SB Ch 7

true

True or false: The possibility of damaged or defective merchandise is included in a company's estimate of returns.

true

True or false: Management can influence the collection of receivables based on the terms they offer.

true

Cash management involves a trade-off between earning lower returns and accepting higher risk. True or False.

gross, net

(sb) The two methods used for recording sales discounts are the __________ method and the __________ method.

overstated understated

(2p) Failing to estimate sales returns can result in income being ____________ in the period the sale is made and ___________ in the period the product is returned.

note receivable

A __________ is reported in the balance sheet in either current or noncurrent assets, as appropriate.

allowance for sales returns

A company believes its sales returns will be material. What is the journal entry required? Debit sales returns; credit __________.

control

A company is allowed to account for the transfer of receivables as a sale if what occurs? The transferor has surrendered __________ over the assets transferred.

cash equivalents

A company's policy for designating __________ should be consistent with the usual motivation for acquiring the investments.

separation of duties

A critical aspect of a good internal control system is __________.

factor

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

handle

A good internal control system for cash would require that those who __________ cash should not be involved with the accounting records. or reconciliation of bank balances.

cash

A good internal control system would require that the employee who handles __________ must not be involved in reconciling the bank statement.

present value

A note received solely for cash is valued at its __________, which is the cash amount.

participating interest

A partial transfer in accounts receivable is treated as a secured borrowing, unless the amount transferred qualifies as a __________, which is defined as sharing proportionally in the cash flows of the receivable and having equal rights with respect to the receivables.

cash flows

A participating interest is defined as having proportionate ownership in the receivables and proportionally sharing in the __________ of the receivables.

fair value

An alternative method for valuing notes receivable is the __________ method.

is

Currency and coins (is/is not) __________ included in cash.

cash and cash equivalents

Depending on the nature of the restriction and the classification of the related debt, compensating balances may be disclosed in the financial statements as noncurrent assets, current assets, or __________.

fair value

Earnings may be distorted by the transfers of receivables because companies may distort __________ estimates in recording securitizations.

sales returns

Examine the following journal entry. Debit Refund liability $10,000; credit Cash $10,000; debit Inventory $6,000; and credit Inventory-estimated returns $6,000. What is the transaction that required this entry? Adjustment for __________ that occurred.

receivables

Financing __________ can be done by a secured borrowing or sale of receivables.

delivery

For a typical credit sale, the revenue recognition criteria is usually satisfied at the point of __________.

signing

For internal control purposes, which of the following responsibilities should be separated for cash disbursements? (1) Check writing and check mailing and (2) check __________ and check writing.

12.77

Garcia sells goods to a customer for $100,000 on a noninterest-bearing, 180-day note receivable. The discount rate is 12%. The effective interest rate for this note is (use 360 days for the year) __________%.

adjusting entry

How do sellers typically account for returns? (1) Using an __________ at the end of the period for any remaining future expected returns, or (2) as returns occur.

future

How does the CECL model differ from current GAAP? (1) Bad debt estimates will be based on predictions about the __________ and (2) the "probable" threshold for identifying impaired receivables is removed.

Company A

If Company A sells accounts receivable with recourse to ABC Finance and the customer cannot pay, who assumes the risk of bad debts? __________

ABC Finance

If Company A sells accounts receivable without recourse to ABC Finance and the customer cannot pay, who assumes the risk of bad debts? __________

net realizable value

If a company anticipates that some of its note receivables will not be collectible, it should use an allowance account to value the note at __________.

cash paid

If a note with an unrealistic interest rate is received solely in exchange for cash, the present value of the note is considered to be the __________.

49000

Jessica accepts a $50,000, 60-day noninterest-bearing note receivable from a customer. The discount rate is 12%. The amount of proceeds of the note used to record the sales revenue is $__________.

