Chapter 7 Cash and Receivables LS

which method permit the offsetting of bank overdrafts against cash balances

IFRS only

both IFRS and US 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

tom company offers Jane company a discount terms of 5/15, n/45. what does this mean?

Jane company must pay the full amount if payment is made after day 15

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

a receivable

when sellers recognize revenue associated with an informal credit sale, a ____ is created

account receivable

a ___ ____ is an informal credit arrangement to receive cash from a credit sale and represents an asset of the company

accounts receivable

which of the following items are not included in cash

accounts receivables from customers

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

allowance

which of the following accounts could be examined to detect potential low earnings quality

allowance for bad debts accounts receivable

which of the following must be disclosed regarding asset transfers

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

the balance sheet approach to measuring bad debt expense focuses on

appropriate carrying value of accounts receivable

A secured borrowing occurs when accounts receivable are ___ or ____ as collateral for a loan

assigned pledged

the expense associated with the estimate of the amount of accounts receivable may not be collected during the year is referred to as

bad debt expense

on which financial statement is the account cash and cash equivalents reported

balance sheet

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 ____ discount

cash

the gross method and the net method are two ways to record ____ discounts

cash

consistent with IFRS, determining risks and rewards have been transferred is evaluated by comparing how variability in the amounts and timing of the ___ ____ of the transferred assets affects the company before and after transfer

cash flows

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

cash, other assets, services

which of the following are factors considered when estimating sales returns?

change in customer base overall economic conditions

for internal control purposes, which of the following responsibilities should be separated for cash disbursements

check writing and mailing check signing and writing

a restriction of cash wherein the borrower is required to maintain a specific amount of low-interest or noninterest-bearing account at the bank is called a _____ balance

compensating

management should maintain a minimum of cash to

conduct business operations meet its obligation take advantage of opportunities

an allowance for sales return account is classified as a

contra account to accounts receivable

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

control

the journal entry required for a note receivable transferred as a sale would include a

credit to notes receivable

Which of the following items are included in cash?

currency and coins checks from customers balance in checking accounts

an account receivable is normally classified as a

current asset

Which ratios measure liquidity?

current ratio; acid-test, or quick, ratio

when a previously written off account is collected, what happens after reinstatement

debit to cash credit to accounts receivable (might be wrong)

which of the following is an internal control procedure for cash disbursements

disbursements should be made by check

if a note receivable is impaired, it is measured at the

discounted present value of expected cash flows at the loans effective rate

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

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

effective interest method

internal control consists of plans to

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

in a _____ arrangement, the company sells its accounts receivable to a financial institution and the financial institution handles the billing and collections

factoring

an alternative method for valuing notes receivables is the

fair value method

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

false

conceptually, the ___ method of recording sales views a discount not taken by the customer as part of sales revenue, whereas the ___ method considers discounts not taken as interest revenue

gross net

a compensating balance results in an effective interest on the loan that is ____ the stated rate on the debt

higher than

using a percentage of each period's net credit sales to estimate bad debt expense is a ___ ___ approach to measuring bad debts

income statement

which approach for estimating bad debts uses a percentage of each periods net credit sales

income statement approach

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

increase in uncollectible accounts increased investment in receivables

Separation of duties requires that

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

how is inventory recorded related to returns

inventory expected to be returned is included as an asset on the balance sheet the inventory account is increased when returns occur to include returned items

a note received solely for cash is valued at

its present value, which is the cash amount

US GAAP typically requires that bank overdrafts be treated as ____ on the balance sheet where IFRS allows them to offset other cash accounts

liabilities

the measure of a company's cash position and its overall ability to obtain cash in the normal course of business is referred to as ______

liquidity

which of the following are non trade receivables

loan to employee interest receivable tax refund claims

it is likely that bad debt accruals under IFRS will be ___ and will occur ___ than under US GAAP

lower, later

cash equivalents include which of the following

money market funds treasury bills with a maturity date of 2 months from the date of purchase commercial paper with a maturity date of 90 days from date of purchase

