Deck 9: Short-Term Operating Assets: Cash and Receivables

Question 1

Cash equivalents are short-term, highly liquid investments with original maturities of one year or less.

Answer 1

False

Question 2

Which of the following would not be included when valuing cash and cash equivalents on the balance sheet?

A) checking account balances
B) treasury bills purchased with three months until maturity
C) overdraft on one of the company's checking accounts
D) checks and money orders from customers in possession but not yet deposited

Answer 2

C

Question 3

A trade discount reduces the list price for customers purchasing a large quantity of merchandise.

Answer 3

False

Question 4

Which of the following would be classified as a cash equivalent?

A) treasury bills purchased with two months until maturity that are owned by the company
B) coins in the company vault
C) paper currency in the cash registers used in the company stores
D) checks and money orders from customers in possession but not yet deposited

Question 5

Bordelain Company has cash in bank of $20,000, restricted cash in a separate account of $6,000, and a bank overdraft in an account at another bank of $5,000. Bordelain should report cash of ________.

A) $15,000
B) $20,000
C) $21,000
D) $26,000

Question 6

Which of the following is considered to be cash (not a cash equivalent)?

A) treasury bill
B) money market fund
C) certificate of deposit
D) money order

Question 7

How do accounting standards for bank overdrafts differ under U.S. GAAP and IFRS?

Question 8

According to U.S. GAAP, checks written in excess of the balance of a bank account are deducted from the cash account on the balance sheet.

Question 9

What is a bank overdraft?

A) reclassification of a cash amount that is restricted from use in the current operating cycle
B) negative cash balance that occurs when a company writes a check in an amount that exceeds the account balance
C) short-term liquid investment with original maturity of three months or less
D) minimum cash balance required to be maintained by a credit agreement

Question 10

A compensating cash balance held as support of a credit agreement is not classified as cash on the balance sheet.

Question 11

Under U.S. GAAP, bank overdraft should generally be reported as ________.

A) a decrease in the balance of Cash and Cash Equivalents
B) a decrease in other current assets
C) an increase in operating expenses
D) an increase in current liabilities

Question 12

Accounting standards require separate disclosure for cash and cash equivalents that are restricted from use in operations.

Question 13

Cash equivalents may include Treasury bills and certificates of deposit.

Question 14

Sales discounts are reductions granted to customers to encourage quick invoice payment.

Question 15

What is a compensating balance?

A) short-term investments with original maturities that are less than one year
B) negative cash balance that occurs when a company writes a check in an amount that exceeds the account balance
C) short-term liquid investment with original maturity of three months or less
D) minimum cash balance required to be maintained by a credit agreement

Question 16

Under what circumstances may cash in a bank account be classified as a noncurrent asset?

Question 17

What is a cash equivalent?

A) reclassification of a cash amount that is restricted from use in the current operating cycle
B) negative cash balance that occurs when a company writes a check in an amount that exceeds the account balance
C) short-term liquid investment with original maturity of three months or less
D) minimum cash balance required to be maintained by a credit agreement

Question 18

What is the balance sheet classification of a bank account whose fund balance is restricted for retirement of bonds that mature in six years?

A) current asset
B) noncurrent asset
C) current liability
D) noncurrent liability

Question 19

Which of the following must be disclosed in the footnotes to the financial statements?

A) reclassification of a cash amount that is restricted from use in the current operating cycle
B) bank overdraft listed as a current liability on the balance sheet
C) short-term liquid investment with original maturity of three months or less
D) minimum cash balance required to be maintained by a credit agreement

Question 20

Grisson Enterprises provides the following information: $$\begin{array} { | l | r | } \hline \text { Currency and coin } & 500 \\\hline \text { First Bank - Checking } & 5,000 \\\hline \text { Second Bank - Checking } & ( 700 ) \\\hline \text { First Bank - Savings* } & 30,000 \\\hline \text { 2-month CD } & 13,000 \\\hline 5 \text { month CD } & 11,000 \\\hline\end{array}$$ * Restricted fund for bond retirement
Following U.S. GAAP, what is the dollar amount of Cash and Cash Equivalents reported on Grisson's balance sheet?

A) $29,500
B) $28,800
C) $18,500
D) $17,800

Question 21

Darko Inc. made a $60,000 sale on account with terms of 1/15, n/30. If the company uses the gross method, which of the following will be included in the journal entry to record the sale on account?

