Deck 6: The Current Asset Classification, Cash, and Accounts Receivable

Question 1

Under the direct write-off method of accounting for bad debts, the recognition of bad debts expense

A) decreases current assets and net income.
B) decreases current assets and increases net income.
C) increases current assets and net income.
D) increases current assets and decreases retained earnings.

Answer 1

A

Question 2

Current assets are assets which

A) can be used immediately to retire liabilities.
B) are newly acquired.
C) have been converted into cash in the previous year.
D) are intended to be converted into cash within one year.

Answer 2

D

Question 3

On January 2, Favre Co. made a $2,000 credit sale under the terms 3/10, n/30. If Favre uses the gross method of accounting for cash discounts, the proper entry on January 2 includes

A) a debit to Accounts Receivable for $2,000, and a credit to Sales for $2,000.
B) a debit to Accounts Receivable for $2,000, a credit to Cash Discounts for $1,940, and a credit to Sales for $60.
C) a debit to Accounts Receivable for $1,940, and a credit to Sales for $1,940.
D) a debit to Accounts Receivable for $1,940, a debit to Cash Discounts for $60, and a credit to Sales for $2,000.

Answer 3

A

Question 4

The face amount of accounts receivable for Rio Inc. is $20,000. It was estimated that 5% of the accounts will not be collected, cash discounts of $500 will be exercised, and $200 of sales returns will be experienced. The net realizable value of accounts receivable is

A) $19,500
B) $19,300
C) $20,000
D) $18,300

Question 5

If a company with working capital of $210,000 pays $4,000 of bonds payable, then its working capital will

A) increase.
B) decrease.
C) remain the same.
D) Not enough information to determine

Question 6

Hummel Inc. and Nadia Co. have experienced identical economic performances for the last several years of growing sales. Each uses identical accounting measurement rules except that Hummel uses the allowance method and Nadia uses the direct write-off method of accounting for bad debts. Both companies have experienced a gradual increase in uncollectible accounts. Which one of the following statements is true in the first year of operations for both companies?

A) Hummel 's net income is less than Nadia's net income.
B) Hummel 's net income is greater than Nadia's net income.
C) Hummel 's current ratio is greater than Nadia's current ratio.
D) Hummel will appear more solvent than Nadia will.

Question 7

A company's operating cycle may be described as

A) the period of time that is typically required for a company to convert cash into inventory and inventory into cash.
B) the period of time from the beginning of operations until a company liquidates all of its assets.
C) always a one-year time period.
D) a cycle that is distinguished at the discretion of the Board of Directors on a daily basis.

Question 8

'Earnings management' is described as deliberate managerial decisions and choices that are solely designed to

A) increase selling prices of a company's products.
B) reduce repair costs on the company's equipment.
C) manipulate net income from one period to the next to boost the company's stock price.
D) increase working capital.

Question 9

On November 3, Carol Company made a $2,000 credit sale under the terms 3/10, n/60. If Carol receives full payment of the account on November 14, how much cash will it receive?

A) $1,400
B) $1,900
C) $1,940
D) $2,000

Question 10

On August 1, Compass Co. made a $10,000 credit sale under the terms 2/10, n/30. If Compass receives full payment of the account on August 8, how much cash will it receive?

A) $9,700
B) $9,800
C) $9,000
D) $10,000

Question 11

Under the allowance method of accounting for bad debts, the recognition of bad debts expense

A) increases current assets and decreases net income.
B) decreases current assets and increases net income.
C) increases current assets and net income.
D) decreases current assets and net income.

Question 12

Montego Bay Resort Club offers a cash discount of 3% if its customers pay within 15 days after the customer eats dinner. Otherwise, the customer must pay within 30 days. If a customer does not take advantage of the cash discount, then he/she is paying an annual interest rate for not delaying payment for 15 days of

A) 3%.
B) 6%.
C) 36%.
D) 72%.

Question 13

Under the allowance method of accounting for bad debts, the write-off of an account receivable determined to be uncollectible

A) decreases the current ratio.
B) increases the current ratio.
C) has no effect on the current ratio.
D) decreases working capital.

Question 14

The allowance for doubtful accounts is

A) an 'other revenue' account.
B) a contra accounts receivable account.
C) an 'other expense' account.
D) a contra expense.

