Chapter 7

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

A receivable

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 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

The formula for calculating interest multiplies which of the following?

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

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

Which of the following give rise to a note receivable?

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

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

Reduction in bad debt Accelerated customer payment Increased sales volume

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

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.

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.

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.

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 false question.

True

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

True

Which of the following items are not included in cash?

accounts receivable from customers

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

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

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

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

amount expected to be received.

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 checks from customers currency and coins

Coins, balances in checking accounts, checks received from customers and money orders received are all included in the __________ account on the balance sheet.

cash

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.

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

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.

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

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.

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.

Accounts receivable are classified as current assets because

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