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