Question 15

Cash may consist of

A) coin and currency, loans to employees, and money orders.
B) petty cash, officer imprest accounts, and employee savings accounts.
C) money orders, postage stamps, and currency.
D) checking accounts, savings accounts, and bank drafts.

Question 16

A compensating balance is

A) cash held by a foreign government.
B) a balance maintained by the company to pay the employees' payroll.
C) a minimum cash balance that must be maintained on deposit.
D) items which are not cash, but equivalent to cash.

Question 17

If a company with a current ratio of 2.0 pays $2,000 of its salaries payable, then its current ratio will

A) change, but not enough information is provided to determine if it will increase or decrease.
B) decrease.
C) remain the same.
D) increase.

Question 18

The net realizable value of receivables is calculated as the face value of the receivables less adjustments for

A) sales returns and sales discounts.
B) actual uncollected amounts adjusted for purchase discounts.
C) bad debts already written off.
D) sales returns, cash discounts, and estimated uncollectible accounts.

Question 19

Which of the following are components of the current ratio?

A) Accounts receivable and short term investments
B) Inventory, retained earnings, and accounts payable
C) Accounts payable, dividends, and cash
D) Short term investments, equipment, and land

Question 20

Which of the following are components of the quick ratio?

A) Cash and notes payable
B) Cash and accounts receivable
C) Accounts receivable and inventory
D) All current assets except accounts receivable

Question 21

A company's allowance for doubtful accounts is $4,000 and $3,000 on 1/1/11 and 1/1/10, respectively. During 2010, bad debts expenses were estimated to be 6% on net credit sales of $100,000. During 2010, the amount of accounts written off as uncollectible amounts to

A) $6,000.
B) $7,000.
C) $5,000.
D) $4,000.

Question 22

Under the allowance method of accounting for bad debts, the actual write-off of an account receivable determined to be uncollectible

A) decreases current assets.
B) has no effect on current assets.
C) increases current assets.
D) occurs in the same accounting period as the sale.

Question 23

If a company decreases its cash discount offer from 3/10, n/30 to 2/10, n/60, then it would expect its accounts receivable collection period to

A) increase.
B) decrease.
C) remain the same.
D) There is not enough information to answer this question.

Question 24

Which of the following would be separately reported as restricted cash in the balance sheet or footnotes to the financial statement?

A) $8,000 in the savings account at First Bank
B) $200 in a petty cash drawer
C) $10,000 cash in an escrow account at Guarantee Bank
D) $4,000 in a checking account at Second Rate Bank

Question 25

Maradonna Co. uses an aging schedule of accounts receivable in estimating its bad debt expense. The total estimate, which appears on the aging schedule, will be equal to

A) the amount of bad debts expense on the company's income statement.
B) the debit balance required in the allowance account prior to the recognition of bad debts expense.
C) the increase in bad debts expense as a result of the estimate.
D) the credit balance required in the allowance account after the recognition of bad debts expense.

Question 26

Polo, Inc. uses the direct write-off method of accounting for bad debts. During July, Torey's account was written off as uncollectible. The write-off of Torey's account

A) increases both the current and quick ratios.
B) decreases the current ratio and has no effect on the quick ratio.
C) decreases both the current and quick ratios.
D) increases the current ratio and has no effect on the quick ratio.

Question 27

If a company's collection period for accounts receivable is considered to be excessively long, then

A) the company may want to invest excess cash from receivable collections in the stock market.
B) the company might examine its billing procedures in order to expedite collection from customers.
C) customer returns should be disallowed in order to increase the collection of cash.
D) cash flows from operations will probably be more than sufficient.

Question 28

If a company uses the allowance method to account for bad debts, the company's owners' equity will decrease

A) at the end of the accounting period when an adjusting entry to estimate bad debts is recorded.
B) on the date a customer's account is determined to be uncollectible.
C) when the accounts receivable amount becomes past due.
D) on the date a customer's account is written off.