A) credit Accounts Receivable $60,000
B) debit Sales Discount $600
C) credit Sales Revenue $60,000
D) debit Cash $60,000

Question 22

The balance-sheet value of the asset Accounts Receivable (accounts receivable less the allowance for doubtful accounts) represents the amount of cash the company is expected to collect from its customers.

Question 23

Eurobake Inc. made a $50,000 sale on account with terms of 1/15, n/30. If the company uses the net method, which of the following will be included in the journal entry to record the sale on account?

A) debit Accounts Receivable $50,000
B) debit Accounts Receivable $49,500
C) debit Sales Discount Forfeited $500
D) credit Sales Discount Forfeited $500

Question 24

The two acceptable approaches to recording sales discounts are ________.

A) the net method and the aging method
B) the allowance method and the aging method
C) the net method and the gross method
D) the allowance method and the gross method

Question 25

Which of the following is a reduction of a catalog price whenever a company sells to a reseller in the same industry?

A) trade discount
B) sales discount
C) net discount
D) gross discount

Question 26

The Sales Discounts Forfeited account is classified as a contra-revenue account.

Question 27

Gappule Corp. made a $30,000 sale on account with terms of 2/15, n/30. If the company uses the net method, which of the following will be included in the journal entry to record customer payment within the discount period?

A) credit Accounts Receivable $30,000
B) debit Sales Discounts Forfeited $600
C) credit Sales Revenue $29,400
D) debit Cash $29,400

Question 28

Fraxon Inc. made a $40,000 sale on account with terms of 1/15, n/30. If the company uses the gross method, which of the following will be included in the journal entry to record customer payment within the discount period?

A) credit Accounts Receivable $40,000
B) credit Sales Discount $400
C) credit Sales Revenue $40,000
D) credit Cash $39,600

Question 29

Frigart Company sold goods for $13,000 with terms 2/10, n/30. How much would Frigart receive if the account were paid within the discount period?

A) $12,974
B) $12,740
C) $9,100
D) $11,700

Question 30

On June 1, Homart Wholesalers, Inc. sells 2,000 cases of facial products for $8 per case with terms of 3/15, n/30. Homart uses the periodic inventory method.
a. If Homart uses the gross method, what is the journal entry to record the sale on June 1?
b. If Homart uses the gross method, what is the journal entry to record customer payment
on June 12?
c. If Homart uses the gross method, what is the journal entry to record customer payment
on June 30?
d. If Homart uses the net method, what is the journal entry to record the sale on June 1?
e. If Homart uses the net method, what is the journal entry to record customer payment
on June 12?
f. If Homart uses the net method, what is the journal entry to record customer payment on June 30

Question 31

If a company employs the gross method of recording accounts receivable from customers, then sales discounts taken should be reported as ________.

A) sales discounts forfeited on the income statement
B) an item of "other income and expense" on the income statement
C) an increase to sales revenue on the income statement
D) a deduction from sales revenue on the income statement

Question 32

Under the gross method of recording accounts receivable, a customer must pay the gross amount of the invoice.

Question 33

A company uses the gross method to account for cash discounts offered to its customers. If payment is made before the discount period expires, which of the following is correct?

A) Sales discounts is debited for the amount of discounts taken by customers.
B) Sales discounts is credited for the amount of discounts taken by customers.
C) Accounts receivable is debited for the gross amount of cash received from customers.
D) Accounts receivable is credited for the net amount of cash received from customers.

Question 34

Net realizable value (NRV) describes the estimated amount of a company's expected cost of uncollectible accounts.

Question 35

Cardboard Cutouts Inc. (CCI) sold $7,000 of products to a customer on account to a customer with terms of 2/10, n/30. CCI uses the expected-value method to record its credit sales and management assumes that it is 40% likely that the customer will not take the discount. (Ignore the journal entry that would typically be necessary to record the cost of goods sold and the reduction of inventory.) Record the journal entry to recognize the sale.

Question 36

Why are trade discounts not recorded in the accounts like sales discounts?

Question 37

ABC Inc. makes a sale to a customer for $10,000 with terms 3/15, n45. ABC Inc. uses the gross method. The customer pays ABC 12 days after the date of the invoice. What journal entry would ABC make upon receiving the payment?