6000

Rascal Corp. borrows $500,000 by signing on a 1-year, 12% promissory note from General Finance Company and assigns $600,000 of its accounts receivable as collateral for the loan. General Finance charges a financing fee of 1% of the receivables assigned. The journal entry for Rascal to record the borrowing will include a debit to finance charge expense for $__________.

services

Receivables represent a company's claims to the future collection of cash, other assets, and/or __________.

deposited

Reconciling cash receipts to bank records helps verify that the amounts received also were __________.

does not

Requirement to pay cumulative preferred dividends prior to paying dividends on common stock (does/does not) __________ require cash to be restricted.

does

Requirement to use cash for future plant expansion (does/does not) __________ require cash to be restricted.

does not

Requirements not to pay dividends unless certain ratios are obtained (does/does not) __________ require cash to be restricted.

does

Requirements to set aside funds to repay debt (does/does not) __________ require cash to be restricted.

cash and cash equivalents

Reston Corp. borrowed $20,000 from First National Bank on a 6-month note at 8% interest. Reston has an informal arrangement with no contractual agreement with the bank to maintain a compensating balance of $2,000 until the loan is repaid. Reston should report the $2,000 as __________.

receivables

Tax refund claims, amounts loaned and expected to be repaid, and amounts owed by customer are all classified as __________.

nontrade

Tax refund claims, interest receivable, and loan to employee are all examples of __________ receivables.

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 __________ a note receivable.

note receivable

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

securitization

The type of arrangement wherein a special purpose entity is created for the purpose of purchasing pools of receivables is called __________.

92000

Tilly Corp. factored accounts receivable that had a book value of $100,000 to Second Bank. The transfer was made without recourse. Second Bank charged a 5% factoring fee and retained $3,000 to provide a reserve against potential sales returns and allowances. The journal entry Tilly will make to record the factoring arrangement will include a debit to cash for $__________.

sales price

To calculate the effective rate of interest on a noninterest-bearing note, the amount of interest is divided by the ___________.

allowance for uncollectible accounts

To record bad debts at the end of the period, an adjustment would be made by a credit to __________.

period of time

What does a sales discount represent? A reduction in the amount to be paid if paid within a specified __________.

credit

he journal entry required for a note receivable transferred as a sale would include a __________ to notes receivable.

office supply

A petty cash fund is an efficient way to handle what type of payments? Low cost __________ purchases.

trade

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

exchange price

At what amount are accounts receivable initially recorded? The __________ agreed on by the buyer and seller.

is

Balance in checking accounts (is/is not) __________ included in cash.

32.44

Below is information from the financial statements of Greenwich Company: Accounts receivable (net) 2016: $2,400 Accounts receivable (net) 2015: $2,200 Net sales 2016: $25,875 What is the average collection period? __________ days

11.25

Below is information from the financial statements of Greenwich Company: Accounts receivable (net) 2016: $2,400 Accounts receivable (net) 2015: $2,200 Net sales 2016: $25,875 What is the receivables turnover? _________ times.

operating

Cash flows may be distorted by the transfers of receivables because companies may report sale of receivables in the __________ section of the statement of cash flows.

is

Cash in savings account (is/is not) __________ included in cash.

cash

Checks received from customers that have not been deposited yet are included on a company's balance sheet in the current asset __________ account.

cash

Companies finance with receivables to obtain immediate __________.

operating cycle

Companies finance with their receivables to increase cash flow, receive cash before customers would pay amounts due and shorten the __________.

notes to financial statements

Companies must disclose policies for designating highly liquid investments as cash equivalents in the __________.

allowance for sales returns

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

income statement

If a company elects the fair value option for receivables, changes in fair value are recognized as Multiple choice question. gains and losses on the __________.

books

In a bank reconciliation, which items will require journal entries by the company? Adjustments to the balance per __________ for items discovered on the bank reconciliation that were not yet recorded on the books.

seller

In a sale of an accounts receivable with recourse, if the customer does not pay, the loss is assumed by the __________ of the accounts receivable.

buyer

In a sale of an accounts receivable without recourse, if the customer does not pay, the loss is assumed by the ___________ of the accounts receivable.

transferee

In a sale of receivables, the __________ includes the receivables as assets in its balance sheet.

noninterest

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.

noncurrent assets

Jackson Corp. borrowed $10,000 from Second National Bank. The note is due in 5 years and includes a contractual agreement requiring Jackson to maintain a compensating balance of $2,000. The $2,000 compensating balance should be reported as __________.

8.8

Kelly borrows $11,000 from the bank at an interest rate of 8%. If the bank requires a compensating balance of $1,000, the effective rate of interest on the loan is __________%.

97000

Lee accepts a $100,000, 90-day noninterest-bearing note receivable from a customer. The discount rate is 12%. The amount of proceeds of the note used to record the sales revenue is $__________.

noncurrent assets

Restricted cash is usually reported in the balance sheet as __________.