Question 29

During the year, Caltech Inc.'s accounts receivable turnover rate increased from 10 to 12 times. The company makes credit sales only with credit terms of 3/10, n/40. The best explanation for the increase is that

A) the company's credit department did a better follow up with customers whose account balances became past due.
B) the company has recently dropped its credit check policy.
C) the company makes all customers pay cash instead of allowing purchases to be charged.
D) the company has more customers at the end of the year than it had at the beginning of the year.

Question 30

On December 1, 2010, Smith Company delivered a shipment of goods to a Danish customer for a price of 160,000 euros. If on that date 1.3 U.S. dollars could be exchanged for 1 euro. If Smith closes its books on December 31 and 1 U.S. dollar is trading for 1 euro at that time, the adjusting entry that Smith would record would include:

A) a credit to Exchange Rate Gain for $48,000.
B) a debit to Accounts Receivable for $20,800.
C) a debit to Exchange Rate Loss for $48,000.
D) a debit to Sales for $48,000.

Question 31

The allowance method of accounting for bad debts emphasizes the net realizable value of accounts receivable on the balance sheet when

A) the direct write-off method is used.
B) the percentage of net credit sales approach is used to estimate uncollectibles.
C) the percentage of accounts receivable approach is used to estimate uncollectibles.
D) a company omits cash payments during the accounting period.

Question 32

Delvin Co. uses the percentage of credit sales approach in estimating its bad debt expense. The total estimate that is calculated by multiplying the percentage times the net sales revenue for the period will be equal to

A) the debit balance required in the allowance for doubtful accounts after the recognition of bad debts expense.
B) the credit balance required in the allowance for doubtful accounts after the recognition of bad debts expense.
C) the difference between the beginning and the ending accounts receivable balance.
D) the amount of bad debt expense.

Question 33

Summers, Inc. uses the allowance method to account for bad debts. The entry to record the write-off of a customer's account balance decreases

A) assets and owners' equity.
B) assets and decreases liabilities.
C) owners' equity and revenues.
D) none of these answers is correct.

Question 34

Managers must understand how transactions affect working capital

A) because GAAP does not allow companies with weak working capital to obtain loans.
B) because lenders often use this to assess a company's ability to meet current obligations.
C) so that management can avoid transactions that increase working capital.
D) in anticipation of meeting creditors guidelines before issuing new stock.

Question 35

The current ratio fails to accurately reflect

A) the ability of a company to pay its current debts as they come due.
B) amounts that will come due within the next accounting period.
C) amounts due within the next operating cycle as of the end of the accounting period.
D) cash flows anticipated in future accounting periods.

Question 36

The procedures designed to ensure that the cash account on the balance sheet reflects the actual amount of cash in the company's possession are referred to as

A) compensating balances.
B) record controls.
C) physical controls.
D) cash budgeting.

Question 37

Most companies

A) use working capital and current and quick ratios as low-cost surrogates for cash flow measures.
B) place little importance on managing current assets.
C) have large amounts of current assets comprised of cash only.
D) are moving away from cash flow accounting.

Question 38

Alma Company uses the allowance method of accounting for bad debts. Alma:

A) is violating the matching principle.
B) will record bad debt expense only when an account is determined to be uncollectible.
C) will not sell to customers on account anymore.
D) will report accounts receivable in the balance sheet at their net realizable value.

Question 39

The journal entry to record the recovery of a previously written-off $2,000 account receivable (for customer Leno Company) under the allowance method would include:

A) a credit to Bad Debt Expense.
B) a credit to Cash.
C) a debit to Accounts Payable - Leno Company.
D) a credit to Allowance for Doubtful Accounts.

Question 40

On March 1, 2010, Silver Corp. sold goods to a Chinese company for 10,000 Chinese yuan (10,000 RMB) to be paid on April 1, 2010. The exchange rates on March 1 and April 1, 2010 are US$8.0 = 1 RMB and US$8.5 = 1 RMB, respectively. What is Silver's revenue in US dollars and its 2009 exchange gain or loss?