Question 38

How does the most-likely-amount approach to recording accounts receivables differ from the expected-value method?

Question 39

If a company employs the net method of recording accounts receivable from customers, then sales discounts forfeited should be reported as ________.

A) sales discounts forfeited on the balance sheet an item of "other revenue and expense" on the income statement
B) an item of "other revenue and expense" on the income statement
C) an increase to sales revenue on the income statement
D) a deduction from sales revenue on the income statement

Question 40

Under the net method of recording accounts receivable, a company assumes that the customer will take the sales discount.

Question 41

Under the allowance method, the recovery of an account previously written-off ________.

A) has no effect on the allowance for uncollectible accounts
B) has no effect on total assets
C) increases net income
D) increases net realizable value of receivables

Question 42

Which method of estimating bad debt expense focuses on the faithful representation of the net realizable value of receivables?

A) net method
B) allowance method
C) aging method
D) direct write-off method

Question 43

Recording bad debt expense during the period when an account is determined to be uncollectible, which is generally not allowed under U.S. GAAP, is known as the ________.

A) allowance method
B) non-allowance method
C) direct write-off method
D) net write-off method

Question 44

The aging-of-receivable method focuses on matching bad debt expense to the revenues that generated those revenues.

Question 45

How can accounting for bad debts be used for earnings management?

A) changing the percentage of aged receivables that comprise the allowance balance
B) using the direct write-off method to determine bad debt expense
C) determining which accounts to write-off
D) reversing previous write-offs

Question 46

The direct write-off method estimates current-period bad debt expense by focusing on balance sheet relationships.

Question 47

Which method of estimating bad debt expense focuses on balance sheet relationships?

A) net method
B) allowance method
C) aging method
D) direct write-off method

Question 48

Bad debt expense represents the amount of ________.

A) gross sales that is written off during the current period
B) current period sales that are expected to be uncollectible
C) gross receivables that are expected to be uncollectible
D) net receivables that is written off during the current period

Question 49

Under the allowance method, the write-off of an uncollectible account ________.

A) has no effect on the allowance for uncollectible accounts
B) has no effect on net income
C) increases expenses
D) decreases total assets

Question 50

The aging of accounts receivable method directly estimates the appropriate balance of the Allowance for Uncollectible Accounts.

Question 51

The account Allowance for Uncollectible Accounts is classified as a contra-revenue account.

Question 52

A company writes off an account receivable when it no longer expects to collect the amount due from the customer.

Question 53

What is the normal journal entry for recording bad debt expense?

A) debit Bad Debt Expense, credit Allowance for Uncollectible Accounts
B) debit Allowance for Uncollectible Accounts, credit Bad Debt Expense
C) debit Bad Debt Expense, credit Accounts Receivable
D) debit Accounts Receivable, credit Bad Debt Expense

Question 54

What are the objectives of the allowance method of accounting for uncollectible receivables?

Question 55

The net realizable value of accounts receivable is calculated as ________.

A) net receivables plus sales discounts forfeited
B) gross receivables minus sales discounts taken
C) gross receivables minus sales discounts forfeited
D) gross receivables minus allowance for uncollectible accounts

Question 56

The allowance method is used to estimate not only the net realizable value of accounts receivable but also the current period's bad debt expense.

Question 57

Bad debt expense represents the amount of receivables written off during the period.

Question 58

The two acceptable approaches to estimating bad debt expense are ________.

A) the net method and the gross method
B) the aging method and the allowance method
C) the gross method and the aging method
D) the direct write-off method and the allowance method

Question 59

The aging-of-receivable method determines current-period bad debt expense by focusing on balance sheet relationships.

Question 60

What type of account is Allowance for Uncollectible Accounts?

A) current liability
B) expense
C) contra asset
D) contra revenue

Question 61

Prior to adjustments, Willett Company's account balances at December 31, 2018, for Accounts Receivable and the related Allowance for Uncollectible Accounts were $2,700,000 and $120,000, respectively. An aging of accounts receivable indicated that $207,000 of the December 31, 2018, receivables may be uncollectible. The net realizable value of accounts receivable at December 31, 2018, was ________.