100700

Riley has a $100,000 note receivable from a customer. The note receivable is an 8% note, due in 9 months. Three months after accepting the note, Riley discounts the note receivable at Third Bank at a discount rate of 10%. What are the cash proceeds of the discounted note? $__________.

accounting records

Separation of duties requires that individuals who have physical responsibility for assets should not have access to __________.

cash equivalents

Short-term investments that can be readily converted to cash and have a maturity date of less than three months from date of purchase are called __________.

cash equivalents

Short-term, highly liquid investments such as money market funds or treasury bills are classified as __________.

allowance

Similar to accounts receivable, a company must estimate credit losses on its notes receivable and use a(n) __________ account to reduce the receivable to the appropriate carrying value.

reporting

The difference between the gross method and net method of recording sales revenue, in terms of the effect on income is what? The timing of the recognition of any discounts not taken varies and could occur in different __________ periods.

mismatching

The direct write-off method could result in a __________ of expenses and revenue

income tax

The direct write-off method is required for __________ purposes.

contra account

The discount on notes receivable account is classified as a _________ to notes receivable.

allowance for uncollectible accounts

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

cash disbursements

The following responsibilities are separated in a good internal control system for __________; (1) check writing and check signing and (2) cash disbursement documentation and the accounting recording function.

income statement

Using a percentage of each period's net credit sales to estimate bad debt expense is a(n) __________ approach to measuring bad debts.

Sales Returns

Warner Corp. sells goods on account for $10,000 on April 2. On April 20, the customer returns $3,000 of the merchandise. The customer has not yet paid for any of the goods. What is the entry Warner will make on April 20 when the goods are returned? Debit __________; credit Accounts Receivable.

policies

What information must a company disclose regarding cash and cash equivalents in the notes to the financial statements? The company's __________ regarding its cash and cash equivalents.

adequacy

With respect to internal controls, the Sarbanes-Oxley Act requires that companies assess the __________ of internal controls and document their internal controls.

restricted

__________ cash is usually reported on the balance sheet as a noncurrent asset.

internal control

__________ consists of plans to promote operational efficiency, enhance the reliability of accounting data, and enhance the accuracy of accounting data.

Restrictions

__________ on cash may be formal by contract or informal arising from management intent.

inventory

When actual inventory returns occur in a perpetual inventory system, which of the following happens? Debit the asset __________ account

oustanding checks

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

Allowance for uncollectible accounts

When an accounts receivable is written off, which account is impacted? __________

Account receivable

When a specific account receivable is determined to be uncollectible, which of the following occur? __________ is reduced and Allowance account is reduced.

accounts receivable

A sale of accounts receivable requires which of the following? Recognize the fair value of assets acquired or liabilities assumed. Remove the __________ from the balance sheet.

quantity

A trade discount is a reduction from the list price, which is to (1) change prices without publishing a new catalog, (2) disguise real prices from competitors, and (3) give __________ discounts to customers.

compensating

A(n) __________ balance is a cash restriction in connection with a loan that creates a higher effective interest rate on that loan.

secured

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

sales return

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

operating cycle

Accounts receivable are almost always considered current assets because their normal collection, even if longer than a year, is part of the normal __________.

collected

Accounts receivable are recorded at the amount expected to be __________.

is not

Accounts receivable from customers (is/is not) __________ included in cash.

aging

An __________ schedule classifies accounts receivable based on length of time outstanding.

effective interest

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? __________ method.

accounting records

An example of separation of duties in a good system of internal control is the individual who receives the inventory does not have access to the __________.

check

An internal control procedure for cash disbursements is that disbursements should be made by __________.

4600

Arcelia Corp.'s bank statement has an end balance of $40,000. The deposits outstanding were $7,000. A note was collected by the bank for $2,000. Checks outstanding at the end of the month were $1,000. Using the bank statement, what is the corrected cash balance? $__________.

secured borrowing

Assigning or pledging accounts receivable is used in a __________.

delivery

For most credit sales, revenue and the related expenses should be reported at the point of __________.

notes receivable

Formal credit arrangement between borrower and lender are __________.

accounts receivable

Informal credit agreement with trade customers are __________.

efficiency

Internal control consists of plans to minimize errors and theft, promote operational __________, and encourage adherence to company policies and procedures.

liquid

Internal control over cash is important because cash is easily stolen and is a highly __________ asset.

authorized

Internal control procedures for cash disbursements (other than small disbursements from petty cash) should include that (1) all expenditures are __________, (2) all disbursements (other than petty cash) are made by check, and (3) checks are signed by authorized individuals.

finance charge

Kraven Corp. borrows $100,000 by signing on a 1-year, 8% promissory note from General Finance Company and assigns $120,000 of its accounts receivable as collateral for the loan. General Finance charges a financing fee of 1% of the receivables assigned. The journal entry for Kraven to record the borrowing will include a debit to __________ expense for $1,200.

