Chapter 7: Cash and Receivables

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. non cost: Accelerated payment from customers who take advantage of the discount. Potential increased sales volume.

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

Accelerated customer payment Increased sales volume Reduction in bad debt

When a specific account receivable is determined to be uncollectible, which of the following occur? (Select all that apply.)

Allowance account is reduced Account receivable is reduced

The formula for calculating interest multiplies which of the following?

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

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

Disbursements should be made by check.

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

Which of the following are services performed by a factor?

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

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

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 give rise to a note receivable?

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

U.S. GAAP IFRS

Requires more disaggregation and disclosure of receivables. Recommends but does not require separate disclosure of receivables.

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

Restricted cash (not available for current use usually is reported as a concurrent asset such as investments or other assets)

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

Secured borrowing

At what amount are accounts receivable recorded?

The amount expected to be collected.

Which of the following must be disclosed regarding asset transfers?

The amount of receivables that are past due and any related credit losses during the period. Any cash flows occurring between the transferor and transferee. How fair values were estimated when recording the transaction.

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

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

At what amount are accounts receivable initially recorded?

The exchange price agreed on by the buyer and seller.

Transferors of assets must provide enough information about the transfer to allow financial statement users to fully understand which of the following?

The transfer Ongoing risk to the transferor Any continuing involvement

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.

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

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

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

Transferor

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.

Which of the following items are not included in cash?

accounts receivable from customers included: balance in checking accounts currency and coins cash in savings account

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 Blank______ method of accounting for bad debts.

allowance

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

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

allowance method

Which of the following items are classified as receivables?

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

Receivables represent a company's claims to the future collection of (Select all that apply.)

cash services other assets

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

checks are signed by authorized individuals. all expenditures are authorized. all disbursements (other than petty cash) are made by check. (this provides a permanent record for a disbursements)

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

control

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. give quantity discounts to customers.

Internal control consists of plans to

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

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

factor

Accounts receivable are normally classified

in the balance sheet as current assets.

Separation of duties requires that

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

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

interest on a note.

A company's plans to adhere to policies and procedures, promote operational efficiency, minimize errors and theft, and enhance the reliability and accuracy of accounting data are referred to as

internal controls

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.

The current ratio and the quick ratio measure

liquidity

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

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

note receivable

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

note receivable

Which ratios measure liquidity?

quick ratio (quick assets/current liabilities) current ratio (current assets/current liabilities)

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

Which of the following is a discount that is a reduction in the amount to be paid if the customer pays within a specified time period?

sales discount

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

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

when the allowance is created