Intermediate: Chapter 6

sinking funds

accounts into which a company deposits cash over an extended period for a specific purpose. normally reported as long-term investments

Which of the following is a characteristic of the balance sheet approach to estimating bad debts?

accounts receivable is reported on the balance sheet at its estimated net realizable value

What are the most common liquid assets?

cash, short-term investments, accounts receivable, and notes receivable

included in cash

coins and currency, checking accounts, savings accounts, negotiable checks, bank drafts, undeposited credit card receipts

A method of estimating bad debts that focuses on the income statement rather than the balance sheet is the allowance method based on:

credit sales

excluded from cash

sinking funds, certificates of deposit, bank overdrafts, postdated checks, travel advances

Why are bad debts dated on New Years Eve?

so that they are in the same year as the sales

liquidity

the availability of a company's liquid assets to settle its obligations

Marmol Corporation uses the allowance method for bad debts. During 2016, Marmol charged $50,000 to bad debt expense and wrote off $45,200 of uncollectible accounts receivable. These transactions resulted in a decrease in working capital of:

$50,000

advantages of sales discounts, to seller

1. increase sales 2. encourage prompt payment 3. increase likelihood of collection

What method of bad debt estimation categorizes individual accounts receivable based on the length of time outstanding? Why is this length of time an important factor?

A company that "ages" its accounts receivable first classifies the individual accounts receivable based on the length of time they have been outstanding and then estimates the allowance for bad debts by applying appropriate bad debts percentages to each age category.

Which of the following statements is correct with regard to the direct write-off method? Allows the manipulation of income. Is simple to apply.

I and II

The definition of cash equivalents includes: available to pay current obligations short-term, highly liquid investments so near maturity that there is little risk of changes in value because of changes in interest rates

II and III.

The net realizable value of a company's accounts receivable is the balance of the accounts receivable account Plus the allowance for sales returns Minus the allowance for doubtful accounts Plus deferred gross profit Minus allowance for sales discounts

II and IV

Which of the following transactions would not be appropriate for the use of a petty cash system?

Paying for NSF checks.

Which of the following is an important element of internal control over cash?

They include a petty cash system.

financial flexibility

a company's ability to use its financial resources to meet obligations and respond to new business opportunities

Sally Company accepted a 3-month, non-interest-bearing note receivable on December 1. If Sally's year end is December 31, what entry would be recorded

debit Discount on Note Receivable and credit Interest Revenue.

A company is in its first year of operations and has never written off any accounts receivable as uncollectible. When the allowance method of recognizing bad debt expense is used, the entry to recognize that expense:

decreases current assets

pledging

in a secured borrowing, a company may assign or pledge its accounts receivable as collateral for a loan, and the servicing activities remain its responsibility

cash

the resource on hand to meet planned payments and emergency situations. must be available to pay current obligations. most liquid of all assets.

When accounts receivable are sold or factored

the transferor records a gain or loss.

receivables

those receivables expected to be collected or satisfied within one year or the current operating cycle, whichever is longer, are classified as current assets; the remainder are classified as noncurrent

factoring

when a company factors its accounts receivable, it sells individual accounts to a financial institution (called a factor)

Must loss contingencies be accrued against income?

yes