7.5

Lydia Corp. borrows $25,000 from the bank at an interest rate of 6%. If the bank requires a compensating balance of $5,000, the effective rate of interest on the loan is __________%.

53000

Malik Corp.'s bank statement has an end balance of $50,000. The deposits outstanding were $6,000. NSF checks were $1,000. Checks outstanding at the end of the month were $3,000. Using the bank statement, what is the corrected cash balance? $__________.

discounts

Management can influence credit and collections by extending payment terms and offering cash __________.

1200

Morrow Corp. had the following information in its bank reconciliation: NSF checks $1,000; Outstanding checks $3,000; and Miscellaneous bank service charges $200. The journal entry required for the bank reconciliation is credit cash, $__________.

noncurrent asset

On January 1, 2021, Raven receives a 3-year note receivable from a customer for goods sold. How should Raven report this note receivable in its financial statements? As a __________.

101293

On January 1, 2022, Austin Company received a 12-month, $100,000 note with a stated rate of 7%. On April 30, 2022, Austin discounted the note at the Houston Bank. The bank's discount rate is 8%. What are the cash proceeds from discounting the note receivable? $__________.

discount on notes receivable

On January 1, Klay Corp. receives a $100,000, 120-day, noninterest-bearing note receivable from a customer in exchange for the sale of goods. The note has a 6% discount rate. On January 1, when Klay receives the note from the customer, Klay will record a debit to notes receivable for $100,000, a credit to __________ for $2,000, and a credit to sales revenue for $98,000.

100000

On January 1, Klay Corp. receives a $100,000, 120-day, noninterest-bearing note receivable from a customer. The discount rate is 6%. On May 1, when Klay receives full payment from the customer, Klay will record a credit to notes receivable for $__________.

9566

On January 1, Song Corp. receives a $100,000, two-year, note receivable from a customer in exchange for payment of goods. The note has a 12% effective interest rate. On December 31, when Song records interest for the year, Song will record a debit to discount on note receivable and a credit to interest revenue, both for $__________.

96800

On January 1, year 1. Jordan receives a $100,000 note receivable from a customer. The note receivable is a 10% note, due at the end of the year on December 31. Jordan immediately discounts the note receivable at Third Bank at a discount rate of 12%. What are the cash proceeds of the discounted note? $__________.

Notes Receivable

On June 1, Tulip Corp. provided services on account to Daffodil. Tulip agreed to accept a $40,000, 10%, 3-month interest-bearing note from Daffodil in payment for the services. The entry required on Tulip's books on June 1 would include a debit to __________, $40,000.

400

On November 1, Orange Corp. sold goods on account to Apple. Orange agreed to accept a $40,000, 12%, 3-month interest-bearing note from Apple in payment for the goods. Orange has a December 31 year-end. On February 1, year 2, when the note matures, the journal entry for Orange will include a credit to interest revenue of $__________.

800

On November 1, Orange Corp. sold goods on account to Apple. Orange agreed to accept a $40,000, 12%, 3-month interest-bearing note from Apple in payment for the goods. The entry required on Orange's books on December 31, at the end of the year includes a debit of interest receivable for $__________.

balance sheet

On which financial statement is the account "cash and cash equivalents" reported? __________.

reconcilliation

One of the most important internal controls for cash is the bank __________.

internal controls

Since cash is the most liquid of assets, a well-designed system of __________ must surround all cash transactions.

2000

Sully Corporation uses an allowance method for accounting for bad debt expense. Sully estimates that 2% of sales will eventually become uncollectible. If Sully has $100,000 of credit sales and $100,000 of cash sales during the year, the adjustment for estimated uncollectible accounts will require a debit to Bad Debt Expense for $__________.

sale

The __________ approach to transfer receivables is preferred by the transferor.

framework

The __________ for designing an internal control system is provided by the Committee of Sponsoring Organizations (COSO) of the Treadway Commission.

accounts receivable turnover

The __________ ratio indicates the number of times the average accounts receivable balance is collected.

collected

The accounts receivable turnover ratio indicates the number of times the average accounts receivable balance is __________.

