Chapter 7

Select all that apply Internal control consists of plans to (Select all that apply.)

promote operational efficiency. minimize errors and theft. encourage adherence to company policies and procedures.

When the amount of bad debts is material, GAAP requires the (1) method be used to reduce the carrying value of accounts receivable to the amount of cash expected to be received. (Enter only one word.)

1. allowance

A secured borrowing occurs when accounts receivable are (1) or (2) as collateral for a loan. (Enter one word per blank.)

1. assigned 2. pledged

Coins, balances in checking accounts, checks received from customers and money orders received are all included in the (1) account on the balance sheet. (Enter only one word.)

1. cash

The most critical element in determining if a company can account for the transfer of receivables as a sale is the surrender of (1). (Enter only one word.)

1. control

In a(n) (1) arrangement, the company sells its accounts receivable to a financial institution and the financial institution handles the billing and collections. (Enter only one word.)

1. factoring

In a(n) (1) 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.

1. noninterest

A(n) (1) discount is a way to change prices without publishing a new catalog. (Enter only one word.)

1. trade

The (1) recognizes a note receivable in a secured borrowing agreement. (Enter only one word.)

1. transferee

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.

Select all that apply Which of the following are potential benefits of offering cash discounts to customers? (Select all that apply.)

Accelerated customer payment Increased sales volume Reduction in bad debt

Select all that apply Which of the following are adjustments to the book balance in a bank reconciliation? (Select all that apply.)

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

Select all that apply Which of the following are adjustments to the bank balance in a bank reconciliation? (Select all that apply.)

Deduct checks outstanding Add deposits outstanding Adjustments for bank errors

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

Select all that apply The formula for calculating interest multiplies which of the following? (Select all that apply.)

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

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

False

Select all that apply Which of the following are services performed by a factor? (Select all that apply.)

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.

Select all that apply Which of the following are costs of extending credit terms to customers? (Select all that apply.)

Increase in uncollectible accounts. Increased investment in receivables.

A petty cash fund is an efficient way to handle what type of payments?

Low cost office supply purchases.

Select all that apply Which of the following would appropriately be paid with petty cash? (Select all that apply.)

Postage expense Office supplies expense Entertainment expense

Select all that apply Which of the following indicate surrender of control over the assets transferred? (Select all that apply.)

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

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

Restricted cash

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.

At what amount are accounts receivable initially recorded?

The exchange price agreed on by the buyer and seller.

Which of the following is an example of separation of duties in a good system of internal control?

The individual who receives the inventory does not have access to the accounting records.

Select all that apply Which of the following conditions must exist for a transfer of receivables to be treated as a sale? (Select all that apply.)

The transferee has the right to pledge or exchange the assets. The transferor surrenders control of the asset. 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

When a creditor changes the terms of a debt agreement in response to the debtor's financial difficulties, this is referred to as what?

Troubled debt restructuring

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

Match the accounting standard with the appropriate treatment of receivables.

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

A trade discount is

a percentage reduction from list price.

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

allowance method

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

amount expected to be received.

Select all that apply Which of the following items are classified as receivables? (Select all that apply.)

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

Restricted cash is usually reported in the balance sheet

as noncurrent assets.

Select all that apply When adjusting the book balance in a bank reconciliation, which items must be subtracted from the cash account book balance? (Select all that apply.)

charges for NSF checks service charges

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

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

Select all that apply Which of the following items are included in cash? (Select all that apply.)

currency and coins balance in checking accounts checks from customers

An account receivable is normally classified as a

current asset

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

deposits in transit

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 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.

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.

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

other assets cash services

Select all that apply Cash that is restricted and is not available for current use may be reported in the balance sheet as (Select all that apply.)

other assets. investments and funds. a noncurrent asset.

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

receivable

Assigning or pledging accounts receivable is used in a

secured borrowing.

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.