A) Sales revenue =US $80,000; Exchange gain US $5,000
B) Sales revenue = US $85,000; Exchange loss US $5,000
C) Sales revenue = US $80,000; Exchange loss US $5,000
D) Sales revenue = US $85,000; Exchange gain US $5,000

Question 41

At the beginning of 2010, Cyrus Corp.'s allowance for doubtful accounts is $12,500.
During 2010, $4,250 was written off as uncollectible. At December 31, the company used an aging schedule of accounts receivable and determined that $10,530 of the accounts receivable would probably be uncollectible. What would be the bad debts expense that should be reported on Cyrus's 2010 income statement?
a. $5,720
b. $26,780
c. $2,280
d.$18,280

Question 42

The following information was taken from the unadjusted trial balance and aging schedule of Diane Company on December 31, 2010. All sales are on account. Accounts and related balances at December 31, 2010 before adjustment:
Aging Schedule of Accounts Receivable:
If Diane uses the aging schedule of accounts receivable to determine bad debts, what is the Allowance for Doubtful Accounts balance at December 31, 2010?

A) $3,000
B) $4,280
C) $2,920
D) $3,740

Question 43

The following information is provided for Atlanta, Inc..
How much is the balance in the Accounts Receivable account at December 31, 2010?
a. $193,600
b. $158,600
c. $202,600
d. $203,600

Question 44

Sanchez Inc. sells to customers only on credit. For the year ended December 31, 2010, the following information is provided:
If Sanchez estimates bad debts at 5% of net credit sales, how much is bad debt expense?
a. $34,000
b. $15,200
c. $23,400
d. $42,150

Question 45

A cash discount differs from a trade discount in that the cash discount is

A) a reduction in the per unit price of an item if a certain quantity is purchased.
B) received in currency instead of by a check from the customer.
C) typically associated with consumers and a trade discount associated with commercial vendors or suppliers.
D) the same as a mark down.

Question 46

Accounts used to cover day-to-day office expenses are referred to as

A) petty cash.
B) bad debts.
C) cash restrictions.
D) compensating balances.

Question 47

The balances of the allowance for doubtful accounts on the balance sheets dated December 31 of 2010 and 2009 were $2,000 and $7,000, respectively. During 2010, bad debts expense was $12,000. What is the amount of accounts receivable that were written off as uncollectible during 2010?
a. $22,000
b. $8,000
c. $17,000
d. $2,000

Question 48

The following information was taken from the unadjusted trial balance and aging schedule of Diane Company on December 31, 2010. All sales are on account.
Accounts and related balances at December 31, 2010 before adjustment:
Aging Schedule of Accounts Receivable:
If Diane uses the aging schedule of accounts receivable to determine bad debts, what is the bad debts expense for the year ending December 31, 2010?
a. $4,280
b. $3,600
c. $3,680
d. $3,060

Question 49

An exchange rate

A) is the cash amount received from a customer who takes advantage of a cash discount.
B) is the value of one currency in terms of another currency.
C) seldom varies from one accounting period to the next.
D) is ignored by multinational companies.

Question 50

Tyson Corp. uses the aging method to estimate bad debts. The bookkeeper provided the following schedule as of March 30th, 2010: What is the amount of receivables deemed uncollectible?

A) $1,650
B) $4,650
C) $3,400
D) $105,000

Question 51

The gross method refers to

A) a method of accounting for uncollectible accounts.
B) the expectation that the customer will not take advantage of a cash discount.
C) a method of reporting cash on the balance sheet.
D) the restriction placed on the company's bank account by the bank.

Question 52

The following information was taken from the unadjusted trial balance and aging schedule of Diane Company on December 31, 2010. All sales are on account.
Accounts and related balances at December 31, 2010 before adjustment:
Aging Schedule of Accounts Receivable:
If Diane uses the aging schedule of accounts receivable to determine bad debts, what is the net realizable value of accounts receivable on the 2010 financial statements?
a. $46,000
b. $42,260
c. $42,320
d. $30,400

Question 53

The following information concerning the current assets and current liabilities of
Mason Company at December 31, 2010, is presented below.
Based on this information, how would the current ratio be affected if Mason collects the accounts receivable and then uses some of the cash to pay off the accounts payable?
a. The current ratio would increase from 1.30 to 1.93.
b. The current ratio would increase from 0.74 to 4.02.
c. The current ratio would decrease from 1.30 to 0.62.
d. The current ratio would increase from 1.09 to 1.61.