bad debt

The balance sheet approach estimates __________ expense by determining the appropriate carrying value of accounts receivable.

accounts receivable

The balance sheet approach to measuring bad debt expense focuses on appropriate carrying value of __________.

binding

The classification and disclosure of a compensating balance depends on the nature of the restriction. Which condition will require that a compensating balance must be reported as restricted cash in either the current or noncurrent assets section of the balance sheet? The restriction is legally __________.

liquidity

The current ratio and the quick ratio measure __________.

sales

The gross method and the net method are two ways to record __________ discounts.

credit sales

The income statement approach for estimating bad debts focuses on current year's __________.

credit sales

The income statement approach for estimating bad debts focuses on current year's ___________.

increases

The possibility of damaged or defective merchandise ____________ a company's estimate of returns.

deposit slip

The reconciliation process for cash receipts requires that the amount received from customers should agree with the bank-generated __________ and the accounting records.

pledging

The required accounting treatment for __________ receivables requires disclosure in the notes to financial statements.

proceeds

The required accounting treatment for transfer of receivables as a sale includes which of the following? (1) Remove receivables, (2) Recognize gain or loss, and (3) Record __________.

Sarbanes-Oxley Act

The requirement that companies must document internal controls and assess their adequacy is required by the __________, Section 404.

transferor

Transferors of assets must provide enough information about the transfer to allow financial statement users to fully understand the transfer, any continuing involvement, and ongoing risk to the __________.

true

True or false: A sale of an accounts receivable results in removing the accounts receivable from the balance sheet.

true

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

false

True or false: In Year 1, Gilead Company estimates future returns to be $30,000; however, in Year 2 actual returns are $35,000. Gilead must restate its Year 1 financial statements to correct its initial estimate.

true

True or false: Inventory that is expected to be returned in the future is included on the balance sheet of the company expecting the return.

true

True or false: Long-term notes receivable are accounted for the same way as short-term notes receivable, but the time value of money has a larger effect.

false

True or false: Most sellers estimate returns every time they make a sale.

true

True or false: The CECL model broadens information that creditors should consider when estimating credit losses.

true

True or false: When a discount on notes receivable is amortized, interest revenue is recorded.

true

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

restricted cash

When a bank requires a borrower to set aside funds for the future payment of debt, this is known as what? __________

accounts receivable

When a previously written off account is collected, what happens after the reinstatement? Collection is recorded with a debit to cash and a credit to __________.

estimate

When recognizing allowance for uncollectible accounts, a company can only record an __________ of the amount of uncollectible accounts for its outstanding receivables at the end of a year.

account receivable

When sellers recognize revenue associated with an informal credit sale, a(n) __________ is created.

allowance

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.

uncollectible

When the direct write-off method is used, an entry for bad debt expense is required when the account receivable is determined to be __________.

current asset

Where are cash and cash equivalents reported in the financial statements? In the __________ section of the balance sheet.

income statement

Which approach for estimating bad debts uses a percentage of each period's net credit sales? The __________ approach.

Accounts receivable

Which of the following accounts could be examined to detect potential low earnings quality? Allowance for bad debts and __________.

bank errors

Which of the following are adjustments to the bank balance in a bank reconciliation? Adjustments for __________, Add deposits outstanding, and Deduct checks outstanding.

receivables

Which of the following are costs of extending credit terms to customers? Increased investment in __________ and Increase in uncollectible accounts.

economic

Which of the following are factors considered when estimating sales returns? Change in customer base, past history of returns, and overall __________ conditions.

customer base

Which of the following are factors considered when estimating sales returns? Overall economic conditions and change in ___________.

liquid

Which of the following are reasons why a transferor prefers the sale approach over the secured borrowing approach of transferring receivables? (1) The transferor seems more profitable, (2) the transferor seems less leveraged, and (3) the transferor seems more __________.

factor

Which of the following are services performed by a __________? Buy accounts receivable and handle billing and collection of accounts receivable.

sale

Which of the following conditions must exist for a transfer of receivables to be treated as a __________? (1) The transferor surrenders control of the asset, (2) the assets are isolated and beyond the reach of the transferor, and (3) the transferee has the right to pledge or exchange the assets.

asset transfers

Which of the following must be disclosed regarding __________? (1) Any cash flows occurring between the transferor and transferee, (2) the amount of receivables that are past due and any related credit losses during the period, and (3) how fair values were estimated when recording the transaction.

Transferor

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