ACCT 3313 Chapter 7 Cash & Receivables

When adjusting the book balance in a bank reconciliation, which items must be subtracted from the cash account book balance?

charges for NSF checks service charges

When adjusting the bank balance in a bank reconciliation, which item must be subtracted from the bank balance?

outstanding checks

Which of the following items are not included in cash?

accounts receivable from customers

A secured borrowing occurs when accounts receivable are _____ or _____ as collateral for a loan.

pledge; assign

Which of the following items are classified as receivables?

tax refund claims amounts owed by customers amounts loaned and expected to be repaid

Separation of duties requires that:

individuals who have physical responsibility for assets should not have access to accounting records.

When a specific account receivable is determined to be uncollectible, which of the following occur?

Allowance account is reduced Account receivable is reduced

Which of the following is a contra account to accounts receivable?

Allowance for sales returns

Warner Corp. sells goods on account for $10,000. The customer pays the invoice in full on April 15, but on April 20, the customer returns $3,000 of the merchandise and receives a refund. What is the entry Warner will make on April 20 when the goods are returned?

Debit Sales Returns; credit Cash.

Which of the following is an internal control procedure for cash disbursements?

Disbursements should be made by check.

Both IFRS and U.S. GAAP permit the fair value option for accounting for receivables. Which of the following is correct regarding the application of this option?

IFRS restricts the circumstances for applying the fair value option

When the amount of bad debts is material, GAAP requires the _____ method be used to reduce the carrying value of accounts receivable to the amount of cash expected to be received.

allowance

If a company believes its sales returns will be material, an adjusting entry for expected returns should be made to which account?

allowance for sales returns

When initially recorded, the typical accounts receivable is valued at the

amount expected to be received.

Internal control procedures for cash disbursements (other than small disbursements from petty cash) should include that

checks are signed by authorized individuals. all disbursements (other than petty cash) are made by check. all expenditures are authorized.

An allowance for sales return account is classified as a(n)

contra account to sales revenue.

The most critical element in determining if a company can account for the transfer of receivables as a sale is the surrender of _____.

control

A financial institution that buys receivables for cash and charges a fee for this service is referred to as a(n)

factor

Separation of duties requires that

individuals who have physical responsibility for assets should not have access to accounting records.

When merchandise is returned for a refund or for credit to be applied to other purchases, the situation is called a(n) ______ ______.

sales return

A(n) ______ discount is a way to change prices without publishing a new catalog.

trade

Which of the following are potential benefits of offering cash discounts to customers?

Reduction in bad debt Accelerated customer payment Increased sales volume

Which of the following is usually reported on the balance sheet as a noncurrent asset?

Restricted cash

At what amount are accounts receivable recorded?

The amount expected to be collected.

Which method of estimating bad debts is required by GAAP when the amount of bad debt is material?

allowance method

When adjusting the bank balance in a bank reconciliation, which item must be added to the bank balance?

deposits in transit

A company's claims to the future collection of cash, other assets, or services is called a ________.

receivable

When a customer returns a product for a refund, in which account is the entry recorded?

sales return

Which of the following is a cost of offering a cash discount?

A reduction in the amount of cash collected from customers who take advantage of the discount.

Which of the following are adjustments to the bank balance in a bank reconciliation?

Add deposits outstanding Deduct checks outstanding Adjustments for bank errors

The formula for calculating interest multiplies which of the following?

Annual interest rate Fraction of the annual period Face amount of the note

An application where the interest rate stays the same over time, but interest revenue increases as the rate is multiplied by a receivable balance that increases is referred to as what?

Effective interest method

True or false: An interest-bearing note earns interest, whereas a noninterest-bearing note does not earn interest.

False

When all or a portion of an account receivable is determined to be uncollectible, what occurs?

The amount of the receivable is written off.

A company is allowed to account for the transfer of receivables as a sale if what occurs?

The transferor has surrendered control over the assets transferred.

Match the accounting standard with the appropriate treatment of receivables. Instructions

U.S. GAAP <-> Requires more disaggregation and disclosure of receivables. IFRS <-> Recommends but does not require separate disclosure of receivables.

The two methods used for recording sales discounts are the ______ method and the ______ method.

gross; net

Accounts receivable are normally classified

in the balance sheet as current assets.

When a company has a claim to receive assets in the future, how is this recorded on the balance sheet?

A receivable

What does a sales discount represent?

A reduction in the amount to be paid if paid within a specified period of time.

Which of the following are adjustments to the book balance in a bank reconciliation?

Bank service charges Collections made by the bank on the company's behalf Company errors

Which of the following are services performed by a factor?