Question 54

The following information is provided for Atlanta Inc.
What is the amount of the Net Realizable Value of the receivables at December 31, 2010?
a. $198,000
b. $154,000
c. $193,600
d. $190,400

Question 55

The following information concerning the current assets and current liabilities of
Mason Company at December 31, 2010, is presented below.
Based on this information, how would the quick ratio be affected if Mason purchased $1,300 of inventory on account?
a. The quick ratio would decrease from 1.30 to 1.21.
b. The quick ratio would not change.
c. The quick ratio would decrease from 1.09 to 1.00.
d. The quick ratio would decrease from 1.09 to 1.21.

Question 56

Before adjusting entries, Kilby Corp's accounts receivable and allowance for doubtful accounts are $745,000 and $7,000 (credit balance), respectively. Using an aging schedule of accounts receivable, it is determined that $60,000 of the accounts receivable would probably be uncollectible. Calculate the net realizable value of Truman's receivables at year end.
a. $681,000
b. $695,000
c. $809,000
d. $685,000

Question 57

A company that maintains a cash balance of more than is necessary for its day-to-day needs

A) is likely to have cash flow problems.
B) is not using working capital to its ideal advantage.
C) is likely to have a very low solvency.
D) has a problem with physical controls.

Question 58

Hedging is used to

A) reduce risks associated with holding receivables denominated in foreign currencies.
B) calculate the current ratio for multinational companies.
C) translate foreign currency into U.S. dollars.
D) 'window dress' uncollectible accounts.

Question 59

Sanchez Inc. sells to customers only on credit. For the year ended December 31, 2010, the following information is provided:
What is the balance of the Accounts Receivable account at December 31, 2010?
a. $1,525,000
b. $590,000
c. $205,000
d. $135,000

Question 60

The following information concerning the current assets and current liabilities of
Mason Company at December 31, 2010, is presented below.
Based on this information, what would the quick ratio be if Mason sold all of its inventory for $6,000 cash?
a. The quick ratio would decrease from 1.09 to 0.19.
b. The quick ratio would decrease from 1.30 to 0.85.
c. The quick ratio would increase from 1.30 to 1.54.
d. The quick ratio would increase from 1.09 to 1.54.

Question 61

Matching Questions
For each item numbered 1 through 5 below, identify the letter of the best description by selecting from items a through e below. You may use each letter more than once or not at all.
____ 1. Current liabilities
____ 2. Current assets
____ 3. Quick ratio
____ 4. Working capital
____ 5. Current ratio

Question 62

Before adjusting entries, Dormont Corp's accounts receivable and allowance for doubtful accounts are $800,000 and $7,000 (credit balance), respectively. Using an aging schedule of accounts receivable, it is determined that $44,000 of the accounts receivable would probably be uncollectible. Calculate the net realizable value of Dormont's receivables at year end.

Question 63

The balances of the allowance for doubtful accounts on the balance sheets dated December 31 of 2010 and 2009 were $21,000 and $14,000, respectively. During 2010, $13,000 of accounts receivable were written off as uncollectible. How much bad debts expense is recognized during 2010?

Question 64

Use the information that follows concerning the current assets and current liabilities of Ryan Company at December 31, 2010, to answer problems 3 through 8. Each problem is independent of the others.

How would the quick ratio be affected if Ryan purchased $500 of inventory on account?

Question 65

Use the information that follows taken from the unadjusted trial balance and aging schedule of Behrend Company on December 31, 2010 to answer problems 15. All sales are on account.
Accounts and related balances at December 31, 2010 before adjustment:
Aging Schedule of Accounts Receivable:

If Behrend uses the aging schedule of accounts receivable to determine bad debts, determine the following:
A. Bad debts expense for the year ending December 31, 2010
B. Allowance for Doubtful Accounts balance at December 31, 2010
C. Net realizable value of accounts receivable on the 2010 financial statements

Question 66

On December 1, 2010, Sedona Trading Co. sold goods to a German company for 25,000 German marks (25,000 DM) to be collected on January 12, 2011. The exchange rates on December 1 and December 31, 2010 are US$0.75 = 1 DM and US$.90 = 1 DM, respectively. What is Sedona's revenue in U.S. dollars?
a. $18,750
b. $22,500
c. $3,750
d. $41,250

Question 67

Use the information that follows concerning the current assets and current liabilities of Ryan Company at December 31, 2010, to answer problems 3 through 8. Each problem is independent of the others.

