FINAL EXAM CH7

In order to qualify as cash equivalents, near-cash items should have a term that is within:

90 days of the balance sheet date

Company M assigned a receivable from AB to the XY Finance Company on a "non-notification" basis. On this basis:

AB will make payment to M.

When accounts receivable are factored with recourse and are accounted for as a sale, what account does the transferor credit?

Accounts receivable

When accounts receivable are factored without recourse, what account does the transferor credit?

Accounts receivable

How is a deposit in transit reflected on a bank reconciliation (using the "correct balance format")?

Added to balance per bank

Which of the following would be classified as a trade receivable?

Amounts due from customers

Bad debt losses on accounts receivable:

Are considered a normal business expense under the matching principle.

Which of the following procedures is not consistent with good control of cash receipts?

Assignment of cash custody and reconciliation to the same individual

The allowance method of recognizing bad debt expense (as opposed to the direct write-off method) can be applied in more than one way. What two conditions must be met before the allowance method can be used

Bad debts must be probable and estimable

A company received two one-year notes in payment for merchandise sold. One note had a face amount of $6,000 and was interest bearing at an annual rate of 18 percent. The other note had a face amount of $7,080 and was non-interest-bearing (its implied interest rate was 18 percent).

Both notes will cause the same total interest to be recognized.

Computing bad debt expense by estimating the net realizable value of accounts receivable (ageing approach):

Causes an adjustment to the allowance account, which produces a balance in the account equal to the total estimated uncollectible amount

A company uses the allowance method of accounting for bad debt. During 2001, an important customer became bankrupt and a related receivable of $6,400 was deemed uncollectible. The 2001 entry to record this event would be:

DR. allowance for doubtful accounts 6400 CR. AR 6400

The members of which of the following pairs of methods of accounts receivable financing are most similar?

Factoring of accounts receivable without recourse, factoring of accounts receivable with recourse accounted for as a sale

The allowance method for estimating and reporting bad debt expense

Generally adheres to the matching principle better than the specific write-off method.

An advantage of relating a company's bad debt experience to its accounts receivable is that this approach:

Gives a reasonably accurate measurement of the net realizable value of the accounts receivable in the balance sheet.

A non-interest-bearing note receivable

Includes an unspecified principal amount and an unspecified interest amount

In reconciling the bank balance with the book cash balance, which of the following would not cause the bank balance shown on the bank statement to be lower than the unadjusted book balance?

Interest credited to the account by the bank

When accounts receivable are factored with recourse and are accounted for as a loan, what account does the transferor credit?

Liability

Which of the following accounting principles primarily supports the use of an allowance for doubtful accounts?

Matching principle

When individual customers' accounts have credit balances of material amounts, these amounts:

Must be reported (or disclosed) separately in the liability section of the balance sheet

Which of the following statements concerning the estimation of bad debt expense by using a percentage of credit sales is incorrect?

Produces the same results, as an aging of accounts receivable.

When receivables are factored without recourse, the transferor generally:

Recognizes an immediate loss or expense and removes the receivables from the books.

When receivables are factored with recourse and recorded as a loan, the transferor generally

Recognizes the cost of the transfer over the term of the related loan

When receivables are factored with recourse and recorded as a sale, the transferor generally:

Records a payable to factor for expected sales adjustments.

A note receivable that is sold (i.e. discounted) to obtain early cash must be:

Reported as a sale or a loan

Accounting for factoring accounts receivable without recourse is generally accounted for by the transferor (original seller of good or service) as a:

Sale

When a firm (assignor) assigns part of its accounts receivable as collateral for a loan:

The assigned accounts are reclassified as a separate account within total accounts receivable

Choose the correct statement about recording the discounting (with recourse) of a customer's four-month note with a financial institution. Assume the note is held for a month before it is discounted

The notes receivable discounted account represents both a contra-notes receivable and a contingent liability.

When a bad debt is written off and subsequently collected in full:

There is no effect to the income statement

Which of the following procedures is the least essential attribute of a cash disbursement control system?

Use of multiple bank accounts

Choosing to account for a transfer of accounts receivable as a sale rather than a borrowing would result in:

a lower current ratio.

Cash management involves the planning and control of cash to efficiently accomplish all of the following except:

obtain the most beneficial credit terms.