Buy accounts receivable. Handle billing and collection of accounts receivable.

True or false: The gross method and the cash method are the two ways to record sales discounts.

False Reason: The gross method and the net method are the two ways to record sales discounts.

Checks received from customers that have not been deposited yet are included where on a company's balance sheet?

In the current asset "cash" account.

Which of the following are costs of extending credit terms to customers?

Increase in uncollectible accounts. Increased investment in receivables.

Which of the following give rise to a note receivable?

Loaning money to stockholders. Loaning money to an affiliated company. A formal, written extension of the credit period to trade customers.

Which of the following would appropriately be paid with petty cash?

Postage expense Entertainment expense Office supplies expense

Which of the following indicate surrender of control over the assets transferred?

Receivables are sold without recourse. The transferor will have no continuing involvement.

Under which approach to financing with receivables does the borrower act like it borrowed money from the lender, with the receivables remaining on the borrower's balance sheet and serving as collateral?

Secured borrowing

When a receivable is written off, which of the following occurs?

The allowance for uncollectible accounts is reduced. Accounts receivable is reduced.

Which of the following conditions must exist for a transfer of receivables to be treated as a sale?

The transferor surrenders control of the asset. The transferee has the right to pledge or exchange the assets. The assets are isolated and beyond the reach of the transferor.

Who houses the financed receivables on their balance sheet in a secured borrowing?

Transferor

True or false: Both interest bearing and noninterest bearing notes bear interest.

True

True or false: With the effective interest method, interest revenue differs between periods.

True Reason: The net note receivable increases over time so the interest revenue differs between periods.

A trade discount is

a percentage reduction from list price.

A contra-asset account is used to reduce the carrying value of accounts receivable to the amount of cash expected to be received under the _____ method of accounting for bad debts.

allowance

The first step in using a balance sheet approach to estimate bad debts is to calculate the desired ending balance in which account?

allowance for uncollectible accounts

The balance sheet approach to measuring bad debt expense focuses on

appropriate carrying value of accounts receivable.

Restricted cash is usually reported in the balance sheet

as noncurrent assets.

Which of the following items are included in cash?

balance in checking accounts currency and coins checks from customers

An account receivable is normally classified as a

current asset.

The transfer of a note to a financial institution is referred to as _______.

discounting

The transfer of a note receivable to a financial institution for an amount less than the face amount of the note is referred to as

discounting a note receivable.

A trade discount is a reduction from the list price, which is to

disguise real prices from competitors. change prices without publishing a new catalog. give quantity discounts to customers.

In a(n) _____ arrangement, the company sells its accounts receivable to a financial institution and the financial institution handles the billing and collections.

factoring

(Face amount x annual rate x fraction of the annual period) is the formula for

interest on a note.

Cash that is restricted and is not available for current use may be reported in the balance sheet as

investments and funds. a noncurrent asset. other assets.

In a(n) _______ bearing note, interest is deducted from the face amount of the loan to determine the cash proceeds available to the borrower at the time of loan.

noninterest, non interest, or non-interest

The transfer of a(n) ____ to a financial institution is called discounting.

note receivable

A formal credit arrangement between a creditor and debtor is called a(n)

note receivable.

A formal, signed credit agreement between a lender and a borrower is called a(n) _____ by the lender.

note receivable.

Receivables represent a company's claims to the future collection of

other assets cash services

The ______ cash account is used to pay for low cost items so checks do not have to be processed.

petty

Internal control consists of plans to

promote operational efficiency. enhance the reliability of accounting data. enhance the accuracy of accounting data.

A cash discount representing a reduction in the amount to be paid by a credit customer if the customers pay within a specified period of time is also referred to as a(n) _______ discount.

sales or cash

A(n) _____ _____ occurs when a customer returns merchandise for a refund.

sales return

A(n) ______ borrowing occurs when accounts receivable are assigned or pledged as collateral for a loan.

secured

Assigning or pledging accounts receivable is used in a

secured borrowing.

A critical aspect of a good internal control system is

separation of duties.

A petty cash account is used for

small amounts of cash needed for low-cost items.

A troubled debt restructuring occurs when

the creditor changes the terms of the agreement to make it easier for the debtor to pay.

Accounts receivable are almost always considered current assets because

their normal collection, even if longer than a year, is part of the normal operating cycle.

The ______ recognizes a note receivable in a secured borrowing agreement.

transferee or lender

For a note receivable, if the original terms of the debt are changed due to financial difficulties of the borrower, this is referred to as a _____ _____ restructuring.

troubled debt

Under the allowance method, when is bad debt expense recognized?

when the allowance is created