Deck 9: Cash and Receivables

Question 1

All operating transactions eventually use or generate cash.

Answer 1

True

Question 2

Securitization delays the receipt of cash from sales made on credit.

Answer 2

False

Question 3

A contingent liability is generally disclosed in the notes to the financial statements.

Answer 3

True

Question 4

Under the allowance method, uncollectible accounts must be estimated if the matching rule is to be followed.

Question 5

A company that factors its receivables will have a less favorable receivable turnover than a company that does not factor.

Question 6

The fee for factoring without recourse is normally higher than it would be with recourse.

Question 7

Following a lenient credit-granting policy will probably result in fewer defaults by customers.

Question 8

Customers with credit balances in their accounts are entitled to a refund if they do not intend to make any future purchase.

Question 9

A company's acceptance of credits cards, like MasterCard, is an example of factoring with recourse.

Question 10

When Company A discounts, with recourse, a note to Company B, Company B has a contingent liability until the note is paid.

Question 11

Bad debts are considered as an expense of selling on credit.

Question 12

Notes receivable and cash are examples of short-term financial assets.

Question 13

The receivable turnover is expressed in terms of dollars.

Question 14

Under securitization, a company sells its receivables in batches at a discount.

Question 15

Companies that experience seasonal cycles of business activity need not manage their cash as carefully as companies whose business is not cyclical.

Question 16

Purchasing receivables with recourse is riskier than purchasing them without recourse.

Question 17

Having a compensating balance increases a company's liquidity.

Question 18

The higher the receivable turnover, the lower the days' sales uncollected.

Question 19

It is considered unethical to use the estimate for bad debts to purposely manipulate the amount of net income.

Question 20

Accounts receivable and inventory are considered short-term financial assets.

Question 21

On a bank reconciliation, outstanding checks are deducted from the balance per books.

Question 22

After a bank reconciliation is completed, journal entries are prepared for items in the balance per books section only.

Question 23

A discounted note represents a contingent liability because a potential liability exists.

Question 24

Cash equivalents are categorized as short-term investments on the balance sheet.

Question 25

A compensating balance restricts cash; in effect, it increases the interest on the loan and reduces a company's liquidity.

Question 26

In a petty cash fund, the current cash amount minus the receipts submitted should equal the original fixed amount.

Question 27

Installment accounts receivable covering periods longer than twelve months are classified as long-term assets.

Question 28

The SEC requires companies to disclose the amount of compensating balances in a note to the financial statements.

Question 29

A compensating balance refers to a minimum amount that must remain in a bank account as part of a credit-granting arrangement

Question 30

It is usually a good business practice to maintain as large a balance in the Cash account as possible.

Question 31

Automated teller machines (ATMs) are used primarily by businesses rather than by consumers.

Question 32

The use of electronic funds transfers makes check writing unnecessary.

Question 33

Cash equivalents are defined as investments that carry a term of less than one year.

Question 34

When an individual uses a debit card to make a purchase, the amount of the purchase is deducted directly from that individual's bank account.

Question 35

Days' sales uncollected cannot be calculated without first knowing the receivable turnover.

Question 36

A petty cash fund is an example of an imprest system.

Question 37

Compensating balances are kept separate from the Cash account balance on the balance sheet.

Question 38

Loans to company employees should be classified on the balance sheet as accounts receivable.

Question 39

Excess cash should be kept in a checking account.

Question 40

Debit balances in customer accounts appear on the balance sheet as a current liability.

Question 41

Uncollectible accounts must be estimated because it is not possible to know which accounts will not be collected.

Question 42

On a bank reconciliation, interest income would be added to the balance per bank.

Question 43

A bank reconciliation begins with the balances as of the beginning of the month.

Question 44

Trade credit arises from wholesale or retail sales.

Question 45

The allowance for uncollectible accounts is similar to accumulated depreciation in that it represents the total of all accounts written off over the years.

