criteria and measurement concepts in the Conceptual Framework d. Apply the requirements in PFRS dealing with similar and related issues.

b. Apply a standard from PFRS if it specifically relates to the transaction, other event or condition.

Which of the following statements is incorrect concerning measurement of cash and cash equivalents? a. Cash is measured at face value. b. Cash equivalents shall be measured at maturity value, meaning face value plus interest. c. Cash in foreign currency is measured at the current exchange rate. d. If a bank or financial institution holding the funds of the entity is in bankruptcy or financial difficulty, cash shall be written down to estimated realizable value.

b. Cash equivalents shall be measured at maturity value, meaning face value plus interest.

What is the quality of information that gives assurance that it is reasonably free from error and bias? a. Relevance b. Faithful Representation c. Verifiability d. Neutrality

b. Faithful Representation

Under the Revised Conceptual Framework, during when an entity is under the direction of a particular management, financial reporting provides information about a. Entity performance and management performance b. Management performance but not entity performance c. Entity performance but not management performance d. Neither entity performance nor management performance

b. Management performance but not entity performance

Which of the following is not true? a. Entries are made to the Petty Cash account only to increase or decrease the size of the fund or to adjust the balance if not replenished at year-end. b. The Petty Cash account is debited when the fund is replenished under the imprest petty cash system c. All of these are not true. d. The imprest petty cash system in effect adheres to the rule of disbursement by check.

b. The Petty Cash account is debited when the fund is replenished under the imprest petty cash system

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.

c. As assets but separately from other receivables.

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.

c. Debit Bad Debt Expense, credit Allowance for Doubtful Accounts.

The valuation of a promise to receive cash in the future at present value is valid because of what accounting concept a. Entity b. Time Period c. Going Concern d. Monetary Unit

c. Going Concern

International Accounting Standards Board a. Was the predecessor to the IASC b. Can overrule the USA GAAP when their policies disagree c. Promotes the use of high-quality and understandable global accounting standards d. Has its headquarters in Geneva

c. Promotes the use of high-quality and understandable global accounting standards

Which of the following statements is true? a. Cash equivalents are investments with original maturities of six months or less. b. Certificates of deposit are usually classified as cash on the balance sheet. c. Short-term,highly liquid investments may be included with cash on the balance sheet. d. Bank overdrafts are always offset against the cash account in the balance sheet.

c. Short-term,highly liquid investments may be included with cash on the balance sheet.

Allowing entities to estimate rather than physically count inventory at interim periods is an example of a tradeoff between a. Verifiability and comparability b. Timeliness and comparability c. Timeliness and verifiability d. Neutrality and consistency

c. Timeliness and verifiability

Assuming that the ideal measure of short-term receivables in the balance sheet is the discounted value of the cash to be received in the future, failure to follow this practice usually does not make the balance sheet 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.

c. the amount of the discount is not material.

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.

d. Debit Accounts Receivable, credit Allowance for Doubtful Accounts.

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.

d. Improved matching of bad debt expense with revenue.

What is the quality of information that enables users to better forecast future operations? a. Faithful representation b. Materiality c. Comparability d. Relevance

d. Relevance

An entity received royalties from the assignment of patent to other entities. In the period in which the royalties are earned, the royalties should be a. Netted against patent amortization expense b. Amortized to income over the remaining useful life of the patent c. Subtracted from the capitalizable cost of the patent d. Reported as revenue

d. Reported as revenue

The objectives of financial reporting are based on a. Generally accepted accounting principles b. Reporting for regulators c. The need for conservatism d. The needs of the users of the information

d. The needs of the users of the information

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.

d. is so near its maturity that it presents insignificant risk of changes in interest rates.

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 answers are correct.

d. none of these answers are correct.

When the accounts receivable of an entity are sold outright to another entity which normally buys accounts receivable, the accounts receivable have been

factored.

In which account are post-dated checks received classified?

receivables

The ideal measure of short-term receivables is the discounted value of the cash to be received in the future. Failure to follow this practice usually does not make the statement misleading because

the amount of the discount is not material.