A) $2,700,000
B) $2,580,000
C) $2,493,000
D) $2,373,000

Question 62

Marston Company has outstanding accounts receivable totaling €1.5 million as of December 31 and sales on credit during the year of €24 million. There is also a credit balance of €2,000 in the allowance for doubtful accounts as of December 31. After aging its receivables, the company estimates that 8% of its total outstanding receivables will be uncollectible. What will be the amount of bad debt expense recognized for the year?

A) €2,000
B) €120,000
C) €122,000
D) €118,000

Question 63

During the year, Liptom Company made an entry to write off a $4,000 uncollectible account. Before this entry was made, the balance in accounts receivable was $60,000 and the balance in the allowance account was $4,500 (normal balance). What is the net realizable value of accounts receivable after the write-off entry?

A) $60,000
B) $64,500
C) $55,500
D) $51,500

Question 64

In which of the following situations are a company's receivables held as collateral for a financing situation?

A) collateralization
B) securitization
C) factoring
D) pledging

Question 65

Marston Company has outstanding accounts receivable totaling €4.5 million as of December 31 and sales on credit during the year of €20 million. There is also a credit balance of €18,000 in the allowance for doubtful accounts. After aging its receivables, the company estimates that 2% of its receivables will be uncollectible. What will be the balance for the Allowance for Uncollectible Accounts after the year-end adjustment is made to record bad debt expense?

A) €418,000
B) €400,000
C) €90,000
D) €382,000

Question 66

Factored receivables have been sold to another company.

Question 67

Teeter Company began 2018 with accounts receivable of $400,000 and an allowance for uncollectible accounts of $29,000 (credit balance). Bad debt expense for the year was $36,000 and the ending balance in the allowance for uncollectible accounts account was $13,000. What was the amount of accounts receivable written off during the year?

A) $16,000
B) $52,000
C) $452,000
D) $416,000

Question 68

Factored receivables sold without recourse are classified as a liability.

Question 69

Securitization of receivables involves taking many separate receivables and bundling them into a single investment pool.

Question 70

Securitization of receivables eliminates the risk of non-collection.

Question 71

Teeter Company wrote off an account for $15,000 which was subsequently recovered. Record the journal entries upon the recovery.

Question 72

What factors are considered when estimating bad debt expense?

Question 73

Lithotech, Inc. had net sales in 2018 of $800,000. At December 31, 2018, before adjusting entries, the balances in selected accounts were: accounts receivable $126,000 debit, and allowance for doubtful accounts $1,400 debit. Lithotech estimates that 1% of its receivables will prove to be uncollectible. What is the net realizable value of the receivables reported on the statement of financial position at December 31, 2018 after adjusting entries?

A) $124,740
B) $126,140
C) $123,340
D) $126,000

Question 74

To be recognized as a sale under IFRS, factored receivables do not have to be isolated.

Question 75

Pledged receivables are collateral for a financing arrangement.

Question 76

To be recognized as a sale under IFRS, companies must give up effective control of factored receivables.

Question 77

Pledged receivables are reported as current assets while assigned receivables are reported as non-current assets. The pledged and assigned receivables are used as collateral for a long-term obligation.

Question 78

On January 1, 2018, Willett Company's account balances for Accounts Receivable and the related Allowance for Uncollectible Accounts were $3,600,000 and $90,000, respectively. During the year, sales revenue totaled $40 million, of which 70% were credit sales and the remainder were cash sales. Altogether, cash collections from all customers amounted to $30 million. Also, write-offs of accounts deemed to be uncollectible totaled $250,000. At the end of the year, an analysis of aged accounts receivable indicated that 2% of total gross receivables may be uncollectible.
Required:
Determine the amount of bad debt expense for the year and net realizable value of receivables at the end of the year.

Question 79

Lithotech, Inc. had net sales in 2018 of $800,000. At December 31, 2018, before adjusting entries, the balances in selected accounts were: accounts receivable $122,000 debit, and allowance for doubtful accounts $1,200 credit. Lithotech estimates that 2% of its receivables will prove to be uncollectible. What is the net realizable value of the receivables reported on the statement of financial position at December 31, 2018 after adjusting entries?

A) $119,560
B) $120,760
C) $122,000
D) $118,360

Question 80

In which of the following situations are a company's receivables sold to another entity?

A) recoursing
B) assigning
C) factoring
D) pledging