Calculate Ryan's working capital, current ratio, and quick ratio at December 31, 2010.

Question 68

The following information is provided for Garland Inc. Answer the questions that follow.
A. How much is the balance in the Accounts Receivable account at December 31, 2010?
B. What is the amount of the Net Realizable Value of the receivables at December 31, 2010?

Question 69

The following information was taken from the unadjusted trial balance and aging schedule of Diane Company on December 31, 2010. All sales are on account.
Accounts and related balances at December 31, 2010 before adjustment:
Aging Schedule of Accounts Receivable:
If Diane Company estimates bad debts as 6% of net credit sales, what is the amount of bad debts expense to be reported on the income statement for the period ending December 31, 2010?
a. $27,019
b. $29,820
c. $30,000
d. $29,779

Question 70

Use the information that follows concerning the current assets and current liabilities of Ryan Company at December 31, 2010, to answer problems 3 through 8. Each problem is independent of the others.

How would the current ratio be affected if Ryan collects $600 from customers for amounts owed?

Question 71

Use the information that follows concerning the current assets and current liabilities of Ryan Company at December 31, 2010, to answer problems 3 through 8. Each problem is independent of the others.

How would the current ratio be affected if Ryan collects the accounts receivable and then uses some of the cash to pay off the accounts payable?

Question 72

Use the information that follows from the financial statements of Pines Company at December 31, 2010, to answer questions 16 through 20 that follow.

Calculate total current assets for Pines Company at December 31, 2010.

Question 73

Use the information that follows concerning the current assets and current liabilities of Ryan Company at December 31, 2010, to answer problems 3 through 8. Each problem is independent of the others.

How would the current ratio be affected if Ryan paid off its wages and taxes?

Question 74

Before adjusting entries, Martin's accounts receivable and allowance for doubtful accounts are $65,000 and $1,500 (debit balance), respectively. Using an aging schedule of accounts receivable, it is determined that $4,000 of the accounts receivable would probably be uncollectible. Calculate bad debts expense to be reported on Martin's current year's income statement?

Question 75

At the beginning of 2010, Flagstaff Corp.'s allowance for doubtful accounts is $10,000. During 2010, $7,000 was written off as uncollectible. At December 31, the company used an aging schedule of accounts receivable and determined that $8,000 of the accounts receivable would probably be uncollectible. Calculate bad debts expense to be reported on Flagstaff's 2010 income statement.

Question 76

The balances of the allowance for doubtful accounts on the balance sheets dated December 31 of 2010 and 2009 were $1,000 and $4,000, respectively. During 2010, bad debts expense was $9,000. What is the amount of accounts receivable that were written off as uncollectible during 2010?

Question 77

Use the information that follows concerning the current assets and current liabilities of Ryan Company at December 31, 2010, to answer problems 3 through 8. Each problem is independent of the others.

What would the quick ratio be if Ryan sold all of its inventory for $5,000 cash?

Question 78

On December 1, 2010, Sedona Trading Co. sold goods to a German company for 25,000 German marks (25,000 DM) to be collected on January 12, 2011. The exchange rates on December 1 and December 31, 2010 are US$0.75 = 1 DM and US$.90 = 1 DM, respectively. What is Sedona's exchange gain or loss for 2010?
a.$22,500 Exchange Gain
b. $3,750 Exchange Loss
c. $3,750 Exchange Gain
d. $18,750 Exchange Loss

Question 79

Before adjusting entries, Clark's accounts receivable and allowance for doubtful accounts are $42,000 and $300 (credit balance), respectively. Clark determined that 0.4% of net sales would probably be uncollectible. Sales during the year were $500,000 and sales returns amounted to $6,000. Calculate the net realizable value of accounts receivable on Clark's balance sheet at year-end.

Question 80

Brocton Inc. sells to customers only on credit. For the year ended December 31, 2010, the following information is provided:
A. Determine the balance of the Accounts Receivable account at December 31, 2010.
B. If Brocton estimates bad debts at 3% of net credit sales, how much is bad debt expense?