Which of the following are reasons why a transferor prefers the sale approach over the secured borrowing approach of transferring receivables

more liquid, less leveraged, more profitable

Cobalt corp uses the allowance method to account for bad debts. if cobalt writes off an account for 3000, what is the effect on the balance sheet

no effect on total assets

in a ___ 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

non interest

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 cash and cash equivalents current assets

the transfer of a _____ to a financial institution is called discounting

note receivable

Gino estimates future sales returns of 2% of total sales. in its third year of operations, Gino believes a more accurate estimate is 3.5%. how should Gino handle this change?

on a prospective basis in the current year and future years

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

ongoing risk to the transferor, any continuing involvement, the transfer

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

participating interest

a trade discount is

percentage reduction from the list price

Kuhn company sells a product that historically is rarely returned by customers. at the end of the current accounting period, Kuhn's accountant estimates that future returns of already sold products will be immaterial. which of the following is the correct accounting treatment?

recognize the returns when they occur

a good internal control system for cash would require that those who handle cash should not be involved with

reconciliation of bank balances the accounting records

what happens when a receivable previously written off is collected in full

reinstate the receivable and the allowance for uncollectible accounts

cash flows may be distorted by the transfers of receivables because companies may

report sale of receivables in the operating section of the statement of cash flows

which of the following situations require cash to be restricted

requirements to set aside funds to repay debt requirement to use cash for future plant expansion

which of the following is usually reported on the balance sheet as a non-current asset

restricted cash

to calculate the effective rate of interest on a non interest bearing note, the amount of interest is divided by

sales price

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

sales return

when merchandise is returned for a refund or for credit to be applied to other purchases, the situation is called a

sales return

assigning or pledging accounts receivable is used in

secured borrowing

jones transfers a portion of its receivables and retains substantially all of the risks and rewards of ownership. consistent with IFRS, Jones should account for the transfer as a

secured borrowing

the type of financing arrangement wherein accounts receivable are sold to a trust or subsidiary as a pool of receivables is called

securitization

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

seller

when a receivable is written off, which of the following occurs

the allowance for uncollectible accounts is reduced accounts receivable is reduced

at what amount are accounts receivable recorded

the amount expected to be collected

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

the amount of the receivable is written off

the average collection period indicates

the average number of days it takes to collect on an account

consistent with IFRS, a transfer of receivables would be treated as a sale if

the company transfers substantially all of the risks and rewards of ownership

when recording non interest-dearing notes receivable, the discount on a noninterest bearing note receivable represents

the interest to be earned on the note receivable

for accounts receivable, the longer an account is outstanding,

the more likely it will prove uncollectible

how does the CECL model differ from current GAAP

the probable threshold for identifying impaired receivables is removed bad debt estimates will be based on predictions about the future

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 non-current assets section of the balance sheet

the restriction is legally binding

which of the following is an accurate comparison of long term notes receivable to short term notes receivable

the time value of money has a larger effect on long term notes receivable

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 reporting periods

accounts receivable are classified as current assets because

they will be converted to cash within 1 year or the normal operating cycle

a ____ receivable is an informal credit arrangement with trade customers, whereas a ______ receivable is a formal signed credit arrangement between a creditor and a debtor

trade note

In the sale of receivables, the ____ includes raw receivables as assets in its balance sheet

transferee

the _____ recognizes a note receivable in a secured borrowing agreement

transferee

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

true

true or false: management can influence the collection of receivables based on the terms they offer

true

true or false: the possibility of damaged or defective merchandise is included in a company's estimate of returns

true

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 net realizable value

when does the actual write-off of a receivable occur

when it is determined that all or a portion of the receivable will not be collected

Glaser Corp does not estimate sales returns. If Glaser sells goods on December 20, year 1, and the goods are returned Jan 15, year 2, what is the effect on its financial statement

year 1 net income is overstated

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

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

ABC finance

the requirement that companies must document internal controls and assess their adequacy is required by the

Sarbanes-Oxley Act, Section 404

Cash that is restricted and not available for current operations is reported in the balance sheet as:

a noncurrent asset investments and funds other assets

the discount on notes receivable account is classified as

a contra account to notes receivable

a company believes its sales returns will be material. what is the journal entry required?

debit sales returns credit 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 3000 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