Question 46

Under the accounts receivable aging method, the balance in Allowance for Uncollectible Accounts must be considered prior to adjusting for estimated uncollectible accounts.

Question 47

The existence of uncollectible accounts is evidence of poor credit policies.

Question 48

On a bank reconciliation, a deposit in transit would be added to the balance per bank.

Question 49

The Allowance for Uncollectible Accounts is a contra-asset account.

Question 50

A check that is outstanding for two consecutive months will appear only on the first month's bank reconciliation.

Question 51

Under the allowance method, Uncollectible Accounts Expense is recorded when an individual customer defaults.

Question 52

The percentage of net sales method of estimating uncollectible accounts is in violation of the matching principle.

Question 53

On a bank reconciliation, a bank service charge would be deducted from the balance per books.

Question 54

On a bank reconciliation, an NSF check would be deducted from the balance per bank.

Question 55

The account Allowance for Uncollectible Accounts is closed at the end of the accounting period.

Question 56

A successful credit policy balances an acceptable level of credit losses with the potential for profit from total credit sales.

Question 57

Because bad debt losses are incurred to generate sales, they should be charged against the sales that they helped generate.

Question 58

The allowance method of handling bad debts violates the matching principle.

Question 59

When a bank reconciliation balances, no errors could have been made by the bank or the company.

Question 60

The direct charge-off method makes not attempt to match bad-debt losses with revenues.

Question 61

A promissory note may be issued for an amount to be determined at a future date.

Question 62

A company's acceptance of credit cards like Visa is an example of

A) securitization.
B) factoring with recourse.
C) discounting.
D) factoring without recourse.

Question 63

Interest on a six-month, 7 percent, $2,000 note is calculated by multiplying $2,000 $\times$ 7/100 $\times$ 6/12.

Question 64

Which of the following statements is true about factoring without recourse?

A) The seller of the receivables is liable upon default of the debtor.
B) The factor's risk is lower than if the factoring were with recourse.
C) An example is the use of major credit cards.
D) The fee will be lower than if the factoring were with recourse.

Question 65

Which of the following is not classified as a short-term financial asset?

A) Accounts Receivable
B) Notes Receivable
C) Inventory
D) Cash

Question 66

Which of the following statements is not true when FLK Company discounts a note receivable to the bank?

A) FLK may ultimately have to pay the bank when the note is due.
B) If the maker of the note pays the bank on time, no liability will result to FLK.
C) FLK will receive the maturity value from the bank.
D) A contingent liability arises for FLK.

Question 67

A 60-day note dated December 10 is due on February 10.

Question 68

Which of the following topics involves a contingent liability?

A) Installment accounts receivable
B) A discounted note receivable
C) Securitization
D) Credit card sales

Question 69

Both the allowance method and the direct charge-off method are acceptable for tax purposes.

Question 70

When an account receivable that was previously written off is collected, it is necessary to reverse the entry for the write-off before recording the collection.

Question 71

The maker of a note records Notes Payable.

Question 72

If a promissory note is dishonored, the payee should record interest income.

Question 73

Cash consists of all of the following except

A) deposits in savings accounts.
B) money orders from customers.
C) compensating balances.
D) IOUs from customers.

Question 74

The debtor named in a promissory note is called the payee.

Question 75

The direct charge-off method of recognizing uncollectible accounts is not in accordance with good accounting practice.

Question 76

When using the direct charge-off method, year-end adjustments for uncollectible accounts expense must be made.

Question 77

The sale or transfer of accounts receivable to raise funds is called

A) discounting.
B) collateralizing.
C) pledging.
D) factoring.

Question 78

Which of the following accounts is classified as a short-term financial asset?

A) Office Supplies
B) Accounts Receivable
C) Equipment
D) Prepaid Insurance

Question 79

When the allowance method is used, the write-off of an account receivable results in an expense at the time of write-off.

Question 80

The holder of a note adjusts for accrued interest by debiting Interest Receivable and crediting Interest Income.